What Is the Tax Cuts and Jobs Act (TCJA)?

What Is the Tax Cuts and Jobs Act (TCJA)?

Signed into law by President Donald Trump, the Tax Cuts and Jobs Act (TCJA) took effect on January 1, 2018. The legislation was the largest overhaul of the tax code in three decades. The reform impacted taxpayers and business owners. Many of the tax reform benefits expire in 2025.

Key Takeaways

• The Tax Cuts and Jobs Act was the largest tax code overhaul in three decades.
• The law created a single flat corporate tax rate of 21%.
• Many tax benefits to help individuals and families will expire in 2025.

The Tax Cuts and Jobs Act brought sweeping changes to the tax code and impacted individuals depending on their income level, filing status, and deductions. The law featured a new, lower corporate rate of 21% and preferable tax treatment of pass-through companies.

The Senate passed the bill on December 2, 2017, by a party-line vote of 51 to 49. The House passed the bill later that month by a vote of 224 to 201. No House Democrats supported the bill and 12 Republicans voted no—most of them representing California, New York, and New Jersey.

The law cut corporate tax rates permanently and individual tax rates temporarily. It permanently removed the individual mandate requiring individuals to purchase health insurance, a key provision of the Affordable Care Act. The highest earners were expected to benefit most from the law, while the lowest earners were believed to pay more in taxes when individual tax provisions expire after 2025.

How the TCJA Affected Individuals

• Income Tax Rates: The law retained the seven individual income tax brackets. The top rate fell from 39.6% to 37%, while the 33% bracket dropped to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. The lowest bracket remained at 10%, and the 35% was unchanged.
• Standard Deduction: TCJA significantly raised the standard deduction. For tax year 2024, the standard deduction for single filers is $14,600 and $29,200 for married couples filing jointly.
• Personal Exemption: The law suspended the personal exemption, which was $4,150, through 2025.
• Health Coverage Mandate: TCJA ended the individual mandate, a provision of the Affordable Care Act (ACA) that levied tax penalties for individuals who did not obtain health insurance coverage.
• Child Tax Credit: The law raised the child tax credit to $2,000 and created a non-refundable $500 credit for non-child dependents. The child tax credit can only be claimed if the taxpayer provides the child’s Social Security number (SSN). Qualifying children must be younger than 17 years of age. The child credit begins to phase out when adjusted gross income (AGI) exceeds $400,000 (for married couples filing jointly, not indexed to inflation). These changes expire in 2025.
• Estate Tax: The law temporarily raised the estate tax exemption. For single filers, the maximum is $13.6 million for 2024. This change will be reversed after 2025.
• Student Loans: TCJA allows 529 plans to fund K to 12 private school tuition—up to $10,000 per year, per child. Under the SECURE Act of 2019, the benefits of 529 plans were expanded, allowing plan holders to withdraw a maximum lifetime amount of $10,000 per beneficiary penalty-free to pay down qualified student debt.
• Retirement Savings: The law repealed the ability to recharacterize one kind of contribution as the other, that is, to retroactively designate a Roth contribution as a traditional one, or vice-versa. Since the passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019, individuals can contribute to Individual Retirement Accounts (IRAs) past 70½. Health savings accounts (HSAs) were not affected by the law.
• Alternative Minimum Tax: The law temporarily raised the exemption amount and exemption phase-out threshold for the alternative minimum tax (AMT), a device intended to curb tax avoidance among high earners by making them estimate their liability twice and pay the higher amount.
• Mortgage Interest: TCJA limits the mortgage interest deduction for married couples filing jointly to $750,000 worth of debt, down from $1,000,000 under the old law, but up from $500,000 under the House bill. The change expires after 2025.
• Pease Limitation: The law repealed the Pease limitation on itemized deductions and gradually reduced their value when adjusted gross income exceeds a certain threshold.
• Miscellaneous Itemized Deductions: Through 2025, miscellaneous itemized deductions suspended include deductions for moving expenses, except for active-duty military personnel and union dues.

Federal Tax Brackets

Source: Internal Revenue Service

State and Local Tax

The new law capped the deduction for state and local taxes at $10,000 through 2025.

Businesses and the TCJA

• Corporate Tax Rate: The law created a single corporate tax rate of 21% and repealed the corporate AMT. Unlike tax breaks for individuals, these provisions do not expire. Supporters of cutting the corporate tax rate argued that it reduced incentives for corporate inversions, in which companies shift their tax base to low- or no-tax jurisdictions, often through mergers with foreign firms. Combined with state and local taxes, the statutory rate under the new law is 26.5%. In 2023, the U.S. was above the weighted average for EU countries (25.21%).
• Immediate Expensing: TCJA allows full expensing of short-lived capital investments rather than requiring them to be depreciated over time. The section 179 deduction cap doubles to $1 million, and phaseout begins after $2.5 million of equipment spending, up from $2 million. 
• Pass-Through Income: Owners of pass-through businesses—which include sole proprietorships, partnerships, and S-corporations—gained a 20% deduction for pass-through income. To discourage high earners from recharacterizing regular wages as pass-through income, the deduction is capped at 50% of wage income or 25% of wage income plus 2.5% of the cost of qualifying property.
• Interest: The net interest deduction was limited to 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA). After four years, it is capped at 30% of earnings before interest and taxes (EBIT).
• Cash Accounting: Businesses with up to $25 million in average annual gross receipts over the preceding three years can use cash accounting—up from $5 million from the old tax code.
• Net Operating Losses: The law scrapped net operating loss (NOL) carrybacks and caps carryforwards at 90% of taxable income, falling to 80% after 2022.The 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily reinstated a carryback period for all net operating losses generated in years beginning after December 31, 2017, and before January 1, 2021.
• Section 199: The law eliminated the section 199 (domestic production activities) deduction for businesses that engage in domestic manufacturing and other production work. This is also known as the domestic manufacturing deduction, U.S. production activities deduction, and domestic production deduction.
• Foreign Earnings: TCJA deemed repatriation of overseas profits at 15.5% for cash and equivalents and 8% for reinvested earnings.The law introduced a territorial tax system, under which only domestic earnings are subject to tax. Companies with over $500 million in annual gross receipts are subject to the base erosion anti-abuse tax, designed to counteract base erosion and profit shifting, a tax-planning strategy that involves moving taxable profits from one country to another with low or no taxes. BEAT is calculated by subtracting a company’s regular corporate tax liability from 10% of its taxable income, ignoring base-eroding payments. Tax credits can offset up to 80% of BEAT liabilities.

Intangible Property

TCJA altered the treatment of intangible property held abroad, such as patents, trademarks, and copyrights. For instance, Nike (NKE) houses its Swoosh trademark in an untaxed Dutch subsidiary. 

When the foreign tax rate on foreign earnings above a 10% standard rate of return is below 13.125%, the law taxes these excess returns at 21%, after a 50% deduction and a deduction worth 37.5% of FDII. This excess income, which the law assumes to be derived from intangible assets, is called global intangible low-taxed income (GILTI). Credits can offset up to 80% of GILTI liability.

Foreign-derived intangible income refers to that which is from the export of intangibles held domestically, which is taxed at a 13.125% effective rate, rising to 16.406% after 2025.The European Union has accused the U.S. of subsidizing exports through this preferential rate violating World Trade Organization (WTO) rules.

Economic Growth

Treasury Secretary Steven Mnuchin claimed that the Republican tax plan would spur sufficient economic growth to pay for itself and more, saying of the “Unified Framework” released by Senate, House, and Trump administration negotiators in September 2017:

“On a static basis our plan will increase the deficit by a trillion and a half. Having said that, you have to look at the economic impact. There’s $500 billion that’s the difference between policy and baseline. That takes it down to a trillion dollars. And there’s two trillion dollars of growth. So with our plan we actually pay down the deficit by a trillion dollars, and we think that’s very fiscally responsible.”

On December 11, 2017, the Treasury released a one-page analysis claiming that the law will increase revenues by $1.8 trillion over 10 years. By contrast, the Federal Reserve projected growth of 2.5% in 2018, 2.1% in 2019, 2.0% in 2020, and 1.8% over the longer run.

Who Benefited From TCJA?

The TCJA cut the corporate tax rate to the benefit of shareholders, who tend to be higher earners. It only cuts individuals’ taxes for a limited period. It scales back the AMT and estate tax and reduces the taxes levied on pass-through income. It does not close the carried interest loophole, which benefits professional investors.

Once individual tax cuts expire after 2025, the TPC estimates that the majority of taxpayers—53.4%—will face a tax increase: 69.7% of those in the middle quintile (40th to 60th percentile) will pay more, compared to just 8% of the highest-earning 0.1%.

The Joint Committee on Taxation estimated that the 22 millions households making $20,000 to $30,000 will collectively pay 26.6% more in 2027 than they would under the previous statute in that year. The 629,000 households making over $1,000,000 will pay 1% less.

When Did Tax Code Last Change Before TCJA?

The last time a major tax overhaul became law before TCJA was in 1986.

How Did TCJA Change How the IRS Measures Inflation?

The law changed the measure of inflation used for tax indexing. The IRS’ use of the consumer price index for all urban consumers (CPI-U) was replaced with the chain-weighted CPI-U. The latter takes account of changes consumers make to their spending habits in response to price shifts, so it is considered more rigorous than standard CPI. It also tends to rise more slowly than standard CPI, so substituting it will likely accelerate bracket creep. The value of the standard deduction and other inflation-linked elements of the tax code will also erode over time, gradually pushing up tax burdens. The change is not set to expire.

How Did TCJA Affect Carried Interest?

The law does not eliminate the carried interest loophole. Hedge fund managers typically charge a 20% fee on profits above a certain hurdle rate, most commonly 8%. Those fees are treated as capital gains rather than regular income, meaning that—as long as the securities sold have been held for a certain minimum period—they are taxed at a top rate of 20% rather than 39.6%.

The Bottom Line

Did the new tax code provide what it promised Americans? According to the Tax Foundation, the long-term effects of TCJA on investment are difficult to gauge due to the COVID-19 pandemic and its impact on the economy. However, in the pre-pandemic years, investment rose in 2018 following the implementation of TCJA policies. TCJA cut taxes for shareholders and individual taxpayers, but the latter cuts expire in 2025, at which the majority of taxpayers will face a tax increase. The broader economic effects of the bill are still being evaluated.

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