Amy Fontinelle has more than 15 years of experience covering personal finance, corporate finance and investing.
Updated November 29, 2023 Reviewed by Reviewed by Lea D. UraduLea Uradu, J.D. is a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer.
Fact checked by Fact checked by Suzanne KvilhaugSuzanne is a content marketer, writer, and fact-checker. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies for financial brands.
The Tax Cuts and Jobs Act (TCJA) made some significant changes to both business and personal taxes when it went into effect in 2018. Many of these changes affected tax deductions and credits, depreciation, and expensing so they impacted virtually every taxpayer.
Former President Donald Trump signed the TCJA into law on Dec. 22, 2017. It cut individual, corporate, and estate tax rates.
The reduced corporate tax rate was one of the key components of the Act. This cut was considered to be a major factor in corporate profits and job creation. The TCJA 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 was about 200 pages.
The ultimate effects on Americans and the economy will be enforced until 2025. Taxpayers in some situations are more affected than others.
Homeowners who live in areas with high property tax rates are affected by a $10,000 limit on the state and local tax deduction which includes property taxes. You can deduct these from your income for federal tax purposes.
Claiming this deduction requires itemizing on your tax return but fewer people tend to itemize after passage of the TCJA because the legislation nearly doubled the standard deduction. It's common sense to claim whichever option amounts to more money subtracted from your income, the standard deduction or the total of all your itemized deductions, because you can't do both.
Homeowners were able to deduct the interest paid on mortgages of up to $1,000,000, or $500,000 for married taxpayers filing separately, before the TCJA was passed. But anyone who takes out a mortgage between Dec. 15, 2017 and Dec. 31, 2025 is only able to deduct interest on a mortgage on the first $750,000 under the terms of the Act. This drops to $375,000 for married taxpayers filing separately.
This tax code change can make homeownership less affordable for buyers in expensive markets.
Homeowners can't deduct the interest on home equity loans whether they itemize or not. This rule remains in effect until 2025.
The standard deductions nearly doubled under the TCJA. Many taxpayers who itemized their deductions using Schedule A began claiming the standard deduction instead after passage of the Act. It increased by $5,500 for single filers in 2018 under the terms of the TCJA and by $11,000 for married taxpayers filing joint returns.
Standard deductions are adjusted annually to keep pace with inflation so they've increased still more since 2018. They're set at $13,850 for single taxpayers and $27,700 for married couples filing jointly in tax year 2023. They increase to $14,600 for single filers and to $29,200 for married filers in 2024.
The TCJA eliminated several previous deductions, further increasing the difference between the two options: itemizing or claiming the standard deduction.
These items are no longer tax-deductible unless they relate to a loss in a federally declared disaster area. This can include areas affected by hurricanes, floods, and wildfire victims. The Internal Revenue Service (IRS) does not consider normal wear and tear under this category.
The threshold for deducting medical expenses is 7.5% of your adjusted gross income. You can only claim a deduction for expenses that are more than this amount. You'd be able to deduct medical expenses that exceed $3,750 if your adjusted gross income (AGI) is $50,000. You could therefore deduct $1,250 of your $5,000 in medical expenses if you paid $5,000 and you’re itemizing using Schedule A.
The $10,000 state and local tax deduction includes income taxes as well as property taxes, or sales taxes. You can deduct income and property taxes or sales taxes that you paid during the tax year, but you can't do both. The limit applies to all these taxes when added together. The $10,000 cap applies whether you are single or married filing jointly. It drops to $5,000 if you're married and filing separately.
This TCJA change can hurt itemizers in high-tax states such as California, New York, and New Jersey.
Taxpayers lost the ability to deduct the cost of tax preparation, investment fees, bike commuting, unreimbursed job expenses, and moving expenses under the TCJA.
The personal exemption was $4,050 each for individuals, spouses, and their dependents in the 2017 tax year before the TCJA went into effect. The total subtracted from your income in addition to the standard deduction or the total of your itemized deductions. The exemption has gone to zero until 2025.
The elimination of the exemption has had the greatest effect on taxpayers with families. This table shows three examples that compare tax breaks from the 2024 tax year to those from the 2017 tax year, before the TCJA enactment.
According to the Tax Policy Center, the second quintile of income earners got an average tax cut of a little over 1%. The third quintile will get an average tax cut of about 1.4%. Overall, middle-income families save about $800 in taxes.
This table shows how middle-income earners saw their tax brackets change between 2017 and 2018.
According to the Tax Policy Center, about 82% of middle-income-quintile households got a lower tax bill and 9% got a higher one. Households in the third and fourth quintiles pay about 16% of all federal income taxes.
The Tax Policy Center indicates that there was no substantive change under the TCJA in the tax bills for over 70% of low-income households.
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.
Lower-income workers still pay Social Security and Medicare taxes, however, even if they don’t always have to pay federal income taxes. This table shows how low-income earners saw their tax brackets change between 2017 and 2018.
A pass-through business is one that pays taxes according to the individual income tax code rather than through the corporate tax code. Income from the business passes through to be reported on the owner's personal tax return. Sole proprietorships, S corporations, partnerships, and limited liability companies (LLCs) are all pass-through businesses. C corporations are not.
Pass-through business owners can deduct 20% of their business income under the TCJA under the terms of the Qualified Business Income (QBI) deduction. However, professional services business owners such as lawyers, doctors, and consultants filing as single taxpayers and earning more than $182,100 in 2023 are not considered to be qualified businesses. The threshold is $365,200 for those who file joint returns with their spouses.
Both pass-through and corporate business owners can write off 100% of the cost of capital expenses for five years instead of writing them off gradually over several years beginning in 2018. It will be less expensive for businesses to make certain investments.
The TCJA changed the U.S. corporate tax system from worldwide to territorial. U.S. corporations no longer have to pay U.S. taxes on most future overseas profits. U.S. corporations paid U.S. taxes on all profits no matter where they were earned under the previous system.
The tax bill also changed how repatriated foreign earnings are taxed. U.S. corporations pay a tax of 8% on illiquid assets such as factories and equipment and 15.5% on cash and cash equivalents when they bring profits held overseas back to the United States. The tax is payable over eight years.
Both rates represent substantial drops from the prior rate of 35%. The anti-base-erosion and anti-abuse tax also intend to discourage U.S. corporations from shifting profits to lower-tax countries moving forward. These cuts also affect how much corporate tax is applied to the deficit but they don't expire after 2025 as the individual cuts and provisions 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 because 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. It effectively double-taxed foreign-earned income. Most developed countries use a territorial system and the United States joined them on Jan. 1, 2018.
Corporations pay taxes under a bracketed system with increasing marginal rates just as individuals and estates do. Those rates were as follows in 2017 before the TCJA:
The corporate tax permanently became a flat rate of 21% beginning in 2018. Most corporations end up with a lower federal tax bill because the flat rate is lower than most of the previous marginal rates. Those with profits under $50,000 have a higher tax bill because their rate increased 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 include retailers, health insurers, telecommunications carriers, independent refiners, and grocers.
Aetna had a median effective tax rate of 35% over the last 11 years as of 2017. Time Warner paid 33%, Target paid 34.9%, and Phillips 66 paid 31.3%.
The way corporate profits are taxed affects 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 gross domestic product (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, 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 since rates have dropped. The corporate alternative minimum tax of 20% was repealed under the TCJA.
However, the Tax Foundation’s models found that the tax plan would have several effects when the law was passed. It would:
The organization expected GDP to grow by an average of 0.29% per year over the next decade, an increase from 1.84% to 2.13%. It also expects the growth generated by the tax cuts to increase federal revenues by $1 trillion.
All the changes to the tax code that affect individuals are temporary, including the 20% deduction for pass-through income. Most changes expire after 2025. 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 the first version of the tax bill on Nov. 2, 2017. Groups who stood to gain or lose significantly fought hard to protect their interests:
Anyone with student loan debt will still be able to deduct the interest even if they no longer itemize because of the higher standard deductions.
The TCJA eliminated certain deductions for expenses incurred in preparing taxes, such as tax preparation fees. It also did away with deductions related to unreimbursed employee expenses and other miscellaneous deductions.
The TCJA changed business taxes by reducing the top corporate tax rate from 35% to 21% and eliminating the graduated corporate rate schedule.
The tax cuts implemented through the TCJA will expire at the end of 2025 unless Congress takes steps to renew some or all of them.
The Tax Cuts and Jobs Act will affect all taxpaying Americans to some extent from the 2018 tax year through at least 2025. Overall, the TCJA lowers tax rates across income levels, helping to reduce Americans' income tax burden. Understanding how the Act affects you in your tax bracket and individual circumstances can help you to ensure that you're taking advantage of all the deductions you deserve and ultimately paying the lowest tax bill possible.
Article SourcesThe offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
