Trump Tax Cuts: A Primer

When President Donald Trump signed the new tax bill into law on December 22, 2017, there was much speculation on how the new tax reform would affect our taxes. Who benefits? Who suffers? There have been a sizable number of rumors floating around on social media channels, so we decided to seek out a tax professional who had read through and analyzed the new Tax Cuts and Jobs Act.

A part of Beam’s mission is to help you make the most of your savings and disposable income. In an effort to deliver on that, last week we sat down with Tony Quach, a reputable tax advisor based in San Francisco, CA, to go over some of the most important, high-level tax changes that would affect the majority of Americans.

Individual Tax Rates

In general, there is a decrease of 3% in income tax rates. Individuals formerly in the 28% tax bracket will see the biggest decrease of 4%, while those formerly in the 10% and 35% tax brackets will see no change at all.

Standard Deduction and Personal Exemption

Single individuals who choose not to itemize deductions can take a standard deduction of $12,000 (up from $6,350 previously), while those who have tied the knot can take a standard deduction of $24,000 (up from $12,700).

The personal exemption, which was previously $4,050, has been eliminated altogether.

Alimony

In the past, alimony payments were tax deductible by the payer. Effective January 1, 2019, alimony payments will no longer be tax deductible and alimony received will not be considered taxable income. Previously, if Spouse A pays Spouse B $15,000 in alimony and Spouse A is in the 33% tax bracket, the deduction would have saved them $4,950. According to the new tax bill, Spouse A can no longer deduct that $15,000 and must pay taxes on the full amount of alimony paid.

The graph above shows the amount of tax an individual paying $15,000 alimony yearly, and bringing in $75,000 and $150,000, would owe in 2017 (when alimony deductions were permitted) and 2018 (when alimony deductions will be removed). This calculation assumes no other deductions or credits.

Mortgage Interest

This particular change affects those whose home loans exceed a quarter of a million dollars. Previously, mortgage interest was deductible up to $1,000,000 of the loan. However, now homeowners can only deduct mortgage interest up to $750,000 of the loan. Also note that home equity loan interest, which was deductible up to $100,000 of the loan previously, is no longer deductible.

Charitable Contribution

There is good news for individuals who opt to participate in philanthropy. Currently, the deductible limit is 50% of your income. For example, if Bob’s salary is $100,000/year and Bob donated $70,000 to charity, he can only deduct $50,000 of that $70,000 donation on his taxes. That’s because 50% of his income is $50,000 and that is the maximum amount currently allowed for deduction. Beginning this year, Bob can now deduct $60,000 of that $70,000 donation on his taxes!

Child Tax Credit

Previously, the child tax credit per child (biological, adoptive, or foster) was $1,000 per head. Under the new tax bill, it has been increased to $2,000 per child. A new, non-child dependent credit of $500 has also been introduced. This can include an aging parent who depends on you for their care, or even a child over 17 years of age who you continue to support.

Keep in mind that this is a credit and not a deduction. This means that instead of lowering the amount of your income on which you have to pay tax (a deduction), a credit reduces the amount of taxes owed. For example, if you owe the IRS $7,000, a $2,000 credit will reduce your tax liability to $5,000, granted you meet the other requirements of that particular credit.

Student Loans

Before the passing of this tax bill, many students across the nation were worried that they would be required to pay income taxes on their tuition waivers if this bill passed. Thankfully, that was only included in the House version of the bill, and not the version that was passed shortly after. Students can continue to deduct student loan interest and tuition waivers for graduate students will remain tax-free.

We hope that helped answer a few of the questions you may have had about the new tax law. Until next time!