EPIC EXPLAINER: The Tax Cuts and Jobs Act

Purpose and Legislative History

The Tax Cuts and Jobs Act (TCJA) of 2017 implemented much-needed, pro-growth tax reforms. It lowered corporate and individual rates, allowed expensing of investments, expanded the standard deduction, and curtailed many tax expenditures. Prior to the TCJA, the tax code had not been reformed since 1986. Over the decades, the tax code had grown increasingly complex and uncompetitive. Congressional Republicans began work on tax reforms to address these problems in 2011, which culminated in the TCJA framework. The TCJA was enacted in December 2017 through the budget reconciliation process. This meant that the bill had to comply with certain rules, including increasing the deficit by no more than $1.5 trillion over the 10-year budget window and not increasing the deficit after 10 years. As a result, most individual income tax provisions expire after 2025, as do some business provisions.

Individual Tax Reforms

Individual Income Tax Rate Reduction. The TCJA lowered income tax rates for most Americans by setting new rates for the seven brackets. The brackets are adjusted for inflation annually. TABLE 1. Tax Brackets Immediately Following TCJA Enactment Compared to Pre-TCJA   Standard Deduction Increase. The TCJA roughly doubled the standard deduction for both individuals (from $6,500 to $13,000) and married couples (from $12,000 to $24,000). This is adjusted annually for inflation. Expanded Child Tax Credit. The TCJA doubled the Child Tax Credit (CTC) from $1,000 to $2,000, making it refundable up to $1,400 with a phase out beginning at $400,000. It requires a child’s Social Security number for a family to receive the CTC. The TCJA also maintained the Child and Dependent Care Tax Credit and the Adoption Tax Credit. Itemized Deductions and Exemptions. The TCJA ended and limited many itemized deductions, while expanding certain others. It repealed the personal exemption. It caps the deduction for state and local taxes (SALT) at $10,000. For new homeowners, the TCJA limited the mortgage interest deduction to $750,000 of principal. In response to high medical bills, the TCJA reduced the floor for medical expense deductions from 10% of AGI to 7.5%. The TCJA increased the limit on charitable contribution deductions from 50% to 60% of AGI. The TCJA also doubled the Estate Tax (better known as the Death tax) exemption. Lessened AMT Impact. The TCJA reduced the impact of the Alternative Minimum Tax (AMT) on individuals, taking the threshold up to $109,400 for married joint filers, and phasing out beginning at $1,000,000 AGI. The levels are adjusted annually for inflation. Additional Individual Reforms. The TCJA reduced the Obamacare individual mandate penalty to $0, effectively dismantling the ACA requirement to purchase health insurance. It also expanded 529 education savings accounts, allowing them to be used for K-12 educational expenses, in addition to higher education. The TCJA additionally expanded contribution allowances to ABLE accounts for disabled Americans and allows tax-exempt rollovers from 529s to ABLE accounts.

Business Tax Reforms

Corporate Tax Rate Reduction. The TCJA lowered the top corporate income tax rate from 35% (the highest in the industrialized world at the time) to 21%. It also repealed the corporate Alternative Minimum Tax. Full and Immediate Expensing of Investments. The TCJA allowed businesses to immediately deduct the full costs of capital investments, replacing longer depreciation schedules and removing a significant tax bias against investment. As an offset to meet the reconciliation rules, expensing began phasing out in 2023, and is set to expire completely in 2027. Expanded Small Business Expensing. Under the TCJA, the limit on small business expensing for equipment (Section 179) is increased to $1,000,000 (up from $500,000), phasing out beginning at $2,500,000 (up from $2,000,000). This is annually adjusted for inflation. The TCJA also expanded the definition of qualified expenses. New Pass-Through Deduction. Small business income is often taxed as a pass-through on the individual income rate scale. For these businesses (sole proprietorships, partnerships, S-corps), the TCJA created a new 20% deduction (“199A Deduction”) for qualified business income. The deduction is limited based on wages paid and tangible assets after $315,000 ($157,500 for single filers) for a joint return and phasing out thereafter. The limit threshold is adjusted annually for inflation. The deduction is scheduled to expire after 2025, alongside other individual provisions. Limited Business Loss Pass Throughs. The TCJA limited the amount of business losses that pass-through business owners can deduct from other income to $250,000 for single filers and $500,000 for married joint filers. This is annually adjusted for inflation. Additional Changes. The TCJA makes numerous other business tax reforms. It limits the net operating loss deduction to 80% of taxable income, largely repealed carryback of losses but allows indefinite carry forward losses, and eliminated several industry-specific tax provisions such as the domestic production activities deduction. As offsets to meet reconciliation rules, the TCJA ended expensing for research and development and tightened interest deductions in 2022. International Business Tax Reforms. The TCJA overhaled the international business tax system, ending the uncompetitive worldwide taxation of American-headquartered businesses and instituting a modified territorial tax system. It created a deemed repatriation tax for untaxed earnings from foreign subsidiaries of U.S. companies, a new minimum tax (GILTI) on foreign- derived intangible income, and a new Base Erosion and Anti-abuse Tax (BEAT) to prevent profit shifting outside the U.S. to avoid taxation.