Bottom line: What the tax reform really means for you


Despite the near non-stop media gabfest about President Trump’s recently enacted tax reforms, you may still be wondering exactly how they will impact you and your family.

I’ve been fascinated by this tax reform, and spent a significant amount of time trying to understand how it will impact Americans. I’m a Certified Financial Planner and not a CPA or tax policy expert, which is why I employed several CPA firms to help me with compiling and verifying this information. Based on our research, here’s a look at how this dramatic change to the tax code, officially known as the Tax Cuts and Jobs Act, may impact your bottom line this year.

How the Tax Cuts and Jobs Act could affect you

The new tax law, in most cases, will leave more cash in taxpayers’ wallets. The vast majority of Americans will see a tax cut in 2018. Those who don’t see a tax cut will likely instead see little change in their taxes. A select few — those on the lower end of the upper 1% of earners — will see their taxes go up.

It’s important to note that this is the first overhaul of the tax code in over 30 years, and it’s also the largest tax overhaul bill in the history of the US. This reform is bigger than the 1963 Kennedy cuts and the 2003 Bush cuts. Some may argue that it’s second to the 1981 cuts, but the flip side is that over the long haul it will best that year’s reform too.

RELATED: Which tax prep software is right for you?

Yes, it’s that historic. Looking to the numbers, the legislation will likely reduce taxes by $120 billion for individuals and small businesses, and by $85 billion for corporations. This is huge news. This figure amounts to an immediate $205 billion stimulus to the US economy for 2018, which is just over 1% of the US’s GDP.

These numbers dwarf the 2003 Bush cuts. Why do I mention that? Because given the similar scope, I believe looking at the GDP both before and after the 2003 cuts is illustrative of what may be in store for us now.

Back in 2002 and 2003, real GDP growth averaged 1.5%. After the cuts, real GDP growth rose to 4.0% in 2004 and stayed above 3.0% in 2005 and 2006. It is possible that a comparable impact could happen in the coming years, especially since our real GDP has averaged around 2.0% for 2016 and 2017.

Okay, that’s it for the macro stuff. Let’s take a deep dive into how the reform may impact your personal finances. To begin, we need to consider ten key factors:

The Standard Deduction

Under the new reform, the Standard Deduction doubles (yes, doubles) to $12,000 for individuals and $24,000 for married couples. This change is huge for helping middle-income families get a break on their federal tax bill.


Tax Brackets

The number of Federal Tax brackets has increased from 6 to 7. The new brackets are a bit more precise than before. The lowest rate remains at 10%, while the highest rate drops from 39.6% down to a 37% cap. One thing to note is that, under the TCJA, these brackets are not permanent ‘ they will revert to pre-2018 levels after the year 2025.

Mortgage Deductions

This one is very straightforward. The maximum mortgage amount you can use for mortgage interest deductions has decreased from $1.0 million to $750,000. But as most Americans have mortgage balances below $750,000, we shouldn’t see many folks taking a hit on their tax bill here.

The State and Local Tax (“SALT”) Deduction

When it comes to SALT deductions, we see the second (and it’s a close second) biggest piece of the reform after the Standard Deduction increase. Before the reform, the SALT deduction was unlimited. The TCJA has capped this deduction at a total of $10,000.

Who does this impact? High wage earners in high income tax states like New York, New Jersey, and California could be pinched the hardest by this change. But, they may not. Our sample calculations indicate that high earners will still see a small overall tax cut (percentage-wise) since the top income bracket has decreased from 39.6% to 37%. That change may offset the loss of the SALT deduction for some taxpayers.

Child Tax Credit

This credit has increased substantially ‘ from $1000 to $2000 per child. Additionally, the number of people who can use the credit will go up dramatically due to the increases in income limits. Now, the limits go all the way up to $200,000 for single folks and $400,000 for couples. Amazingly, $1400 of this is refundable! That means that even if you don’t owe any taxes, you get a check back from the federal government for this refundable credit.

Obamacare Individual Mandate Penalty Removed for 2019

Beginning next year, you aren’t required to buy health insurance. This means you won’t have to face a penalty at year end if you don’t have coverage (which has averaged about $470). A side note: while the TCJA addresses this piece of the Affordable Care Act, the Obama-era increase in Medicare taxes still remains.

The Alternative Minimum Tax (“AMT”)

The dreaded AMT remains intact, but the good news is that there are higher exemption amounts. So, it’s likely that fewer Americans will get hit with the AMT. To put numbers to the new provision, under the old law a married couple filing jointly had an $86,200 exemption to protect against AMT, but now that income level exemption increases to $109,400.

Charitable Deductions

Here we see a two-fold win. The limit has gone up from 50% of your Adjusted Gross Income (“AGI”) to 60%. And, if you give more than 60%, you can carry the additional amount forward for up to 5 years.

New Inflation Measure

We have moved from standard Consumer Price Index for All Urban Consumers (“CPI-U”) to chained CPI-U. Because chained link CPI-U grows at a slower rate than standard CPI-U, this move will slow the rate at which the tax bracket starting points will rise. This change is really just a covert way for the government to increase tax revenue over time.

Capital Gains Tax

These figures remain largely the same ‘ 0%, 15% and 20%. The TCJA keeps the breakpoints that exist under pre-reform law, but indexes them for inflation using chained CPI-U in tax years after Decemeber 31, 2017. Two things to note on this point:


The 2018 15% breakpoint is $77,200 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $51,700 for heads of household, $2,600 for trusts and estates, and $38,600 for other unmarried individuals.
The 2018 20% breakpoint is $479,000 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $452,400 for heads of household, $12,700 for estates and trusts, and $425,800 for other unmarried individuals.

RELATED: Here’s your 2018 estimated tax refund schedule

Got all that? I know, it’s a lot to digest, but hopefully you’ll find this list useful in assessing the major changes under the TCJA and these changes may impact you and your family.

To help clarify the new rules more, let’s apply them to some relatable examples. For our exercise, let’s assume the following:

  • A home value of 1.5 to 3 times annual income and a mortgage balance of 80% of the value. (Remember, under the TCJA, mortgage interest deductions are capped at $750k.)
  • Property taxes at 1.8% of the home’s value. (This helps the calculator determine if you would lose some of your property tax deduction.)
  • SALT ‘ The tax calculator we are using automatically calculates your SALT. You just add in property taxes and the calculator caps your total SALT at the new $10,000 level. Note that we did not assume any other itemized deductions on top of this.

With that foundation, let’s look at a handful of post-TCJA scenarios:

‘ Jim, single, has no kids and makes $50,000. His federal taxes go down by about $200, which represents a 5% reduction.

‘ Beth, single, has two kids and makes $50,000. Her taxes go down by $996, which represents a 73% reduction.

‘ Marc and Tracy, married, have two kids and make a combined income of $150,000. Their taxes will go down by $120, which represents an 8% reduction.

‘ Marshal and Lindsay, married, have no kids and make a combined income of $150,000. Their taxes go up about $800. If  Marshal and Lindsay were not itemizing (let’s say they aren’t homeowners but are renting), their taxes would go down relative to what they paid last year because their standard deduction is going up. They would see savings to the tune of $3,800. But Marshal and Lindsay as renters still come out paying more than homeowner Marshall and Lindsay.

‘ Ernest, single, has no kids and makes $500,000. His taxes are going way up, by approximately $17,000. If Ernest decides to get married and have two kids, his taxes go down. The tax changes seem to reward those filing jointly and who have children under the age of 17.


‘ For the biggest earners among us, those making, say, $2 million a year, their tax situation will really depend on how much they are deducting. But, in general, this group will likely either stay flat or see a slight reduction in taxes.

For a better assessment of how your taxes might change under the new law, check out this calculator.

And at the end of the day, this overhaul may more than pay for itself. If we see GDP growth from the projected 1.8% to 2.5%, that makes up for the $1.5 trillion in cuts. Take it a step further to a 3.5% GDP growth rate, and not only will we pay for the cuts, but will reduce our national debt by $1.5 trillion.

No matter exactly where it clocks in, one thing is for sure  ‘ this tax bill gives the economy a fighting chance. With the TCJA, we should see the creation of an economic environment that’s better for jobs, wages, and small businesses and entrepreneurship. All of us should benefit ‘ you, your family, small businesses and large companies.

Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.

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