The Tax Cuts and Jobs Act (TCJA) was signed into law by former President Donald Trump in 2017 and took effect in 2018. We've had over two years to grapple with all its changes and implications, and determine what it means to each of our personal financial situations, but some taxpayers are still scratching their heads.
Here are some of the key pieces to help the average taxpayer sort through it all.
The standard deduction nearly doubled under the TCJA. In addition to the initial increase, the standard deduction increases every year to keep up with inflation. In the 2021 tax year, the standard deduction is $12,550 for single filers (and married taxpayers filing separately), $25,100 for married couples filing jointly, and $18,800 for head of household filers. For the 2020 tax year (taxes you'll file in 2021), the standard deductions are $12,400, $24,800, and $18,650, respectively.
There are still seven brackets, but most tax rate percentages were reduced and each bracket now accommodates slightly more earnings.
If you earned $35,000 under the 2017 tax system and were single, for example, you would have fallen into a 15% tax bracket. That dropped to 12% in 2018 under the TCJA. If you earned $75,000, you would have paid 25%. That went down to 22%. At $100,000, you would have paid 28% in taxes, and this was reduced to 24%.
The tax bracket for the very highest earners, those with incomes of more than $418,400, was 39.6% in 2017 — it dropped to 37% under the TCJA.
The income levels for each tax bracket changes each year. In the 2021 tax year, for instance, the top tax bracket (37%) applies to income over $523,600.
The Tax Policy Center indicated in 2018 that the TCJA would reduce taxes “on average” for all income groups, and the Tax Foundation said the same thing.
The keyword here is “average.” Some taxpayers may fare a little worse, while some may fare better. It's important to keep in mind that tax brackets and rates are percentages.
A taxpayer who earns $100,000 and sees a 4% reduction in their effective tax rate would realize a far greater dollars-and-cents increase — $4,000 — in after-tax income than a low-income taxpayer earning only $10,000 a year and seeing the same 4% reduction of just $400. It's all relative.
Effective tax rates — the actual percentage of income paid in taxes — dropped from 8.7% in 2017 to 7.1% in 2018 for those with incomes in the $50,000 to $75,000 range after implementation of the TCJA, according to the Tax Foundation.
Here is a quick overview of how much taxpayers in each income group will save under the bill.
If You’re a Low-Income Earner
You should see about a 0.3% increase in your after-tax income if you earn less than $25,000.
If Yours Is a Middle-Income Household
You’ll see an additional $800 a year or so in after-tax income if you earn between $49,000 and $86,000, according to the Tax Policy Center — an increase of about 1.4%. The Tax Foundation has indicated that the “bottom” 80% of American earners, including low-income and middle-income households, will see an increase in after-tax income of anywhere from 0.8% to 1.7%.
If You're a High Earner
The Tax Policy Center says you should see an additional $11,200 in after-tax income on average, a difference of about 3.4% if you earn between $308,000 and $733,000 a year. The top 1% of earners (those making more than $733,000 a year) cut nearly $33,000 (2.2%) from their tax bill. The Tax Foundation was more conservative in its estimates on the effects on high-income earners and put the number at only 1.6%.
You Might Not Want to Itemize Any Longer
The 2018 tax bill made changes to several itemized deductions and this has affected taxpayers who have historically itemized rather than claiming the standard deduction for their filing statuses. In addition to changing what could be itemized, the TCJA substantially increased the standard deduction, so even if you can itemize the same deductions, it might not be worthwhile to do so under the TCJA.
The number of taxpayers who itemized their deductions dropped from 30% in 2017 to just 10% in 2018.
On the flip-side are those taxpayers whose total itemized deductions typically exceeded the new standard deduction amount for their filing statuses. If that's you, you might be among the taxpayers who were actually hurt by this legislation.
TCJA Changes to Itemized Deductions
If you found that the TCJA increased your tax liability, check the following circumstances to learn some possible reasons why.
How Much Is Your Home Mortgage?
The mortgage interest itemized deduction is now capped at mortgage values of $750,000 instead of $1 million. Unless you have a very expensive home, this shouldn’t affect you. In early 2019, Experian calculated that the average mortgage debt was $202,284. There’s still a whole lot of room between that average and the TCJA's cap.
Interest on Refinance Loans
The home interest mortgage deduction used to cover both acquisition debt (mortgages taken out to purchase or build a home) and equity debt (when you refinance and take some cash out of your home’s value to spend on other things, such as your child’s college education). The TCJA eliminated the provision for equity debt. You're no longer able to claim the interest on refinance loans as a tax deduction unless you use the proceeds to "buy, build, or substantially improve" a home.
The State and Local Tax Deduction
The deduction for state and local taxes wasn't entirely eliminated. Instead, it was capped at $10,000. That limit applies to all state and local taxes (SALT), including any sales, income and property taxes a taxpayer faces in their home state.
If you had been paying and deducting more than $10,000 a year in state and local taxes, this would be a negative aspect of the TCJA for you. According to the Tax Policy Center, taxpayers with a tax benefit from the SALT deduction fell from about 25% in 2017 to 10% in 2018.
The Medical Expense Deduction
The itemized deduction for medical expenses actually improved under the TCJA, at least temporarily. This deduction includes out-of-pocket uncovered medical costs, deductibles, co-pays and insurance premiums that are not reimbursed by your employer.
The deduction used to be limited to expenses that exceeded 10% of your adjusted gross income (AGI). That dropped to 7.5% in 2017 and 2018, and later legislation extended the tax break through 2020. The 7.5% threshold was made permanent by the Consolidated Appropriations Act 2021.
The Alimony Adjustment
Alimony payments were an "above the line" adjustment to income on the first page of Form 1040 before TCJA. You could subtract alimony payments you made from your taxable income, then claim either the standard deduction or itemize your deductions, as well. Meanwhile, your ex had to claim that alimony as income and pay taxes on it.
Now, under the terms of the TCJA, you have to pay taxes on the portion of your income that you sent to your ex as part of an alimony settlement. As for your ex, they get to collect that income tax-free.
This change only applies to divorces and divorce agreements finalized after Dec. 31, 2018.
Those Lost Personal Exemptions
Personal exemptions were dollar amounts that taxpayers could deduct from their taxable incomes for themselves and each of their dependents: $4,050 per person as of the 2017 tax year. The TCJA suspended these exemptions through at least 2025.
However, with the TCJA's significant increase to the standard deduction, single taxpayers with no children might come out ahead after the change. Large families with many children, on the other hand, may ultimately see a tax increase after losing their exemption for each child.
This is balanced somewhat by the altered tax brackets, but it's still unlikely that large families will end up coming out ahead with the new standard deduction amounts.
The Expanded Child Tax Credit
The Center on Budget and Policy Priorities has consistently argued that the TCJA's changes to the Child Tax Credit, despite appearing generous, don't serve the lowest-income families.
The true impact of this tax credit has always been tricky to calculate. Technically, it’s nonrefundable, so all it could do was eliminate any tax bill you might have owed. But there was a tack-on: the Additional Child Tax Credit. This would allow a portion of the credit to become refundable, so after it erased your tax bill, you could expect to receive a check from the IRS for part of the balance.
The nonrefundable part of the old tax credit was $1,000 per child. The TCJA amped that up to $2,000, and it made up to $1,400 of that amount refundable while eliminating the "extra" Additional Child Tax Credit. However, the refundable portion of the credit is 15% of a taxpayer’s or family’s earnings over $2,500, up to the $1,400 limit. That means lower-income families won't benefit as much from this tax break. A single mom earning $10,000, for example, doesn't have enough income to qualify for the full $1,400 refundable part of the credit.
Under President Joe Biden's American Rescue Plan during the COVID-19 pandemic, the Child Tax Credit has increased to $3,000 for each child over the age of 6 and $3,600 for children under 6 years old. Families with an income of $150,000 (married filers; $112,000 for single-parent families) automatically qualified for the credit. This increase is only for the year 2021.
Meanwhile, high-income families benefit from the new rules. They used to be unable to claim this tax credit because they earned too much, but the TCJA expanded the income limits. Now, many high earners can take advantage of it.
It’s Not Forever
These are just a few of the many tax rules that changed under the TCJA, but there's an important caveat to all of these issues: the Tax Cuts and Jobs Act is not permanent. Many of the provisions — if not most of them — are scheduled to expire or “sunset” on Dec. 31, 2025, unless Congress renews them or otherwise haggles out a whole new tax bill before then.
The Tax Cuts and Jobs Act is expected to cost the government nearly $1.5 trillion in lost revenues, according to the Tax Foundation. Barring changes elsewhere in the tax code, that means the cuts probably are not sustainable over the long haul. So, stand by and get ready to revisit this issue no later than 2025.