Cecily Zamora
The Tax Cuts and Jobs Act (TCJA) is a law passed in 2017 that made significant changes to individual and corporate tax rates, deductions, depreciation, expensing, tax credits, and other items. The TCJA included provisions that affected both businesses and individuals, such as changes to the standard deduction, income tax brackets, child tax credits, and itemized deductions. Some of the TCJA provisions were set to expire in 2025, but the One Big Beautiful Bill Act extended most of them beyond their original expiration dates. The impact of the TCJA has been debated, with some arguing that it has negatively affected federal revenues and others claiming it has boosted economic growth and investment.
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What You'll Learn
The impact of tax cuts on federal revenue
Tax cuts are a common feature of economic policy, and their impact on federal revenue is a key consideration for governments. By reducing taxes, governments can increase the disposable income of individuals and families, which can spur spending and help grow the economy. However, tax cuts also reduce government revenues, leading to budget deficits and higher sovereign debt. The impact of tax cuts on federal revenue is complex and depends on various factors, including the type of tax cut, the economic context, and the distribution of taxes across different income brackets.
Supply-side tax cuts, for example, are designed to stimulate capital formation and increase aggregate demand and supply. According to the National Bureau of Economic Research (NBER), corporate income tax cuts lead to a sustained increase in GDP and productivity, while personal income tax cuts have a short-lived positive impact on GDP, productivity, and hours worked but no long-term effects. The effectiveness of tax cuts in stimulating the economy may also depend on other factors such as interest rates and trade deficits.
Overall, while tax cuts can have both positive and negative effects on the economy, their impact on federal revenue is generally negative. Policymakers need to carefully consider the potential revenue losses and the distribution of benefits when implementing tax cuts to ensure that they do not exacerbate inequality and limit the government's ability to invest in public services and shared prosperity.
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Changes to deductions, depreciation and expensing
The Tax Cuts and Jobs Act (TCJA) of 2017 brought about changes to deductions, depreciation, and expensing. The TCJA nearly doubled the standard deduction, reducing the number of taxpayers choosing to itemize their deductions. The income phaseout thresholds for this deduction are not indexed to inflation. The TCJA also repealed the phase-down of allowable itemized deductions, which had previously applied to AGI at or above $266,700 for single filers and $320,000 for joint returns.
The TCJA changed the structure of several major itemized deductions. For example, it limited the deductibility of mortgage interest on new loans to the first $750,000 of loan principal and eliminated the deductibility of interest for home equity debt unless used to substantially improve the taxpayer's home. Additionally, the TCJA allowed deductions for out-of-pocket medical expenses above 7.5% of AGI in 2017 and 2018, a reduction from the previous threshold of 10%.
The TCJA also introduced changes to business deductions, depreciation, and expensing. It affected fringe benefits and tax credits for businesses with employees. The TCJA's 100% bonus depreciation provision allowed businesses to immediately expense qualifying assets, driving accelerated capital investment. This provision is set to be phased out by 2027, with the bonus depreciation rate reduced to 40% in 2025. The TCJA also reshaped R&D tax credits and introduced new deductions for overtime pay, car loan interest, and tips to ease the tax burden on middle-class families.
The impact of the TCJA has been mixed. It lowered individual and corporate tax rates, resulting in reduced tax revenues. It has been criticized for its negative impact on scientific research funding and its rushed legislative process. However, it has also provided tax relief to families and businesses and is expected to boost economic development and job creation in distressed communities.
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Changes to fringe benefits
Tax cuts are laws that are enacted by governments to reduce the amount of tax that individuals or businesses pay. They are often implemented to stimulate economic growth, attract investment, or provide relief during economic downturns. An example of a tax cut law is the Tax Cuts and Jobs Act (TCJA) enacted in the United States in 2017. This act included various provisions that affected both individual and business taxes.
Now, focusing on the requested topic of 'Changes to fringe benefits':
The Tax Cuts and Jobs Act (TCJA) brought about several changes to the tax treatment of fringe benefits for employees and businesses. Fringe benefits are a form of pay provided to employees for the performance of services. Here are the key details of the changes:
- Taxation of Unreimbursed Employee Business Expenses: Prior to the TCJA, employees could deduct unreimbursed business expenses as miscellaneous itemized deductions. However, beginning January 1, 2018, these deductions were no longer allowed. Now, if an employer reimburses an employee for business expenses, the reimbursement remains tax-free for the employee, but the employer can no longer claim a tax deduction for these expenses.
- Moving Expenses: Before the TCJA, employees could deduct moving expenses incurred when starting work at a new location. Additionally, employers could reimburse moving expenses on a tax-free basis. However, under the TCJA, employees can no longer deduct moving expenses, and employers cannot reimburse moving expenses tax-free. If employers treat moving expenses as taxable W-2 wages, they can deduct them as compensation expenses.
- Qualified Transportation Fringe Benefits: Previously, employers could provide tax-free transportation benefits, such as commuter highway vehicle transportation between an employee's residence and workplace, subject to monthly limits. While employers can still provide tax-free qualified transportation fringe benefits, they can no longer deduct the expenses for providing these benefits. If employers treat these benefits as taxable W-2 wages, they can then deduct the expenses. Additionally, qualified bicycle commuting reimbursements are no longer tax-exempt.
- Exclusions for Certain Fringe Benefits: The TCJA limited tax exclusions for some employer-provided fringe benefits. For example, bicycle commuter benefits and moving expense reimbursements are no longer excluded from taxation. These exclusions raised relatively small amounts of revenue over a ten-year period.
- Tax Advantage for Fringe Benefits: The changes to the tax treatment of fringe benefits aim to address the tax advantage they provide to employees. By including the value of fringe benefits in taxable income, taxes may increase for some workers. However, this change is intended to create a fairer system across the economy. Employers may respond by reducing or discontinuing certain benefits or compensating employees with higher wages or salaries, which employees may financially prefer.
These changes to fringe benefits under the TCJA represent a shift in how certain employee benefits are taxed and deducted, impacting both employees' and employers' tax obligations.
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Changes to individual income tax
Tax cuts are laws that are enacted by governments to reduce the amount of tax that individuals or businesses have to pay. One notable example of tax cuts being implemented as laws is the Tax Cuts and Jobs Act (TCJA) enacted in 2017 by former US President Donald Trump.
The TCJA made significant changes to individual income tax, including:
- Lowering tax rates for individuals.
- Increasing the standard deduction, which nearly doubled from $12,700 to $24,000 for married couples and from $6,350 to $12,000 for single filers.
- Increasing family tax credits, such as the Child Tax Credit (CTC), which was expanded to higher-income families and doubled from $1,000 to $2,000 per child.
- Eliminating personal exemptions.
- Reducing itemized deductions, including limiting the itemized deduction for state and local taxes to $10,000 annually and reducing the mortgage interest deduction.
- Changing the income level of individual tax brackets, with the number of brackets remaining at seven but the income ranges within those brackets being adjusted.
These changes to individual income tax were initially set to expire in 2025 but were extended beyond that date by the One Big Beautiful Bill Act passed by Congress in 2025. The extension of these tax cuts has raised concerns among economists about its potential impact on inflation and the fiscal trajectory of the country.
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Changes to corporate income tax
Tax cuts are laws, and one of the most notable pieces of legislation in this regard is the Tax Cuts and Jobs Act (TCJA). This Act made significant changes to corporate income tax, including reducing the federal top corporate income tax rate from 35% to 21%. This change brought the US federal and state rates to about the average for most other Organisation for Economic Co-operation and Development (OECD) countries. The TCJA also eliminated the graduated corporate rate schedule.
The TCJA allowed businesses to deduct the full cost of qualified new investments in the year those investments were made, referred to as 100% bonus depreciation or "full expensing" for five years. This bonus depreciation is then phased down in 20% increments starting in 2023 and is fully eliminated after 2026. The Act also repealed the corporate alternative minimum tax.
The TCJA made changes to the treatment of foreign source income and international financial flows. It increased the amount of foreign-sourced income subject to tax in the US and increased repatriations of income previously held offshore. However, this income was often taxed at reduced rates. These changes may have contributed to a lower effective tax rate in 2018, but they also generated tax liability from income that was previously not taxable under US law.
The TCJA also created a new base erosion and anti-abuse tax (BEAT), which imposes a minimum tax on otherwise deductible payments between a US corporation and a related foreign subsidiary. To transition to this new system, the TCJA created a new deemed repatriation tax for previously accumulated and untaxed earnings of foreign subsidiaries of US firms, with a back-loaded minimum payment schedule.
Overall, the TCJA made substantial changes to corporate income tax, reducing the top rate and introducing new deductions and incentives for businesses. These changes had a significant impact on the tax landscape for corporations in the US.
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Frequently asked questions
The Tax Cuts and Jobs Act is a piece of legislation passed in 2017 that changed deductions, depreciation, expensing, tax credits and other tax items that affect both individuals and businesses.
The TCJA changed the income level of individual tax brackets, lowering tax rates, and increasing the standard deductions and family tax credits while reducing itemized deductions and eliminating personal exemptions.
The impact of the TCJA has been varied. It has been criticised for its negative impact on Americans seeking advanced degrees and federal funding for scientific research. It has also been criticised for its rushed passage through Congress. However, it has also been estimated to boost long-run economic output, the capital stock, wages, and the number of jobs.
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