Listen to Episode 20 on the Tax Cuts and Jobs Act
On December 22, 2017 President Donald Trump signed the Tax Cuts and Jobs Act, the most significant legislation of his presidency. In the twentieth episode of Bills with Luke Scorziell, we dive into the details of the new law. Specifically, how the tax reform bill affects individual taxpayers. From the new tax brackets to the repeal of the individual mandate to the expanded child tax credit, we cover it all. Stay tuned for objective, well-researched analysis on the new tax code.
Brief Show Notes
Tune in for a special announcement about my own life at the beginning of the show!
Also, if you’d like to read the text of the bill, you can find the final version here.
Changes to the Tax Brackets
There are still seven brackets with lower overall rates. The lowest bracket remains the same with a 10% tax for incomes of up to $9,525. The next bracket has a 12% tax, down from 15% before, on income up to $38,700. The third bracket’s maximum income drops to $82,500 from $93,700, and the rate drops to 22% from 25%. The fourth bracket’s maximum income drops to $157,000 from $195,000, and the rate drops to 24% from 28%.
The fifth bracket shrinks to allow the bracket after to grow significantly larger in range. This fifth bracket has a maximum income of $200,000, down from $424,950. Its tax rate is 32%, down from 33% before. The sixth bracket greatly expands under the new law. It’s minimum income is $200,000 with a maximum of $500,000, before it was $424,950 to $426,700. The rate remains at 35%. The maximum bracket is for incomes over $500,000 with a rate of 37%, lower than the 39.6% before.
Standard Deduction and Child Tax Credit
The Tax Cuts and Jobs act raises the standard deduction for all filers. For single filers it rises to $12,000 from $6,500; for heads of households it rises to $18,000 from $9,550; and for married couples filing jointly it rises to $24,000 from $13,000. The increase in the standard deduction makes up for the repeal of the $4,150 personal exemption under the new law.
The Child Tax Credit increases to $2,000 for each child from $1,000. The phaseout for the credit increases to $400,000 for married couples and $200,000 for singles.
Click here for the link to the Motley Fool examples discussed in the episode.
Repeal of the Individual Mandate
This New York Times article discusses the reasoning behind the mandate and the penalty and why politicians want to get rid of it. The Congressional Budget Office released their own report on the effects of repealing the individual mandate here. It would save the government $340 billion over the next decade, but result in 13 million Americans losing coverage.
Here is the Kaiser Family Foundation penalty calculator I used to determine the penalty the average American would pay for being uninsured. Additionally, here is another resource on the number of Americans who paid the penalty in 2015.
The Tax Cuts and Jobs Act keeps the both the American Opportunity Tax Credit and the Lifetime learning Credit. Both credits allow those pursuing higher education to deduct around $2,000 from their federal income taxes.
State and Local Tax Deductions and Mortgage Interest Deduction
The Tax Cuts and Jobs Act will allow taxpayers to deduct up to $10,000 in all income, property, and sales taxes at the state level. Previously all state and local taxes were deductible from federal tax.
Under the new law, interest on up to $750,000 in debt can be deducted from a person’s income. This is down from $1,000,000 under previous law. The combination of these two deductions is expected to result in $640 billion of revenue over the next decade, according to the Tax Foundation.
The new tax law will allow medical expenses exceeding 7.5% of a person’s income to be deducted from federal taxes. The provision lowers the threshold from 10% under previous law.
Other Sections and Deductions
We also talk about estate taxes, capital gains taxes, and the limits on itemized deductions, but you’ll have to tune in for that! The New York Times also has a simplified breakdown of the tax code here.
Bills with Luke Scorziell does not provide investment, tax, or legal advice or recommendations. This material is solely intended for educational purposes based on publicly available information and may change at any time.
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About Luke Scorziell
Mr. Scorziell created The Edge of Ideas when he was 15 years old. After a few years of blogging he found a passion for podcasting and now regularly has guests on his show, Bills with Luke Scorziell. Find out more about Luke and his unique journey. Feel free to send Luke a message below.
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