The Biggest Changes to Taxes in 2018
Craig Donofrio — Break It Down
When Trump’s tax plan was unveiled last September, many analysts saw it as a confusing—and worrying—set of rough guidelines. That includes us here at Make Change and Andrew Poulos, the tax accountant we consulted to determine “What the Heck is Happening with Trump’s Tax Plan?”
The tax bill passed into law in December is more fleshed out and isn’t as sweeping as the original proposal—you may even see some (initial) tax breaks—but the long-term effects may be less pleasant. We went back to Poulos to see how the new law will affect filing your taxes in the years to come.
The Tax Brackets
The original plan proposed three tax brackets instead of the customary seven. But there was little guidance about what income levels and tax rates would be included in each bracket, leaving economists guessing about who would or wouldn’t benefit.
“Many people in the industry never expected to see three [brackets],” says Poulos. “And with lots of politicians involved, there was a lot of compromise.”
When the tax bill passed, seven brackets remained with a slight adjustment. For the 2017 tax year, the brackets were: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 36.9 percent. Under the Trump tax plan, in 2018 the brackets are: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. Capital gains and qualified dividend rates remain the same.
While Poulos worried that the three-tax bracket plan would hurt the middle-class, he says the adjusted seven brackets will reduce tax bills for many Americans.
“It isn’t going to be a windfall in savings [for the middle class], but I don’t think anyone is going to complain about paying less taxes,” says Poulos. According to the Tax Policy Center, after-tax income will increase by about 2.2 percent for all Americans. Middle-income taxpayers—those making between $49,000 and $86,000—will see a tax cut of about $900.
Additionally, the child tax credit has doubled to $2,000 per child.
Deductions and itemizations
But not everyone has reason to celebrate. While the majority of Americans will get a tax cut, some will get a tax hike—particularly those who pay a lot of state and local income and property taxes. That's because most people will have no reason to use the itemized deduction option when faced with the new, much bigger, standardized deduction. This is an important consideration for people who are used to getting a tax break by itemizing things like mortgage interest. The most recent tax statistics from the IRS indicate approximately 30 percent of all fliers use itemized deductions.
The initial tax plan proposed to dramatically increase the standardized deduction limit—rendering itemization obsolete for most Americans—and this element remains in the new law. In 2018, the standard deduction will nearly double to $12,000 for single filers and $24,000 for joint filers.
Deductions for state tax, income tax, and property tax are capped at $10,000.
Alternative minimum tax
The alternative minimum tax, or AMT, is a law put in place nearly 50 years ago requiring the wealthy to pay some tax even if they’ve used every loophole possible. Initially, the Trump administration wanted to scrap the AMT altogether, but that didn’t happen. It’s still in place, albeit in a slightly less afflicting form for the haggard elites out there.
According to The Wall Street Journal, the AMT affected about 5 million tax filers, with many of them earning between $200,000 and $600,000. The new AMT for 2018, according to The Journal, is now predicted to affect only 200,000 people, with most of them making over $600,000, essentially benefiting the rich but not like, the super-rich.
Small business tax cuts
Small businesses will get a big tax relief. Deductions for qualified “pass-through” businesses—small businesses where income passes through to the owner—have increased to as much as 20 percent. Small business owners who file for less than $157,500 single (or $315,000 jointly) are automatically qualified for the 20 percent deduction. For businesses making more, the deduction is still available, though it decreases as profits grow.
“Let’s say I make $200,000 and am filing jointly as a pass-through business. The first 20 percent, or $40,000, of that would not be taxable,” Poulos says. While the original proposal caused Poulos to worry that “small business owners and the middle class will foot the bill in its entirety in its current form,” he considers this pass-through relief a potential game-changer for small business owners like himself.
Big corporate tax cuts
One of the few things that has stayed consistent throughout the tax overhaul is a giant corporate tax cut. The statutory tax has been cut from 35 percent to 21 percent, though many giant corporations already pay much less, or nothing at all, in corporate taxes due to loopholes.
However, an interesting bit of the tax bill is a new, low repatriation tax rate which encourages business to return overseas business and money back to the United States. It works like this: Since multinational corporations don’t have to pay corporate taxes on foreign profits, they use loopholes and accounting magic to keep that balance off the books—a balance that comes to about $767 billion worth of avoided taxes.
Trump’s repatriation plan offers a one-time 15.5 percent in order to bring these multinational business (and their taxes) back to the U.S. This, combined with the 21 percent tax rate, is supposed to incentivize corporations to create jobs and new facilities in the states.
“It’s not just, ‘Hey, bring this money back at a one-time reduced fee. It’s ‘Come back here, bring the money, make new jobs, and [be taxed less] at the 21 percent tax bracket,’” says Poulos.
Some huge businesses have already responded to the new bill. Apple announced in January that it will pay $38 billion in taxes, build new facilities, and create 20,000 jobs over the next five years. Cisco has also said it will repatriate $67 billion, though it hasn’t announced any plans for new facilities or jobs.
However, Poulos is still cautious about the long-term benefits of this approach. “The question becomes just how many new jobs and how many new facilities are created and where. Are they going to be in already-thriving cities, or are they going to be in depressed cities?”
With no rules in place dictating where these mega-corporations must put their business, it’s entirely possible Apple will plunk down a facility in a place that doesn’t really need the economic boost, leaving the areas in desperate need unchanged.
The monster at the end of this bill
The biggest issue for Trump’s plan is the deficit created from all these tax cuts. Just as experts predicted after the initial tax plan reveal, the sweeping corporate cuts and other tax reductions will increase the deficit by $1.5 trillion in the next 10 years according to an estimate by the Congressional Budget Office. While Republican advocates say the tax cuts will generate enough revenue to pay for themselves, economists are more skeptical. Before the plan was finalized last year, in a poll of 38 economists conducted by the University of Chicago’s Initiative on Global Markets, 37 found the plan would greatly increase the debt ratio. The 38th misread the question. Once the bill was finalized, things didn’t look much better. Politico estimates the deficit will, in fact, be worse; putting the 10-year cost of the bill at $2.3 trillion, adding that the bill's tax cuts would "fall substantially short" of paying it back by $700 billion and $1.1 trillion.
While major economic problems may come a decade from now, consumers could see rising interest rates and inflation much sooner. Billionaire hedge fund manager Ray Dalio, speaking at Harvard University recently, said the U.S economy is in a “pre-bubble stage” and estimated that there’s a 70 percent chance of another recession before 2020. Mark Zandi, chief economist at Moody’s Analytics, told the LA Times: “It’s as if someone picked up a macroeconomic textbook and decided to do just the opposite of what it told you to do. The economy is at full employment, and if you juice things up by cutting taxes and increasing government spending—all deficit-financed—the economy will get away from you. It’s going to overheat.”
To tamp down inflation, policymakers often seek to raise interest rates. Poulos says the housing market, a leading economic indicator, could see a major hike in mortgage interest rates.
“If everything stays the same, I think we could see 7 or 8 percent interest rates, give or take, in the next two years,” says Poulos. It’s also possible that rising mortgage rates could make mortgage interest deductions—and therefore itemized tax deductions—great again in the coming years if rates drive up housing costs.
And while the take-home check may be bigger now, the tax bill’s long-term benefits are less clear. By 2027, the majority of middle-class earners will start seeing a tax hike, starting at around $150 according to the Tax Policy Center, a nonpartisan think tank.