The top individual tax rate dropped from 39.6% to 37% under the terms of the law, and numerous itemized deductions were eliminated or affected as well. The TCJA also cut the corporate tax rate from 35% to 21% effective 2018.
How the TCJA Affects You
The TCJA is complex. Its various terms affect each family differently depending on their personal situations.
High-Income Earners
When the TCJA was proposed, the independent tax policy nonprofit Tax Foundation found that those who earn more than 95% of the rest of the population would enjoy a 2.2% increase in after-tax income. Those in the 20% to 80% range would see a 1.7% increase.
Those With Valuable Estates
A larger exemption for the estate tax benefits you if you leave an estate that’s worth a great deal of money. The TCJA doubled the estate tax exemption from $5.49 million in 2017 to $11.18 million in 2018. The exemption was $12.06 million in 2022 and it increased to $12.92 in 2023 because it’s indexed to keep pace with inflation.
Taxpayers Who Claim the Standard Deduction
You win on two levels if you claim the increased standard deduction because it has the potential to be greater than your itemized deductions. Claiming the standard deduction tends to reduce your taxable income more than it did before passage of the TCJA so you can skip the complicated process of itemizing your deductions and reduce your taxable income just as much if not more.
Large Families
You might be hurt by the elimination of personal exemptions under the terms of the TCJA if you have a large family and several dependents. The increased tax credits for children and adult dependents and the doubled standard deductions aren’t generally enough to offset this loss for families with multiple children.
The Self-Employed
You might benefit from the 20% qualified business income deduction if you’re an independent contractor, own your own business, or are self-employed.
Individual Income Tax Rates
The TCJA lowered tax rates, but it kept seven income tax brackets. The brackets correspond with more favorable spans of income under the TCJA than under previous law. Each bracket accommodates more income. The highest tax bracket started at taxable income greater than $539,900 for single filers and $647,850 for married couples filing jointly in tax year 2022. These thresholds increased in 2023 to $578,125 for single taxpayers and to $693,750 for married taxpayers filing joint returns. Taxpayers are subject to a 37% rate on incomes over these thresholds after exemptions and deductions.
The Standard Deduction vs. Itemized Deductions
A single filer’s standard deduction increased from $6,350 in 2017 to $13,850 in 2023. The deduction for married joint filers has increased from $12,700 in 2017 to $27,700 in 2023. The Tax Foundation estimated in September 2019 that only about 13.7% of taxpayers would itemize on their returns in 2019 due to this change. That’s less than half of the 31.1% who would have itemized before the TCJA.
Personal Exemptions
Taxpayers could subtract $4,050 from their taxable incomes for themselves and for each of their dependents before the TCJA. That worked out to $20,250 for a married couple with three children. Combined with the standard deduction for married taxpayers filing joint returns ($12,700 at that time), the total deduction worked out to $32,950. Now fast forward to TCJA terms. There are no more personal exemptions, but the legislation does provide for a partially refundable tax credit of up to $2,000 per child, so that couple can claim $33,700 (the standard deduction plus as much as $6,000 for their children) in 2023. That’s $750 less in income that they’ll pay taxes on, assuming in both scenarios that they’re not claiming any other tax deductions or credits.
Fewer Itemized Deductions
The TCJA eliminated most miscellaneous itemized deductions. This includes tax preparation fees, job expenses, and investment fees:
The deductions for tax preparation fees and most unreimbursed employee expenses are gone under the TCJA. The TCJA limited the deduction on mortgage interest to the first $750,000 of qualifying loans. Borrowers who took out their loans before Dec. 16, 2017, aren’t affected by this change. Interest on home equity loans or lines of credit can no longer be deducted unless the proceeds are used to buy, build, or substantially improve the home. The state and local tax (SALT) deduction remains in place, but it’s capped at $10,000. Taxpayers can deduct property taxes, and either state income or sales taxes, but not both. The deduction threshold for most charitable contributions was improved. You can generally claim a deduction for donations up to 60% of your adjusted gross income (AGI) rather than 50%, the limit prior to passage of the TCJA. Deductions for casualty losses are mostly limited under the TCJA to those that occur in federally declared disaster areas. The threshold for the medical expense deduction dropped from 10% to 7.5% of a taxpayer’s AGI. This change was set to expire at the end of 2019, but the Further Consolidated Appropriations Act of 2020 resurrected it.
Another important change is that the TCJA did away with the Pease limitation on itemized deductions. This tax provision previously required that taxpayers had to reduce their itemized deductions by 3% for each dollar of taxable income over certain limits, up to a total of 80%. This is no longer the case, thanks to the TCJA.
Above-the-Line Adjustments to Income
The above-the-line deduction for moving expenses has been eliminated for everyone other than active-duty members of the military. Those paying alimony can no longer deduct it as an adjustment to income. This change is effective for divorces granted or divorce agreements entered into on or after Jan. 1, 2019. The TCJA keeps the deduction for retirement savings. It also allows those age who are age 70½ or older to directly transfer up to $100,000 a year to qualified charities from their individual retirement accounts.
Changes to Tax Credits
The TCJA increased the child tax credit from $1,000 up to $2,000. Even parents who don’t earn enough to pay taxes can claim a refund of the credit up to $1,400. The TCJA also introduced a $500 credit for other dependents, which helps families whose dependent children no longer meet the strict criteria of child dependents because they’ve aged out, as well as families caring for elderly parents.
The Obamacare Tax
The TCJA repealed the Obamacare tax penalty that was charged to those without health insurance, effective 2019.
The Alternative Minimum Tax
The TCJA keeps the alternative minimum tax (AMT). The 2022 exemption was $75,900 for single filers and $118,100 for joint filers. The exemptions began to phase out at $539,900 for singles and $1,079,800 for married joint filers. These thresholds apply to the tax return you’ll file in 2023. They increase for the 2023 tax year to $81,300 to $578,150 for single filers, and to $126,500 to $1,156,300 for married taxpayers filing joint returns.
Business Tax Rates
The tax plan lowers the maximum corporate tax rate from 35% to 21%, the lowest it’s been since 1939.
Business Deductions
Pass-through businesses get a 20% standard deduction on qualified income. Pass-through businesses include:
Sole proprietorshipsPartnershipsLimited liability companiesS corporationsCertain trusts and funds
The deductions phase out for service professionals when their income reaches $157,500 for singles and $315,000 for joint filers. The TCJA limits certain businesses’ ability to deduct interest expenses to 30% of their adjusted taxable income. Income was based on EBITDA through 2021. This acronym refers to earnings before interest, tax, depreciation, and amortization. It’s based only on earnings before interest and taxes beginning in tax year 2022, and this makes it more expensive for financial firms to borrow money. Companies would be less likely to issue bonds and to buy back their stock so stock prices could fall. But the limit generates revenue to pay for other tax breaks. Businesses can deduct the cost of certain depreciable assets in a single year rather than amortize them over several years. But the equipment has to have been purchased and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The tax act stiffens the requirements on carried interest profits. Carried interest is taxed at the top long-term capital gain rate of 20% instead of the top ordinary income rate of 37% for 2022. Firms had to hold assets for a year to qualify for the lower rate before the TCJA took effect. This requirement now extends to three years. This can hurt hedge funds that trade frequently, but it shouldn’t affect private equity funds that typically hold on to assets for around five years.
Other Changes to Corporate Taxes
The TCJA eliminated the corporate AMT. This tax had a 20% rate that kicked in if tax credits pushed a firm’s effective tax rate below 20%. Companies could not deduct the cost of research and development under the AMT. Trump’s tax plan incorporates elements of a territorial tax system in what was previously a “worldwide” taxation of companies operating abroad. Multinationals were taxed on foreign income earned under the worldwide system. They didn’t pay the tax until they brought the profits home. Many corporations left their revenue parked overseas as a result. The adoption of elements of territorial taxation allows companies to repatriate the approximately $1 trillion they’ve held in foreign cash stockpiles. They pay a one-time tax rate of 15.5% on liquid assets and 8% on illiquid assets under the TCJA. The Federal Reserve found that U.S. firms repatriated $777 billion in 2018. That was around 78% of offshore cash holdings. Corporations increased buybacks of their stocks to improve share prices instead of investing those funds. The TCJA also allows oil drilling in the Arctic National Wildlife Refuge. The drilling provision is estimated to add around $1.8 billion in revenue from 2019 to 2029. Half that money goes to the state of Alaska.
Impacts on the Economy
The tax plan made the U.S. progressive income tax more regressive. Tax rates have been lowered for everyone, but they’ve been lowered the most for the highest-income earners. The Trump tax cuts were estimated to cost the government $1 trillion, according to the Joint Committee on Taxation. This $1 trillion figure is the result of the overall $1.456 trillion the TCJA would cost over the long term, minus the roughly $451 billion it would create via an annual 0.7% growth in gross domestic product. The Tax Foundation made a slightly different estimate. The tax cuts themselves would cost $1.47 trillion but savings would offset that figure by $1 trillion. The plan was expected to boost gross domestic product by 1.7% a year, create 339,000 jobs, and add 1.5% to wages. The U.S. Treasury estimated that the bill would bring in around $1.8 trillion in new revenue and projected economic growth of 2.9% a year, on average. With increased debt being the likely outcome of these tax cuts, it’s important to understand how that debt affects the gross domestic product (GDP). The World Bank estimates that a nation’s GDP decreases by 0.017 percentage points for every percentage point that its debt-to-GDP ratio increases above 77%.
