On the 22ndof December 2017, US President Donald Trump signed the Tax cuts and Jobs Act into law. It was the first time in over three decades that tax laws had changed significantly. The new laws maintained the number of tax brackets at seven.The law doubled the standard deduction, cut individual income tax rates and completely waived personal exemptions. The National Retail Federation (NRF) was working behind the scenes to support Washington lawmakers in passing the bill.The NRF was of the opinion that the new tax code would inspire investment and mitigate retailers of financial hardship. Retail analysts from Nomura/Instinet Equity Researchers in New York agreed that for the longest time, retailers had been paying the highest average corporate tax rates.
How has tax reforms affected the American citizen?
On the 22ndof December 2017, US President Donald Trump introduced tax reforms and signed the Tax cuts and Jobs Act into law. It was the first time in over three decades that tax laws had changed significantly. The new laws maintained the number of tax brackets at seven.
The law doubled the standard deduction, cut individual income tax rates and completely waived personal exemptions. The National Retail Federation (NRF) was working behind the scenes to support Washington lawmakers in passing the bill.
The NRF was of the opinion that the new tax code would inspire investment and mitigate retailers of financial hardship. Retail analysts from Nomura/Instinet Equity Researchers in New York agreed that for the longest time, retailers had been paying the highest average corporate tax rates.
The primary individual tax rate was reduced to 37% while the corporate tax rate was reduced from 35% to 21%. While individual changes will conclude in 2025, the corporate changes are invariable.
The $1.4 Trillion tax bill would also Repeal a portion of the Affordable Care Act that sets up disciplinary measures if US citizens do not sign up for Health Insurance.
The following are some of the prevalent changes the American taxpayer has experienced in the recent past due to tax reform.
The standard deduction lowers the proportion of your income that is to be taxed. Trump’s tax reforms has increased the IRS standard deduction since coming into effect in 2017. Although not all taxpayers qualify for the standard deduction, it has greatly reduced the average citizen’s tax bill.
Before Trumps Tax cuts and Jobs Act in 2017, the standard deduction for singles filing alone was $6,350 and for couples filing together was $12700.
Last year the standard deduction was $12,000 for singles filing solo and couples filing independently whereas married couples filing together was $24,000.
The bottom rate did not change and remained at 10% while the top rate fell from 39.6% down to 37%. Although the tax bracket number remained the same at seven, the rates have come down significantly.
The rates for individuals are set to remain the same until 2025 when they expire if Congress does not revise them. Those who earned less got a tax break, for instance, a single individual earning $39,000 in taxable income in 2017 got a rate of 25%,which reduced to 22% in 2018.
The highest earners also got a tax break, the top tax bracket carried a 39.6% rate, the highest rate dropped to 37% and started at $500,001 for single people and $600,001 for married couples.
Personal exemptions waiver
Personal exemptions were one way of reducing your overall taxable income. This would, as a result, lower the amount of income tax you were eligible to pay since you would be paying taxes on less money.
The Tax cuts and Jobs Act removed the personal exemption from the tax code when it took effect in 2018. The law suspended the personal exemption which was $4,150 through the year 2025.
The law also put an end to the individual mandate, a provision of the Affordable Care Act (Obama Care) that tax penalties for individuals who do not obtain health insurance coverage in 2019. The mandate remains in place but the penalty is down to 0%.
The IRS code still offers many deductions that you can take advantage of to slash away some of your income and you only get to pay tax on the balance.
Individual Income Tax Rates
The most symbolic changes for individuals is the adjustment in the handling of income from pass-through entities. Many businesses are pass-through entities and the effects will be significant.
Pass-through income is made through business arrangements like partnerships, Sole proprietorship, and corporations. Pass through income was previously taxed to the end taxpayer and not at the corporate level.
This changed in 2018 for individuals eligible for the pass-through deduction. 20% was removed from the table for tax computation purposes. This meant that if you were in the new highest 37% tax rate for 2018, the rule lowered your sufficient tax rate to 29%.
Child Tax Credit
The Child Tax credit is given to taxpayers for every qualifying dependent child under the age of 17 at the end of the tax year. The legislation doubled the credit to $2,000 per child and made most of it refundable.
It was previously $1,000 non-refundable credit. The new $2,000 dollar per qualifying dependent child credit makes $1,400 of the child tax refundable.
To be eligible for the child tax credit the child must be a US citizen, US resident alien or US national. The child must have resided with the person claiming the tax credit for more than half of the tax year and be claimed as a dependent on the taxpayer’s returns.
Most taxpayers qualify for the child tax credit by claiming their children. Other family members who are under the age of 17 years can qualify if the taxpayer provided more than half of their financial needs. These include siblings, nieces, nephews, grandchildren, adopted and foster children as long as they meet the residency and citizenship tests.
Only one taxpayer can claim the child tax credit even if the child spent time between two households in the tax year. The tax credit is reserved for the parent with primary custody, in case of joint custody the parents can agree on who to claim the credit and when.
Americans had until the 15thof April 2019 to file their taxes. About 76.4 million Americans or 44.4 % did not pay Federal income taxes for the year 2018.This rose from 72.6 million or 43.2% from the year 2016 before Trump’s Tax cuts and Job cuts.
The IRS has access to most of your financial information and they constantly gather more from your debit transaction records, credit card bills, travels, and social media accounts.
The IRS is adding tax offenders to the government’s no-fly list and can even revoke your passport if you try to flee. When the IRS moves on your assets in their efforts to recover unpaid taxes you may lose your home, vehicles, paychecks, retirement funds and businesses.
Evading tax debt is a felony and if convicted you can face up to five years in prison, a $250, 000 fine, and additional costs for prosecution.
A large majority of Americans believe that their taxes rose. The misconception is largely due to the efforts by liberal opponents of the law to portray it as a middle-class tax increase. An American online research platform Survey monkey found that only 40% of American citizens actually believe they got a tax cut after the tax reform and only about 20% were sure they did.
In the fall of 2017 when Republicans planned to introduce the House Tax bill, independent tax policy wrongly predicted that the majority of families would pay more in taxes. This continued until president Trump signed the bill into law, even though it was then clear that the amended bill would raise taxes to a very small number in the 2018 tax year.
According to The Tax Policy Center assessments, 65% of Americans paid less under Trump’s tax laws, only 6% of people paid more. A nonpartisan team of tax analysts in Congress, The Joint Committee on Taxation found that all income groups would get a tax cut.
A left-leaning think tank Institute on Taxation that was previously a harsh critic of the law later concluded that the Trump tax laws would give tax breaks to all income groups in all States.
A political scientist at Brookings institution, Vanessa Williamson who studies public attitudes towards taxation said that Surveys have shown that it is not that Americans do not think they pay too much under the Trump tax laws, but they have a problem with corporates and the rich paying too little.
Trumps Tax laws have largely been misunderstood because of a relentlessly negative campaign by the left-leaning Democrats. They have been fighting the legislation since its infancy claiming that it was tailor-made to favor big corporations and the wealthy over low-income citizens and small businesses.
Less attention has been given to small businesses although experts are of the opinion that they have benefited undoubtedly. Most small businesses file as pass-through entities, which mean they pay taxes as individuals. It is, therefore, a fact that almost all small businesses will benefit greatly from Trump’s tax law as their taxes will decrease significantly.
As a result of Trump signing the Tax cuts and Job act, big corporations have been giving gratuity and pay hikes to employees. Additionally, with the slashing o the individual rates, owners pay less and these businesses are set to see more money and more savings in their pockets.
The Tax cuts and Job act is the Republican government’s biggest legislative achievement currently and it is becoming clear that the laws were made with low-income citizens in mind.