On Friday, December 22, 2017, President Donald Trump signed a massive tax bill known as the Tax Cuts and Jobs Act (TCJA). As its name implies, it seeks to cut individual, corporate, and estate tax rates. The lower corporate tax rate is one of its key components, said to be a major factor for corporate profits and job creation. The act went in the record books as “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018."
The final bill is approximately 200 pages, and the title gives you just a whiff of how the text reads. Even tax and public policy experts probably need megadoses of caffeine to slog through it. The ultimate effects on Americans and the economy continue to play out and will be enforced until 2025. Meanwhile, several effects are clear already.
What follows is a take on what you can expect to affect you in the near term, plus a quick look at some much-discussed provisions that didn't happen. While this guide doesn’t include an exhaustive list of every change to the tax code, it does provide key elements that will affect the most people.
The changes involve so many parts of the tax code that how the tax bill affects you depends on your personal situation — how many children you have, how much you pay in mortgage interest and state/local taxes, how much you earn from work, and more. So find yourself in the sections below and start planning.
- The Tax Cuts and Jobs Act took effect beginning on January 1, 2018, and will substantially impact tax filings through 2025.
- The 200-page Act extensively changes the tax code for institutions and American citizens with a focus on cutting individual, corporate, and estate tax rates.
- Nearly everyone in America is affected by the tax changes but the effects are highly dependent on personal and business situations.
- Understanding the new tax laws and how they may affect personal circumstances can greatly help to alleviate uncertainty in tax planning and filing.
You Own a Home
If you live in an area with high property taxes, you will be especially affected by the new $10,000 limit on how much state and local tax (including property taxes) you can deduct from your federal income taxes (exempted: taxes that are paid or accrued through doing a business or trade). More details below, under "You Itemize and File Schedule A."
For the 2018 tax year, mortgage-interest deductions won't be affected, but if you move, that will change (see next section). Fewer people will itemize, though, since the standard deduction will increase from $6,350 to $12,000 for individuals and for married couples filing separately, from $9,350 to $18,000 for heads of household, and from $12,700 to $24,000 for married couples filing jointly. Homeowners also won’t be able to deduct the interest on home-equity loans, whether they itemize or not.
You're Buying (or Selling) a Home
Under prior law, homeowners could deduct the interest on a mortgage of up to $1,000,000, or $500,000 for married taxpayers filing separately. Now, anyone who takes out a mortgage between December 15, 2017, and December 31, 2025, can only deduct interest on a mortgage of up to $750,000, or $375,000 for married taxpayers filing separately.
For buyers in expensive markets, these tax code changes could make home ownership less affordable. For most people, the difference between owning and renting, from a tax standpoint, is now much smaller. Zillow estimated that only about 14% of homeowners, down from 44%, will claim the mortgage interest deduction next year.
The National Association of Realtors, one of the nation’s largest lobbying groups, predicted that the lower mortgage interest deduction could cause home prices to fall and sales growth to slow – though prices climbed in 2018.
Itemizing Your Deductions
As already discussed, the standard deduction has increased from $6,350 to $12,000 for individuals and for married couples filing separately, from $9,350 to $18,000 for heads of household, and from $12,700 to $24,000 for married couples filing jointly.
The TCJA's standard deduction for single filing, individual taxpayers.
This change means many households that used to itemize their deductions using Schedule A will now take the standard deduction instead, simplifying tax preparation for an estimated 30 million Americans, according to USA Today. The Joint Committee on Taxation estimates that 94% of taxpayers will claim the standard deduction starting in 2018; about 70% claimed the standard deduction under prior law. Not filing Schedule A means less record keeping and less tax-prep time. But it also means charitable contributions will effectively no longer be tax deductible for many taxpayers because they won’t itemize.
Taxpayers who continue to itemize need to be aware of changes to many Schedule A items beginning with the 2018 tax year.
- Casualty and Theft Losses. These are no longer tax deductible unless they are related to a loss in a federally declared disaster area – think hurricane, flood, and wildfire victims.
- Medical Expenses. The threshold for deducting medical expenses temporarily goes back to 7.5% from 10%. That change applied to 2017 taxes, unlike the bill’s other changes, which mostly didn’t kick in until 2018. After the 2018 tax year, the 10% threshold returns. This change particularly helps those with low incomes and high medical expenses. If your adjusted gross income is $50,000, you’ll be able to deduct medical expenses that exceed $3,750. So if you paid $5,000 in medical expenses in 2017 or 2018 and you’re itemizing using Schedule A, you will be eligible to deduct $1,250 of your $5,000 in medical expenses.
- State and local taxes. Taxpayers can deduct a maximum of $10,000 from the total of their state and local income taxes or sales taxes, and their property taxes (added together), a measure that might hurt itemizers in high-tax states such as California, New York, and New Jersey. The $10,000 cap applies whether you are single or married filing jointly; if you are married filing separately, it drops to $5,000.
- Eliminated Miscellaneous Deductions. Taxpayers lose the ability to deduct the cost of tax preparation, investment fees, bike commuting, unreimbursed job expenses, and moving expenses.
Taking a Personal Exemption
For 2017, the exemption amount was $4,050 each for individuals, spouses, and dependents. Like a deduction, it helped to lower your taxable income. In 2018 through 2025, that exemption goes away. The exemption’s elimination has the greatest effect on taxpayers with families. Here are three examples:
You're Single, with No Children
Standard deduction increases from $6,350 to $12,000.
Personal exemptions decrease from $4,050 to $0.
Old tax break: $10,400.
New tax break: $12,000.
You're Married Filing Jointly, with No Children
Standard deduction increases from $12,700 to $24,000.
Personal exemptions decrease from $8,100 to $0.
Old tax break: $20,800.
New tax break: $24,000.
You're Married Filing Jointly, with Two Children
Standard deduction increases from $12,700 to $24,000.
Personal exemptions decrease from $16,200 to $0.
Old tax break: $30,900.
New tax break: $28,000.
(In some cases, you may be able to take the child tax credits which increase from $2,000 to $4,000 or from $0 to $4,000 if your income was too high to qualify before – see the next section for more explanation).
You Have Kids Under 17
The TCJA increased the child tax credit from $1,000 to $2,000 per child under age 17. It’s also refundable up to $1,400, which means that even if you don’t owe tax because your income is too low, you can still get a partial child tax credit. The TCJA also makes the tax credit more widely available to the middle and upper class. In 2017, single parents couldn’t claim the full credit if they earned more than $75,000 and married parents couldn’t claim it if they earned more than $110,000. With the TCJA those thresholds increase to $200,000 and $400,000 through 2025.
As for age, the prior law applied to children under age 17. The tax bill doesn't change the age threshold for the child tax credit but it does change the situation for undocumented immigrant parents. Under the previous law, undocumented immigrants who filed taxes using an individual taxpayer identification number could claim the child tax credit. The new law requires parents to provide the Social Security number for each child they’re claiming the credit for – a move that seems designed to prevent even undocumented immigrants who pay taxes from claiming the credit. In addition, the broader exposure that children’s SSNs receive makes their numbers more susceptible to identity theft, and people might make more use of stolen SSNs to claim the credit in the first place.
You Have Kids in Private School
One big change: 529 plans have been expanded. In addition to using them to fund college expenses, parents may now use $10,000 per year from 529 accounts tax-free to pay for K-12 education tuition and related educational materials and tutoring.
Elderly Dependents or Kids 17+
For dependents who don’t qualify for the child tax credit, such as college-aged children and dependent parents, taxpayers can claim a nonrefundable $500 credit, subject to the same income limits as the new child tax credit (explained in the "Children Under 17" section, above). Caregivers have lost two benefits under the new law.
With the personal exemption gone, caregivers can no longer claim the $4,050 personal exemption for an elderly parent. In addition, they can no longer claim a dependent care tax credit for qualifying relatives who met dependent standards, which included having a gross income of less than $4,050 and receiving more than half of their support from the taxpayer. The maximum available was $600 to $1050, depending on the taxpayer's adjusted gross income, and was based on up to $3,000 of expenses for care. Not being able to claim this credit for caring for a dependent parent if you qualified for it and getting just $500 instead – and losing the personal exemption of $4,050 – is a significant blow to family caregivers.
Buying Insurance Through the ACA
The Republicans got their wish to see the individual health insurance mandate penalty repealed. This change, which becomes effective in 2019, not 2018, means that from 2019 on, people who don’t buy health insurance will not have to pay a fine to the IRS. This freedom of choice also means that individual insurance premiums could increase by 10%, and 13 million fewer Americans could have coverage, according to the Congressional Budget Office.
Premium increases will likely affect everyone who buys insurance, including people who get it through their employers and employers who subsidize their employees’ premiums.
Your Spouse Has a Student Loan
Federal and private student loan debt discharged from death or disability will not be taxed from 2018 through 2025. This change will be a big help to unfortunate families.
Let’s say you’re married and you have $30,000 in student loan debt. Under the old law, if you died or became permanently disabled and your lender discharged your debt, reducing it to zero, you or your estate would receive an income tax bill on that $30,000. If your marginal tax rate was 25%, your heirs or survivors would owe $7,500 in taxes. Tax reform eliminates that burden. But it doesn’t require private lenders to discharge debt.
Inheriting a Large Estate
The old federal estate-tax exemption thresholds were $5.49 million for individuals and $10.98 million for married couples. If one died with assets worth less than those amounts, no estate tax was owed. From 2018 through 2025, the thresholds double to nearly $11 million for individuals and nearly $22 million for couples. Some folks may wonder whether hospitals will see an increased use of life-support machines by the very wealthy through the end of 2017 – and decreasing use of them in December 2025.
The top estate-tax rate remains 40%. The estate tax uses a bracketed system with increasing marginal rates, just like the individual income tax does. It starts at less than 17% but escalates quickly. Once your taxable estate (the amount beyond the exemption) reaches six figures, you’re already in the 30% bracket.
How Will Your Tax Bracket Change?
That depends. Tax rates are changing from 2018 through 2025 across the income spectrum. In 2026, the changes will expire and 2017 rates will return, absent further legislation. The individual cuts were not made permanent. The reason given: their effect on increasing the budget deficit.
The TCJA has lowered tax rates across income tax brackets with income levels adjusted annually based on the Chained Consumer Price Index for All Urban Consumers.
The nonpartisan Tax Policy Center projects that everyone, on average, will save money from the tax-bracket changes. In 2018, the fourth quintile and the top 80%–95% of income earners will receive an average tax cut of about 2%. The top 95%–99% are the biggest winners, with an average tax cut of about 4%. The top 1% will see an average tax cut of a little less than 3.5%, while the top 0.1% will receive an average tax cut of a little more than 2.5%.
The new tax brackets eliminate the marriage penalty. The income brackets that apply to each marginal tax rate for married couples filing jointly are exactly double those for singles. Previously, some couples found themselves in a higher tax bracket after marriage.
Read on to see how the changes will affect your bracket. Note that there is some overlap among where people fit in the income spectrum. Also, note that income tax rates will remain through 2025 but qualifying income brackets will be adjusted annually for inflation.
The Tax Policy Center’s analysis shows that the biggest benefits will go to households earning $308,000 to $733,000. And those who earn more than $733,000 can expect a $50,000 tax cut.
Note that the top 20% pay nearly 87% of all the federal income tax the government collects, according to the Tax Policy Center. The top 1% pay more than 43% of it, and the top 0.1% pay more than 20% of it.
The table below shows how high-income earners will see their tax brackets change from 2018 through 2025.
Federal Individual Income Tax Rates for High-Income Earners, 2017 vs. TCJA
In 2018, according to the Tax Policy Center, the second quintile of income earners will get an average tax cut of a little over 1%. The third quintile will get an average tax cut of about 1.5%. Overall, middle-income families can expect to save an average of $900 in taxes.
The table below shows how middle-income earners will see their tax brackets change.
Federal Individual Income Tax Rates for Middle-Income Earners, 2017 vs. TCJA
The Tax Policy Center says about 90% of middle-income households will have a lower tax bill, while 7% will have a higher one. Households in the third and fourth quintiles pay about 17% of all federal income taxes.
The Tax Policy Center estimates that almost half of low-income households will not see their tax liability change under the tax bill. And it estimates that in 2018, the lowest quintile of income earners will get an average tax cut of less than 0.5%, while the second quintile will get an average tax cut of a little over 1%.
Note that many in the lowest brackets don’t earn enough to owe federal income tax. The Tax Policy Center says that the lowest 20% of income earners get 2.2% back in total federal income taxes paid each year, with an average tax bill of –$643. The second lowest 20% are in a similar situation. However, lower-income workers still pay Social Security and Medicare taxes, even if they don’t always pay federal income taxes. The table below shows how low-income earners will see their tax brackets change.
Federal Individual Income Tax Rates for Low-Income Earners, 2017 vs. TCJA
Tax Brackets and Inflation
The tax bill also changes how tax brackets are increased for inflation. They are now indexed to a slower inflation measure called the Chained Consumer Price Index for All Urban Consumers.
A pass-through business pays taxes through the individual income tax code rather than through the corporate tax code. Sole proprietorships, S corporations, partnerships, and LLCs are all pass-through businesses while C corporations are not.
Under the new tax code, pass-through business owners are able to deduct 20% of their business income, which will lower their tax liability. However, professional-services business owners such as lawyers, doctors, and consultants filing as single and earning more than $157,500 or filing jointly and earning more than $315,000 face a phase-out and a cap on their deduction. Other types of businesses that surpass these earnings thresholds will see their deduction limited to the higher of 50% of total wages paid or 25% of total wages paid plus 2.5% of the cost of tangible depreciable property, such as real estate. Independent contractors and small business owners will benefit from the pass-through deduction, as will large businesses that are structured as pass-through entities, such as certain hedge funds, investment firms, manufacturers, and real estate companies.
Both pass-through and corporate business owners will be able to write off 100% of the cost of capital expenses from 2018 for five years instead of writing them off gradually over several years. (L44) That means it will be less expensive for businesses to make certain investments.
Tax reform changes the U.S. corporate tax system from a worldwide one to a territorial one. This means U.S. corporations no longer have to pay U.S. taxes on most future overseas profits. Under the previous system, U.S. corporations paid U.S. taxes on all profits no matter what country they are earned in.
The tax bill also changes how repatriated foreign earnings are taxed. When U.S. corporations bring profits held overseas back to the United States, they will pay a tax of 8% on illiquid assets such as factories and equipment, and 15.5% on cash and cash equivalents. The tax is payable over eight years. Both new rates represent substantial drops from the prior rate of 35%. In addition, the anti-base-erosion and anti-abuse tax intends to discourage U.S. corporations from shifting profits to lower-tax countries moving forward.
Although these cuts will also affect how much corporate tax is applied to the deficit, they do not expire starting in 2026 as the individual cuts do.
Tax-bill proponents point out that Americans who own stocks, mutual funds, or exchange-traded funds in their retirement and investment accounts will also profit from these changes. The reason: their investments rise in value when multinational stocks rise in value. They also note that the prior system of worldwide taxation harms Americans by sending jobs, profits, and tax revenue overseas by effectively double-taxing foreign-earned income. Most developed countries use a territorial system, and the United States joined them beginning January 1, 2018. This could result in fewer companies relocating overseas to lower their taxes.
Corporate Tax Rates
Corporations, like individuals and estates, pay tax under a bracketed system with increasing marginal rates. In 2017, those rates were as follows:
The TCJA's corporate tax rate.
Starting in 2018, the corporate tax became a flat rate of 21% – permanently. Since it’s a flat rate that’s lower than most of the previous marginal rates and most corporations will have a lower federal tax bill. Those with profits under $50,000 will have a higher tax bill because their rate will increase from 15% to 21%.
According to an analysis by The Wall Street Journal, the types of companies most likely to benefit from the lower corporate rates are retailers, health insurers, telecommunications carriers, independent refiners, and grocers. Aetna, for example, has a median effective tax rate of 35% over the last 11 years according to MarketWatch’s Corporate Tax Calculator, while Time Warner has paid 33%, Target has paid 34.9%, and Phillips 66 has paid 31.3%.
As with the changes in how foreign profits are taxed, the changes in how corporate profits are taxed will affect everyone who owns shares of a corporation through stocks, mutual funds, or exchange-traded funds.
The top marginal tax rate for U.S. corporations under former law was 35% and the global average was 25%. Critics have long contended that America’s high corporate tax rates put the country at a competitive disadvantage compared to lower-tax nations such as Ireland and Canada, pushing American corporations’ profits overseas. In theory, now that rates are lower, companies might allow more profits to be earned domestically and they might spend fewer resources lobbying for lower tax rates and more resources on improving their products and services.
Also, the corporate alternative minimum tax of 20% was repealed.
Republicans say the tax bill will create jobs through a lower tax rate on repatriated profits. But critics such as Senator Mark Warner (D-Va.) say that higher corporate profits don’t necessarily translate into more jobs or more domestic investment.
Given that Congress’s 2004 tax holiday failed to deliver on a similar promise, the new bill may not give the promised job growth. The additional money in corporate coffers may instead be paid to shareholders through dividends and share repurchases, as it was earlier this century. Companies could also use it to pay down debt or undertake mergers.
The Tax Foundation’s models, however, found that the tax plan should increase GDP by 1.7% over the long term, increase wages by 1.5%, and add 339,000 full-time equivalent jobs. They say GDP will grow by an average of 0.29% per year over the next decade, an increase from 1.84% to 2.13%. They also expect the growth generated by the tax cuts to increase federal revenues by $1 trillion. Job growth indeed did occur in 2018.
You're a Tax Professional
Starting already, tax preparers, tax attorneys, and accountants can expect a boost in business from clients seeking to maximize benefits or limit damage from the tax-code changes.
They were busy in 2018, helping people set up pass-through businesses and reevaluating their clients’ circumstances in light of all the tax changes. Tax preparers who primarily work for low- and middle-class taxpayers may see a drop in business, however, since fewer of those households will benefit from itemizing their deductions.
What's Permanent, What Isn't
All the individual changes to the tax code are temporary, including the 20% deduction for pass-through income. Most changes expire after 2025; a few, like the reduced medical-expense threshold, expire sooner. The corporate tax rate cut, international tax rules, and the change to a slower measure of inflation for determining tax brackets are permanent.
Issues the Tax Bill Didn’t Change
The House released its first version of the tax bill on Nov. 2, 2017. Different groups who stood to gain or lose significantly fought hard to protect their interests.
Grad students felt threatened by the possibility that their tuition waivers would be taxed. Many graduate schools don’t charge tuition to students who teach or who work as research assistants. Students were opposed to getting tax bills for the income they never received. The average graduate tuition in 2015–16 was $17,868, so depending on what tax bracket the grad student fell into, the tax bill might have been several thousand dollars. Grad students will continue to receive this tuition benefit tax-free. And anyone with student-loan debt will still be able to deduct the interest, even if they no longer itemize because of the higher standard deduction.
Teachers also worried about losing their up-to-$250 deduction for classroom and certain job-related expenses. They didn't. They can take this deduction whether they itemize deductions or take the standard one.
The low-income housing tax credit was saved. The president of the National Low Income Housing Coalition told NPR that a provision of the bill that would have revoked the tax-exempt status of private activity bonds, a benefit that encourages investment in affordable housing construction by lowering its cost, would have meant “a loss of around 800,000 affordable rental homes over the next 10 years." These bonds are also used to finance infrastructure projects such as roads and airports.
The act failed to reduce the number of tax brackets to four, which would have simplified the tax code – a major part of Paul Ryan’s original proposal to make taxes so easy that most Americans could file them on a postcard.
The act also failed to eliminate the individual alternative minimum tax. But it did increase the threshold for paying the AMT so fewer taxpayers will be affected by it.
The House bill wanted to eliminate medical-expense deductions, but the final bill keeps them and provides a small boost for three years, as noted above in "You Itemize Deductions and File Schedule A."
The earned income tax credit, which gives a tax break to the working poor, was not expanded.
And, in the end, the expansion of 529 plans to cover K-12 education did not include homeschooling.
The Bottom Line
The Tax Cuts and Jobs Act will have an effect on tax payments for all Americans beginning in the 2018 tax year and primarily lasting through 2025. Overall, the TCJA lowers tax rates across income levels helping reduce Americans' income tax burden. Individually, understanding how the Act affects taxes in your tax bracket and individual circumstances that affect you directly can potentially help you to ensure you are taking advantage of all the deductions you deserve and ultimately paying the lowest tax bill available to you.