It is estimated that the TCJA (Tax Cuts and Jobs Act) altered a number of business and personal tax deductions, credits, depreciation, and expenses, among other things. As a result of the law, many changes occurred, as well as some of the much-discussed proposals that did not come to fruition. In this guide, we cover the key elements of the tax code that most people deal with, but it is not an exhaustive list.
- From Jan. 1, 2018, until 2025, taxpayers will be adversely affected by the Tax Cuts and Jobs Act.
- In approximately 200 pages, the TCJA significantly changes the tax code for individuals, corporations, and estates.
- Standard deductions are being increased and corporate tax rates are being lowered.
- Changes affect almost everyone in America, but how it affects you will depend on your personal and business circumstances.
- You can reduce uncertainty in tax planning and filing by understanding this tax law and how it might affect your circumstances.
Acting on the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act of 2017 was signed into law by former President Donald Trump on Dec. 22, 2017.
It was believed that the lower corporate tax rate contributed substantially to corporate profits and job creation. One of the key components of the Act was the lower corporate tax rate. This act was recorded as “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the fiscal year 2018 budget.”
Approximately 200 pages of text were in the final bill, whose effects on the economy and the American people will unfold until 2025.
Having a home of your own
A $10,000 limit applies if you live in a high property tax area and can deduct state and local taxes (including property taxes) from your federal income tax return. If you conduct business or trade, you may be exempt from paying or accruing taxes. More details are provided below.
In the last few decades, the standard deduction has nearly doubled, which has led to a reduction in itemizing. The following figures are adjusted for inflation each year:
- A single taxpayer can take $12,950 in deductions and a married couple can take $25,900.
- Single taxpayers will be able to deduct $13,850 and married couples filing jointly will be able to deduct $27,700.
Until 2025, homeowners cannot deduct interest on home equity loans, whether they itemize or not.
In 2023, you file taxes for 2022, which means you file taxes for 2023 in 2024.
When you buy (or sell) a house
Until the TCJA was passed, homeowners were entitled to deduct up to $1,000,000 in mortgage interest, or $500,000 for married taxpayers filing separately. Between December 15, 2017 and December 31, 2025, people taking out a mortgage can deduct interest on the first $750,000. For married taxpayers filing separately, this amount is $375,000.
For most people, however, the tax difference between owning and renting is much smaller now that the tax code has changed.
Make sure you itemize your deductions
In addition to nearly doubling the standard deduction, many households are now taking the standard deduction instead of itemizing their deductions on Schedule A. This simplifies tax preparation for Americans, which saves them time and money.
There have been a number of changes to Schedule A, including the elimination of a significant number of previous deductions. Taxpayers who continue to itemize should be aware of these changes.
Losses from casualties and thefts
Unless they are related to a loss in a federally declared disaster area, these items are no longer tax deductible. This may include hurricane, flood, or wildfire affected areas. Normal wear and tear is not included in this category according to the Internal Revenue Service (IRS).
Costs associated with medical care
When you have an adjusted gross income (AGI) of $50,000, you can deduct medical expenses that exceed $3,750.9 The threshold for deducting medical expenses is 7.5%. In this situation, you will be able to deduct $1,250 from your $5,000 medical expenses if you itemize using Schedule A.
Local and state taxes
Adding all of these taxes together results in a maximum deduction of $10,000 for state and local income taxes, sales taxes, and property taxes. If you live in a high-tax state such as California, New York, or New Jersey, this measure might hurt itemizers.
Singles and married couples filing jointly are both subject to the $10,000 exemption. Married couples filing separately are subject to the $5,000 exemption.
Deductions for miscellaneous items have been eliminated
As a result, taxpayers cannot deduct expenses such as tax preparation, investment fees, biking to work, and moving expenses.
Exemption for personal use
Individuals, spouses, and dependents were each allowed an exemption amount of $4,050 for the 2017 tax year. As a deduction, it helped lower your taxable income. The exemption amount will reduce to zero by 2025.
Credit for children
Child tax credits are now $2,000 per child under the age of 17, and they are refundable up to $1,400, so even if your income is too low, you can still receive a partial credit even if you don’t owe tax. Furthermore, the TCJA makes the tax credit more accessible to middle- and upper-class families.
With the TCJA, those thresholds were increased to $200,000 and $400,000. Parents earning more than $75,000 can’t claim the full credit in 2017, and married parents can’t claim it if they earn more than $110,000.
The child tax credit isn’t changed for children under 17, but it does change the situation for parents who are undocumented.
The child tax credit was previously available to undocumented immigrants who filed their taxes under an individual taxpayer identification number. A new law requires parents to provide the Social Security number (SSN) of each child for which they claim a tax credit, an effort intended to prevent even undocumented immigrants from claiming the credit.
The use of 529 plans for education
Among the biggest changes is the expansion of 529 plans. Parents can now use $10,000 out of 529 accounts each year to pay for tuition at public, private, or religious K-12 schools tax-free.
For those with 529 plans, this is a very important point. The SECURE Act was passed in December 2019 and expanded the rules even further. The Department of Labor must register the apprenticeship program in order to be eligible to withdraw funds. This bill was signed in December 2019 and allows 529 account holders to withdraw funds to pay expenses related to an apprentice’s apprenticeship.
It is also possible to pay off student loan debt with funds from a 529 plan under Section 302 by withdrawing a maximum lifetime amount of $10,000 to pay down a qualified education loan. The withdrawals are tax- and penalty-free at the federal level, but they may be considered nonqualified distributions under state tax laws.
Children over 17 years of age or elderly dependents
A taxpayer can claim a nonrefundable $500 credit for dependents who do not qualify for the child tax credit, such as college-aged children or dependent parents (see “Children Under 17” above). These credits are subject to the same income limits as the new child tax credit.
As a result of the TCJA, caregivers lose two benefits. Caregiver exemptions for elderly parents will no longer be available. As a result, qualifying relatives can no longer claim a dependent care tax credit when they meet dependent standards for 2022. These include having a gross income of less than $4,400 (originally $4,050) and living with the taxpayer at least half of the year. The maximum available was $600 to $1,050, depending on the taxpayer’s adjusted gross income, and was based on up to $3,000 in care expenses.
It is a serious blow to caregivers to lose the exemption of $4,050 and not be able to claim this credit.
ACA Insurance Purchases
Those who don’t buy health insurance won’t be fined by the IRS for not buying it. This change satisfies the Republican desire to repeal the individual mandate penalty.
During the year 2021, the American Rescue Plan will reduce the cost of Marketplace plans, increase their tax credits for many Americans, and expand their eligibility for the tax credits for the first time. Market users will now pay an average of $85 less per month for Marketplace insurance.
Student loans from the federal government and private lenders
It will be helpful for families that are facing hardship to know that federal and private student loans discharged as a result of death or disability will not be taxed from 2018 through 2025. However, private lenders do not have to discharge borrowers in the event of death or disability.
Under the old law, if you passed away or became permanently disabled and your lender discharged your debt and reduced it to zero, your estate or you would be responsible for paying an income tax bill on the $30,000. Your heirs or survivors would owe $7,500 in taxes if your marginal tax rate was 25%. The TCJA tax reform eliminated that burden.
An estate tax relief of $12 million
Individuals who die with assets worth less than $5.49 million are not subject to estate taxes, and the threshold for 2022 is $12.06 million and for 2023 is $12.92 million.
It starts at 18%, but escalates quickly to 40%. The estate tax is bracketed like the individual income tax, with increasing marginal rates, similar to the individual income tax. In the event that your taxable estate exceeds six figures, you are already in the 28% bracket.
Revisions to tax brackets
Unless further legislation is passed, 2017 rates will return. The individual cuts were not made permanent due to the deficit increase they caused.
A nonpartisan Tax Policy Center estimate indicates that everyone will save money overall as a result of the tax bracket changes. The top 1% will see a 2.2% average tax cut while the top 95% to 99% will see a tax cut of about 3.4%.
Previously, some married couples found themselves in a higher tax bracket after marriage due to the marriage penalty. Now, the income brackets that apply to each marginal tax rate for married couples filing jointly are exactly double those for singles.
Check out the chart below to see how the changes will affect your income bracket. Also, keep in mind that income tax rates will remain through 2025, while income brackets will be adjusted for inflation annually.
There is also a change in how tax brackets are adjusted for inflation, with the new tax brackets indexed to a slower inflation measure called the Chained Consumer Price Index for All Urban Consumers (CPI-U).
Households with high incomes are subject to higher taxes
Tax Foundation reports that almost 88% of federal income tax is paid by the top 25% of earners, while 42% is paid by the top 1%, and even less is paid by the top 0.1%.
From 2018 through 2025, high-income earners’ tax brackets will change as shown in the table below.
Tax Liability of Middle-Income Households
Overall, middle-income families save about $900 in taxes according to the Tax Policy Center. Tax cuts for the second quintile are about 1% and for the third quintile are about 1.4%.
In the third and fourth quintile, about 16% of the federal income taxes are paid by households with incomes in the third and fourth quintile, according to the Tax Policy Center.
Tax Liability of Low-Income Households
Over 70 percent of low-income households do not see a change in their tax bill under the TCJA, according to the Tax Policy Center.
Most lower-income earners do not owe federal income taxes. The Tax Policy Center reports that the lowest 20% get 0.4% back in federal income taxes paid with an average tax bill of $60. While lower-income workers aren’t always taxed at the federal level, they still pay Social Security and Medicare taxes.30 The table below shows how low-income earners’ tax brackets will change.
Taxes passed through to businesses
A pass-through business, such as a sole proprietorship, a S corporation, a partnership, or a limited liability company (LLC), pays taxes through the individual income tax code rather than through the corporate income tax code.
As a result of the TCJA, pass-through business owners are able to deduct 20% of their business income. If you file as a single professional-services business owner and earn more than $157,500 or file as a couple and earn more than $315,000, you’ll face a phase-out and a cap on your deduction.
Businesses that exceed these thresholds are limited to deducting 50% of their total wages or 25% of their total wages plus 2.5% of the cost of tangible depreciable property, such as real estate, respectively. Small and medium-sized businesses, as well as those structured as pass-through entities, benefit from the pass-through deduction. Among these are hedge funds, investment firms, manufacturers, and real estate developers.
It will be less expensive for businesses to make certain investments from 2018 if they can write off 100% of the cost of capital expenses for five years instead of writing them off gradually over several years.
Multinational corporations and taxation
U.S. corporations no longer have to pay U.S. taxes on most future overseas profits due to the TCJA, which changed the U.S. corporate tax system from a worldwide one to a territorial one. It was previously the case that U.S. corporations had to pay tax on all profits, regardless of where they were earned.
Taxation of repatriated foreign earnings was also changed as a result of the tax bill. The tax for bringing profits back to the United States from overseas is 8% for illiquid assets such as factories, equipment, and cash, and 15.5% for cash and cash equivalents.
As a result of these new rates, U.S. corporations are discouraged from shifting profits to lower-tax countries in the future. The anti-base erosion and anti-abuse tax both represent substantial drops from the prior rate of 35%. Although these cuts also affect how much corporate tax is applied to the deficit, they do not expire starting in 2026.
In addition to those whose retirement and investment accounts hold stocks, mutual funds, or exchange-traded funds (ETFs), tax-bill proponents say they will also benefit from these changes. Multinational stocks tend to increase in value when they are listed on the stock market.
Also, the previous worldwide tax system harms Americans by effectively double taxing foreign-earned income by sending jobs, profits, and tax revenue overseas. As of Jan. 1, 2018, the United States has joined the territorial system of most developed countries.
Tax rates for corporations
The following rates apply to corporations as well as individuals and estates in 2017.
With the introduction of a flat corporate tax rate of 21% in 2018, corporations end up paying a lower federal tax bill than they did in the past. It’s a flat rate that’s lower than most of the previous marginal rates. The tax rate for businesses with profits under $50,000 went from 15% to 21% in 2018.
A Wall Street Journal analysis found that retailers, health insurers, telecommunications companies, independent refiners, and supermarkets are likely to benefit from the lower corporate rates.
Among the large companies, Aetna had an effective tax rate of 35 percent over the last 11 years. Time Warner paid 33 percent, Target paid 34 percent, and Phillips 66 paid 31 percent.
In the same way foreign profits are taxed, corporate profits are taxed the same way for anyone owning shares of the corporation.
When weighted for gross domestic product (GDP), the top marginal tax rate for U.S. corporations was 35% under the former law, and the global average was 25.44 percent. The high corporate tax rate in the United States has long been criticized by critics as making the country less competitive than lower tax countries like Ireland.
Ideally, companies would be able to earn more profits domestically now that rates are lower, and they might spend fewer resources lobbying for lower taxes and more resources improving their products. In the TCJA, the corporate alternative minimum tax of 20% was repealed.
According to the Tax Foundation’s models, the tax plan would, however,:
- The long-term growth rate of GDP should be 1.7%
- 1.5% increase in wages
- Increase the number of full-time jobs by 339,000
It is forecasting that GDP will grow by 0.29% per year over the next decade, which is an increase from 1.84% to 2.13%.3839 Federal revenues will also increase by $1 trillion as a result of the tax cuts.
working in the tax industry
Tax preparers, tax attorneys, and accountants were busy in 2018, helping people set up pass-through businesses and reevaluating their clients’ situations. Since fewer low- and middle-class households will benefit from itemizing their deductions, tax preparers whose primary clientele are low- and middle-class taxpayers may see a drop in business.
The Permanents and the Non-Permanents
Individual changes to the tax code, like the 20% deduction for pass-through income, are all temporary. There are three permanent changes to the corporate tax rate, international tax rules, and a slower measure of inflation to determine tax brackets: a corporate tax rate cut, international tax rules, and a slower measure of inflation.
Several groups that stood to gain or lose substantially fought hard to protect their interests in the tax bill released by the House on Nov. 2, 2017.
- A number of graduate schools do not charge tuition to teaching or research assistant students. Graduate students felt threatened that their tuition waivers would be taxed.41 Students were opposed to getting tax bills for income they did not receive. The tax bill could have been several thousand dollars, depending on the student’s tax bracket. The tuition benefit will remain tax-free for graduate students.
Because the standard deduction has increased, anyone who has student-loan debt can still deduct the interest.
- There was some concern that teachers would lose deductions for expenses related to their classrooms and jobs, but they did not. This deduction can be taken regardless of whether they itemize deductions or take the standard deduction.
- As a result of the bill, the low-income housing tax credit was also preserved. According to the president of the National Low Income Housing Coalition, a provision that would have revoked the tax-exempt status of private activity bonds, an incentive that lowers the cost of affordable housing construction, would have meant losing around 800,000 affordable rental houses in the next 10 years. Infrastructure projects like roads and airports are also financed with these bonds.
- AMT also did not get eliminated by the act, but it has been raised in order to make it a less burdensome tax.
- It is noted above in “You Itemize Deductions and File Schedule A” that the House bill was intended to eliminate medical expenses, but the final bill keeps them and provides a small boost for two years.
- Tax breaks for the working poor were not expanded, including the earned income tax credit.
- A 529 plan that expanded to include K-12 education did not cover homeschooling.
What is the impact of the TCJA on tax preparation?
As part of the TCJA, certain deductions related to preparation of taxes were eliminated, including tax preparation fees and unreimbursed employee expenses.
Changes in business taxes under the Tax Cuts and Jobs Act?
Corporate taxes have been reduced from 35% to 21% as a result of the Tax Cuts and Jobs Act. As a result, the graduated corporate tax rate schedule has also been eliminated.
What is the duration of TCJA?
Tax cuts introduced by the TCJA will expire in 2025.
Americans will see a reduction in their income tax burden with the implementation of the Tax Cuts and Jobs Act beginning in 2018 and continuing through 2025. Taking advantage of all deductions you deserve and ultimately paying the lowest tax bill possible is possible when you understand how the Act affects taxes in your tax bracket and your individual circumstances.