On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act into law. This act brought the most significant changes to the U.S. tax code in three decades and shook up the way Americans file their taxes.
What is the Tax Cuts and Jobs Act (TCJA)?
The Tax Cuts and Jobs Act (TCJA) is a comprehensive tax reform bill that was signed into law on December 22, 2017, and took effect starting in the 2018 tax year. The TCJA aims to simplify the U.S. tax code and provide tax relief to individuals and businesses. It brought significant changes to tax rates, deductions, and credits, among other things, affecting almost every taxpayer in the country.
Key Changes for Individual Taxpayers
Here are some of the most significant changes that the TCJA brought for individual taxpayers:
New Tax Brackets
The TCJA created new tax brackets for individuals and lowered most of the tax rates. The new tax brackets for single filers are as follows:
- 10% for income up to $9,700
- 12% for income between $9,701 and $39,475
- 22% for income between $39,476 and $84,200
- 24% for income between $84,201 and $160,725
- 32% for income between $160,726 and $204,100
- 35% for income between $204,101 and $510,300
- 37% for income over $510,300
The new tax brackets for married filers filing jointly are as follows:
- 10% for income up to $19,400
- 12% for income between $19,401 and $78,950
- 22% for income between $78,951 and $168,400
- 24% for income between $168,401 and $321,450
- 32% for income between $321,451 and $408,200
- 35% for income between $408,201 and $612,350
- 37% for income over $612,350
Increased Standard Deduction
Under the TCJA, the standard deduction was nearly doubled. For the 2020 tax year, it is $12,400 for single filers and married filers filing separately, $18,650 for heads of households, and $24,800 for those married and filing jointly.
Elimination of Personal Exemptions
Before the TCJA, taxpayers could claim a personal exemption of $4,050 for themselves, their spouse, and each dependent. The TCJA eliminated this exemption.
Changes to Itemized Deductions
Many taxpayers itemize their deductions rather than taking the standard deduction. The TCJA brought several changes to itemized deductions, including:
- Capping the state and local tax (SALT) deduction at $10,000, which includes income, sales, and property taxes.
- Limiting the mortgage interest deduction to mortgage debt of $750,000 or less ($375,000 or less if married filing separately) for loans after December 15, 2017.
- Eliminating the deduction for interest on home equity loans.
- Raising the limit for charitable contributions from 50% to 60% of adjusted gross income (AGI).
Changes to Child Tax Credit and Dependent Credit
The child tax credit was increased from $1,000 to $2,000 per qualifying child. Additionally, the income threshold for the credit was raised, making it available to more taxpayers. A new $500 credit was introduced for dependents who don’t qualify for the child tax credit.
Changes to Alternative Minimum Tax (AMT)
The AMT exemption was increased, and the phase-out threshold was raised, making it less likely for taxpayers to be subject to the AMT.
Key Changes for Business Taxpayers
The TCJA also brought significant changes to the tax code for businesses, including:
Reduction in Corporate Tax Rate
The corporate tax rate was lowered from 35% to 21% under the TCJA.
Changes to Pass-Through Business Income
Pass-through entities, such as partnerships, S corporations, and sole proprietorships, are not taxed at the corporate level. Instead, their income passes through to the owners’ tax returns. The TCJA introduced a new 20% deduction for qualified business income from these entities, subject to certain limitations.
Changes to Business Depreciation Rules
The TCJA made several changes to business depreciation rules, including:
- Allowing businesses to immediately expense 100% of the cost of qualifying property, such as machinery and equipment, acquired and placed into service after September 27, 2017, and before January 1, 2023.
- Raising the Section 179 expensing limit to $1 million and the phase-out threshold to $2.5 million.
- Shortening the recovery period for real property used in a business from 39 years to 15 years for qualified improvement property placed into service after December 31, 2017.
FAQs
1. What is the deadline for filing tax returns for the 2020 tax year?
The deadline for filing tax returns for the 2020 tax year is May 17, 2021.
2. Can I still itemize my deductions under the new tax law?
Yes, you can still itemize your deductions, but it may not always be beneficial, especially with the increased standard deduction.
3. Can I still claim a deduction for charitable contributions?
Yes, you can still claim a deduction for charitable contributions, subject to certain limitations.
4. Is the child tax credit refundable?
In some cases, the child tax credit is refundable, which means that even if you don’t owe taxes, you can still receive a credit.
5. Can I claim the 20% deduction for my pass-through business income?
You may be able to claim the 20% deduction for qualified business income from a pass-through entity, subject to certain limitations and qualifications.
6. Is the AMT still in effect under the new tax law?
Yes, but fewer taxpayers are likely to be subject to the AMT because of the changes made to its exemption and phase-out threshold.
7. Can I still deduct student loan interest under the new tax law?
Yes, you can still deduct up to $2,500 of student loan interest on your tax return.
8. Does the new tax law affect my state taxes?
The new tax law does not directly affect your state taxes, but it may indirectly affect them, especially if you have a high SALT deduction.
9. Are there any changes to retirement plan contributions under the new tax law?
No, there were no major changes to retirement plan contributions under the TCJA.
10. What is the penalty for not having health insurance under the new tax law?
The penalty for not having health insurance was eliminated under the TCJA, so there is no longer a penalty for not having health insurance.
Conclusion
The Tax Cuts and Jobs Act of 2017 brought significant changes to the U.S. tax code, affecting almost every taxpayer in the country. The changes made by the TCJA are complex and extensive, and it’s essential to understand how they impact your specific financial situation to maximize your tax savings. By seeking the guidance of a qualified tax professional, you can better navigate the complexities of the tax code and ensure that you are taking advantage of every tax-saving opportunity available to you.
