The Tax Cuts and Jobs Act: Breaking Down the Winners and Losers
The Tax Cuts and Jobs Act has many moving parts
The Tax Cuts and Jobs Act (TCJA) was signed into law on Dec. 22, 2017, and it changed up federal tax rules to such an extent that many Americans were left scratching their heads when reform went into effect in 2018. Not surprisingly, many taxpayers are still scratching as they get read to prepare their 2019 returns.
Will they end up paying more in taxes, or less? It depends. The TCJA's impact is highly dependent on individual circumstances. Two individuals earning the same income dollar-for-dollar might find the law impacts them differently.
The Basics of the Tax Cuts and Jobs Act
These are the highlights for personal filers:
- There are still seven tax brackets, but the tax rates are reduced a little.
- The standard deduction has effectively doubled for all filing statuses.
- Personal exemptions have been eliminated from the federal tax code, although some states still recognize them.
- The child tax credit has increased, and an additional family-related credit has been added for non-child dependents.
- Several tax exclusions and deductions have been tweaked. The state income and property tax or local sales tax deductions are capped at $10,000 beginning in 2018.
- Deductions for medical expenses must exceed only 7.5% of your adjusted gross income in the 2017 and 2018 tax years, but this increased to 10% beginning in 2019.
- The above-the-line alimony deduction has been eliminated. The obligor has to pay taxes on this income now.
- The TCJA changed the limitations on the home mortgage interest deduction. Mortgage debts of up to $1 million qualified for this deduction in 2017, but the TCJA slashed that to $750,000 and it eliminates this tax deduction for most home equity loans.
But some things remain the same:
- The law did not make any changes to deductions for 401(k) plan contributions.
- The earned income tax credit was unaffected except for the usual inflation adjustments that happen every year.
- The terms of the Affordable Care Act are not yet subject to change, although the tax penalty for not carrying insurance has been eliminated effective Jan. 1, 2019.
How Will This Affect Low-Income Taxpayers?
The changes to tax brackets, the standard deduction, and the loss of personal exemptions could all have an impact on low-income taxpayers.
Let’s say that John, a single taxpayer, earned $16,000 last year. That would have put him in a 15% tax bracket back in 2017. He would have paid 10% in tax on his income up to $9,325, and 15% on the balance of his income up to $16,000. That’s a pretty significant tax bill of $1,933: $932 on the first $9,325, plus $1,001 of the $6,675 balance, for a total of $1,933.
The TCJA provides for a new 12% bracket for incomes from $9,700 up to $39,475 for single filers. This income figures are those in effect for the 2019 tax year.
John would still pay 10% in tax on his income up to $9,700 in 2019, but only 12% on the balance. As a result, his 2019 tax bill would come out to just $1,729 compared to $1,933: 10% of $9,700 or $970, plus 12% of the $6,300 balance, or $756. That's $207 less than in 2017, pretty significant for someone who earns just $16,000 a year.
These 2019 thresholds and figures affect the tax return you'll file in 2020 for the 2019 tax year.
Now Let's Calculate Including the Standard Deduction
The above scenario doesn’t take the standard deduction into consideration, and this makes a more dramatic difference.
Under the terms of the TCJA, John does not pay taxes on the first $12,200 of his income—the new standard deduction amount for single filers in 2019. After taking the standard deduction, his actual taxable income isn't $16,000, but just $3,800. His actual tax would work out to $380, or 10% of $3,800.
By comparison, John got a standard deduction of $6,350 in 2017, so he paid taxes on $9,650 of his income—$16,000 less his standard deduction of $6,350. His total tax bill came out to $980 in 2017 in this scenario: $932 or 10% of the first $9,325, plus $48 or 15% of the $325 balance.
The final result is that John comes out ahead under the terms of the TCJA. Due largely to the change in the standard deduction, he would pay $380 under the TCJA, compared to $980 under the 2017 tax structure.
The standard deduction is indexed for inflation. It increases to $12,400 for single filers in 2020, to $24,800 for married taxpayers who file jointly, and to $18,650 for those who qualify as head of household.
About Those Personal Exemptions...
Unfortunately, we’re not done yet. Remember that personal exemption that the TCJA eliminated? John would have been able to further reduce his taxable income by an additional $4,050 by claiming that exemption for himself in 2017. So he would pay tax at the rate of 10% on just $5,600 in income: $16,000 less the standard deduction leaves $9,650, less the additional $4,050 for the exemption. His $980 tax debt now drops from $980 to just $560.
Here's the final analysis: John would have paid $560 in federal income taxes in 2017. Under the TCJA, he pays $380 in 2019. The TCJA saves him $180 a year. That's not a huge windfall, but for someone in this income range, it's nothing to sniff at, either.
Supporters of the TCJA say that many low-income taxpayers came out ahead in 2018 and will continue to do so in 2019.
What About Families?
Of course, this all assumes that John isn’t eligible for any tax credits. But what if he has a child dependent so he can claim the child tax credit?
The child tax credit was $1,000 per child under age 17 in 2017. The TCJA pushed this up to $2,000 per child, an increase of $1,000. The first $1,400 is refundable. This means that a parent with zero tax liability would receive a refund from the IRS for $1,400 for each dependent child he can claim.
If John’s tax bill was $380 and he could claim the child tax credit for one child, the tax credit would wipe out his tax debt so John would end up not owing the IRS anything at all. That leaves $1,620 remaining of the $2,000 credit, of which $1,400 is refundable subject to certain rules. So John would actually receive a $1,400 refund.
The Effect of Lost Personal Exemptions
Now let’s say that John is married and he has four kids. He earns $50,000 in this scenario and his spouse earns $25,000 for a total joint income of $75,000. This still puts them in a 12% tax bracket under the TCJA because this bracket stretches up to $78,950 in joint incomes as of 2019. Back in 2017, they paid 15% in tax in this bracket—an additional 3%.
But they’re losing those six personal exemptions under the TCJA, one for each of them and one for each of their children, for a walloping total of $24,300—the $4,050 exemption amount in 2017 times six. So John and his spouse would end up paying taxes on $24,300 more in income, which neutralizes that 3% break they’d get on their tax rate.
Of course, they’d potentially get $8,000 of that back—$2,000 per child—thanks to the revamped child tax credit, but they'll still be paying taxes on more income than they did in 2017.
The Law's Effect on the Middle Class
Middle-class taxpayers shouldn’t fare too badly under the TCJA, either. But once again, it depends on personal circumstances.
The math on the new tax brackets pretty much works out the same way as it does for low-income taxpayers. The new income parameters reduce the tax percentage for many middle-class filers. The 25% tax bracket began for single filers with incomes of $37,950 in 2017.
Under the TCJA, a single taxpayer can earn up to $39,475 in 2019 before finding themselves in a higher tax bracket—not a huge difference. But again, the new tax rate for this bracket drops, in this case from 25% to 22%.
The Standard Deduction vs. Itemized Deductions
But a higher percentage of these taxpayers have historically chosen to itemize their deductions rather than claim the standard deduction for their filing status, and the Tax Cuts and Jobs Act can be expected to affect them in this respect.
Under 2017 tax law, their total itemized deductible expenses could well exceed their standard deduction because the standard deduction was roughly half of what it is in 2019. This would have made it more advantageous for them to itemize. In 2019, a single taxpayer who averages about $12,200 in itemized deductions would find himself in pretty much the same tax situation under TCJA whether he itemized or claimed the standard deduction for his filing status.
One who has historically claimed $15,000 in itemized deductions would find himself paying tax on an additional $2,800 if he chose to claim the standard deduction rather than itemize in 2019. And itemizing probably won't reap the same tax savings under the TCJA because the increased standard deduction also interacts with the cap on state and some local taxes and limitations on mortgage interest deductions.
These taxpayers might well end up having less in the way of itemized deductions. The theory is that the increased standard deduction is supposed to balance that, but will it really?
Other TCJA Adjustments
As for that revamped child tax credit, more middle-income earners will qualify for it under the terms of the TCJA. The credit began phasing out or reducing at incomes of $75,000 or more in 2017. John and his spouse would have just made it in under the wire at a joint income of $75,000.
The TCJA increased this limit significantly to $200,000 for single filers and $400,000 for those who are married and filing joint returns. This allows many more middle- and upper-income families to take full advantage of the credit.
So does a middle-income taxpayer win or lose under these changes? It depends. Does he have children? How many? Was he claiming a lot of itemized deductions that would now be eliminated?
The Effect on High Earners
Opponents of the Tax Cuts and Jobs Act argue that it unfairly favors the wealthy. And in some cases, that might appear to be true.
Many of these taxpayers will fall into a 37% tax bracket in 2018 as opposed to the top tax bracket of 39.6% that existed in 2017. That 2017 bracket kicked in at incomes of $418,400 or more for single filers. The 37% bracket provided for by the TCJA begins with incomes of $510,300 for single filers in 2019, or $612,350 for taxpayers who are married and filing joint returns. So, yes, some wealthy taxpayers will get a break there.
The wealthy can pass more of their largess to their heirs tax-free as well. The TCJA provides for an $11.4 million estate tax exemption in 2019. As of 2017, the exemption was only $5.49 million. Low- and middle-income taxpayers have always dodged this tax so there’s no big change for them here. But now some wealthier individuals might be able to stop concerning themselves with the estate tax, too.
What Happens Next?
These changes aren't necessarily permanent. The TCJA applies to tax years 2018 through 2025, then it sunsets or expires if Congress doesn't act to breathe new life into it for another stretch of years. Congress might also elect to retain just some portions of the TCJA, allowing others to expire.
Whether it helps your tax situation or hurts it, the TCJA might not be forever.
NOTE: Please consult with a tax professional for the most up-to-date advice and answers to any specific questions you might have. The TCJA includes many more changes that are not summarized in this article and that could potentially affect your tax situation. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.
Tax Policy Center. "The TCJA Eliminated Personal Exemptions. Why Are States Still Using Them?" Accessed Nov. 25, 2019.
IRS. "Topic No. 503 Deductible Taxes," Accessed Nov. 25, 2019.
Tax Policy Center. "How Did the Tax Cuts and Jobs Act Change Personal Taxes?" Accessed Nov. 25, 2019.
Internal Revenue Service. "Publication 936 (2018) Home Mortgage Interest Deduction," Accessed Nov. 25, 2019.
The Tax Foundation. "2019 Tax Brackets," Accessed Nov. 25, 2019.
Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2019," Accessed Nov. 25, 2019.