What follows is an overview of the Tax Cuts and Jobs Act (TCJA) and some changes you can expect to affect your taxes in the near term. We also give an overview of some much-discussed proposals that didn't happen. While this guide is not an exhaustive list of every change to the tax code, it does cover the key elements that will affect the most people.
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.
- The Tax Cuts and Jobs Act took effect on Jan. 1, 2018, and will substantially impact taxpayers through 2025.
- The nearly 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 you feel will depend on your personal and business situations.
- Understanding this tax law and how it may affect your circumstances can alleviate uncertainty in tax planning and filing.
Passing the Tax Cuts and Jobs Act
On Dec. 22, 2017, former President Donald Trump signed a massive tax bill known as the Tax Cuts and Jobs Act (TCJA). As its name implies, it cut individual, corporate, and estate tax rates.
The lower corporate tax rate is one of the key components of the Act. This cut is 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 the fiscal year 2018."
The final bill is approximately 200 pages and the ultimate effects on Americans and the economy continue to play out and will be enforced from Jan. 1, 2018 through 2025. Meanwhile, a number of its effects were clear immediately.
You Own a Home
If you live in an area with high property taxes, you will be 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). You can find more details below.
Fewer people will itemize, though, since the standard deduction nearly doubled. The figures are adjusted annually:
- For 2021, the standard deduction is $12,550 for single taxpayers and $25,100 for married couples filing jointly.
- For 2022, the standard deduction is $12,950 for single taxpayers and $25,900 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 Dec. 15, 2017, and Dec. 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 homeownership less affordable. For most people, the difference between owning and renting, from a tax standpoint, is now much smaller.
Itemizing Your Deductions
As already discussed, the standard deduction has nearly doubled.
This means many households that used to itemize their deductions using Schedule A will now take the standard deduction instead, simplifying tax preparation for Americans. Not filing Schedule A means less record-keeping and less tax-prep time.
Taxpayers who continue to itemize need to be aware of changes to many Schedule A items. And those changes include the elimination of many previous deductions.
Casualty and Theft Losses
These items are no longer tax deductible unless they are related to a loss in a federally declared disaster area; think hurricanes, floods, and wildfire victims.
For the tax year 2021, the threshold for deducting medical expenses is 7.5%.
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 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). This measure 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, this figure 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
The exemption amount for the 2017 tax year was $4,050 each for individuals, spouses, and dependents. As a deduction, it helped to lower your taxable income. That exemption goes to zero until 2025.
The elimination of the exemption has the greatest effect on taxpayers with families. Here are three examples, comparing the tax breaks from the 2021 tax year to the 2017 tax year, before the TCJA enactment.
Single, With No Children
- Standard deduction increases from $6,350 to $12,550
- Personal exemptions decrease from $4,050 to $0
- Old tax break: $10,400
- New tax break: $12,550
Married Filing Jointly, With No Children
- Standard deduction increases from $12,700 to $25,100
- Personal exemptions decrease from $8,100 to $0
- Old tax break: $20,800
- New tax break: $25,100
Married Filing Jointly, With Two Children
- Standard deduction increases from $12,700 to $25,100
- Personal exemptions decrease from $16,200 to $0
- Old tax break: $30,900
- New tax break: $25,100
For those married people with children, there is another offset, an increase in the child tax credit.
Child Tax Credit
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 classes.
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 the age of 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 (SSN) 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.
Using 529 Plans for 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 at the public, private, or religious institution of choice.
An important point to note for those with 529 plans. The rules were expanded even further after the passing of the Setting Every Community Up for Retirement Enhancement Act—also referred to as the SECURE Act. Signed in December 2019, the bill allows 529 account holders to withdraw funds to pay expenses related to a beneficiary's apprenticeship. In order to qualify, the program must be registered with the Department of Labor.
Another addition to the 529 plan is the ability to use funds to pay down student debt. Under Section 302, a plan holder can withdraw a maximum lifetime of $10,000 to pay down a qualified education loan for a beneficiary or their sibling. These withdrawals are tax- and penalty-free at the federal level but may count as nonqualified distributions under state tax laws.
Elderly Dependents or Children Over 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 living with the taxpayer for at least half 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 of expenses for care.
For the 2021 tax year only, the credit for care for a dependent such as an elderly parent has been restored. Up to $4,000 in costs can be claimed.
Not being able to claim this credit 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 American Rescue Plan of 2021 reduces the cost of Marketplace plans, increases the tax credits for many Americans, and expands eligibility for the tax credits starting April 1, 2021. The average Marketplace user will pay $85 less every month per policy.
The Republicans got their wish to see the individual health insurance mandate penalty repealed. This change means that people who don’t buy health insurance will not have to pay a fine to the Internal Revenue Service (IRS).
Federal and Private Student Loans
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. However, the law does not require private lenders to discharge the debt in the event of a death or disability.
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. The TCJA tax reform eliminates that burden.
$12 Million Estate Tax Relief
The old federal estate-tax exemption thresholds were $5.49 million for individuals. If one died with assets worth less than those amounts, no estate tax was owed.
From 2018 through 2025, the thresholds double to over $12 million for individuals.
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 18% but escalates quickly. Once your taxable estate—the amount beyond the exemption—reaches six figures, you’re already in the 28% bracket.
Changes in the Tax Bracket
Tax rates are changing 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. Here's the reason: 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. The top 95% to 99% are the biggest winners, with an average tax cut of about 3.4% while the top 1% will see an average tax cut of about 2.2%. On average, households in 2018 should receive a 1.7% increase in after-tax incomes.
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 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 (CPI-U).
High-Income Households Tax Liability
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 $33,000 tax cut.
Note that the top 25% paid nearly 86% of all the federal income tax the government collects, according to the Tax Foundation. The top 1% pay more than 37% of it, and the top 0.1% pay even less.
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.
Middle-Income Households Tax Liability
According to the Tax Policy Center, the second quintile of income earners will get an average tax cut of a little over 1% in 2018. The third quintile will get an average tax cut of about 1.4%. Overall, middle-income families can expect to save a rough 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 82% of middle-income-quintile households will have a lower tax bill, while 9% will have a higher one. Households in the third and fourth quintiles pay about 16% of all federal income taxes.
Low-Income Households Tax Liability
The Tax Policy Center estimates that over 70% of low-income households will not see their tax liability change under the tax bill.
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 0.4% back in total federal income taxes paid each year, with an average tax bill of ~$60. 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.
Pass-Through Business Taxes
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 limited liability companies (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. That means it will be less expensive for businesses to make certain investments.
The TCJA 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 intend 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 (ETFs) 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 Jan. 1, 2018. This could result in fewer companies relocating overseas to lower their taxes.
Corporate Tax Rates
Corporations, like individuals and estates, pay taxes under a bracketed system with increasing marginal rates. In 2017, those rates were as follows:
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, 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 ETFs.
The top marginal tax rate for U.S. corporations under the former law was 35% and the global average was 25.44%, when weighted for GDP. 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, pushing American corporations’ profits overseas. In theory, now that rates are lower, companies may 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.
The Tax Foundation’s models, however, found that the tax plan should increase gross domestic product (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.
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.
Graduate 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 the 2015–16 year was $17,868, so depending on what tax bracket the grad student fell into, the tax bill may have been several thousand dollars. Grad students will continue to receive this tuition benefit tax-free.
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 deductions 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 also 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 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 two 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 from 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 help you to ensure you are taking advantage of all the deductions you deserve and ultimately paying the lowest tax bill available to you.