Anaya Nolan
The Tax Cuts and Jobs Act (TCJA) was a major overhaul of the US tax code, signed into law by President Donald Trump in 2018. The reform impacted taxpayers and business owners, particularly through tax cuts. The TCJA changed deductions, depreciation, expensing, tax credits, and other tax items that affect businesses and individuals. It was pro-growth reform, significantly lowering marginal tax rates and the cost of capital. The law also temporarily raised the estate tax exemption and the exemption amount and phase-out threshold for the alternative minimum tax (AMT).
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What You'll Learn
The Tax Cuts and Jobs Act (TCJA)
The Act cut taxes for most US taxpayers, including shareholders and individual taxpayers. The top 20% of Americans by income were projected to receive roughly 65% of the tax savings. The bottom 80% of taxpayers (income under $149,400) would receive 35% of the benefit in 2018, 34% in 2025 and none of the benefit in 2027, with some groups incurring costs. According to Bloomberg, the TCJA simplified the tax code for some, lowered corporate debt, and led to a temporary increase in investment.
The TCJA reduced the American corporate tax rate to 21%, four percentage points lower than the OECD average at the time. It also eliminated the Corporate Alternative Minimum Tax and the domestic production activities deduction. The law cut corporate tax rates permanently and individual tax rates temporarily. Many of the tax reform benefits for individuals will expire in 2025, including the exemption amount for unmarried individuals and married couples filing jointly.
The TCJA also impacted individuals based on their income level, filing status, and deductions. It permanently removed the mandate requiring individuals to purchase health insurance, a key provision of the Affordable Care Act. The mortgage interest deduction for newly purchased homes (and second homes) was lowered from total loan balances of $1 million under current law to $750,000. The deduction for state and local income tax, sales tax, and property taxes ("SALT deduction":0) was capped at $10,000.
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Changes to deductions, depreciation, expensing and tax credits
The Tax Cuts and Jobs Act (TCJA) has brought about changes to deductions, depreciation, expensing, and tax credits. These changes affect both businesses and individual taxpayers. Here are the key details:
Deductions
- The mortgage interest deduction for newly purchased homes and second homes has been lowered from total loan balances of $1 million to $750,000.
- Interest from home equity loans is no longer deductible unless the money is used for home improvements.
- The deduction for state and local income tax, sales tax, and property taxes (SALT deduction) is capped at $10,000.
- New middle-class deductions have been introduced for overtime pay, car loan interest, and tips to reduce the tax burden on working families.
Depreciation
- The permanent restoration of 100% bonus depreciation simplifies the tax code and removes penalties for delayed depreciation deductions.
- Qualified production property enjoys 100% bonus depreciation through 2032, benefiting domestic manufacturers and supply-chain operators.
Expensing
- Domestic research and development (R&D) costs are now fully deductible under Section 174A, while foreign R&D must be amortized over 15 years.
- Companies with capitalized domestic R&D expenses from 2022 to 2024 can elect a catch-up deduction to improve cash flow.
- Small businesses may retroactively apply full expensing to tax years beginning after 2021 and recover previously amortized costs.
Tax Credits
- The Corporate Alternative Minimum Tax was eliminated.
- The law eliminates various IRA-era green tax credits, including 179D, 45L, and electric vehicle credits.
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Changes to individual taxpayers and business taxes
The Tax Cuts and Jobs Act (TCJA) was a major overhaul of the US federal tax code, amending the Internal Revenue Code of 1986. It was signed into law by President Donald Trump in 2018 and was the largest tax code overhaul in three decades. The TCJA reformed individual and business taxes, with the aim of encouraging economic growth.
Changes to individual taxpayers
The TCJA increased the standard deduction for single filers to $12,400 (up to $15,000 in 2025) and $24,800 for married filers (up to $30,000 in 2025). The personal exemption, worth $4,150, was suspended through 2025. The law also ended the individual mandate, a provision of the Affordable Care Act, which levied tax penalties for individuals who did not obtain health insurance coverage.
The Child Tax Credit (CTC) was increased from $1,000 to $2,000, with the first $1,400 being refundable. The income thresholds for the CTC were also raised from $110,000 to $400,000. The estate tax exemption was temporarily raised, with a maximum of $13.99 million for single filers in 2025. The law also allows 529 plans to fund K-12 private school tuition, up to $10,000 per year, per child.
Changes to business taxes
The TCJA greatly reduced the corporate tax rate to a flat 21% rate, down from 35%. The law also changed flow-through taxation, with individuals given a deduction of 20% from pass-through income from business entities like partnerships and LLCs. A 100% bonus deduction was enacted for business assets purchased through the end of 2022, and many expensing provisions were increased.
The TCJA also implemented changes to how corporations are taxed for international income, including exempting foreign-earned dividends from US income tax for those owning over 10% of the foreign corporation. The Corporate Alternative Minimum Tax was eliminated, as was the net operating loss carryback, which allowed companies with significant losses to receive a tax refund by counting the losses as part of the previous year's tax return.
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The Internal Revenue Code of 1986
The Internal Revenue Code (IRC) of 1986 is a federal tax law enacted by Congress in the United States. It is formally recognised as the Tax Reform Law and is also referred to as the Trump Tax Cuts or TCJA (Tax Cuts and Jobs Act). The Internal Revenue Code of 1986 has been amended several times since its enactment, with the most recent amendments proposed in 2023.
The IRC is a complex code that forms part of the United States Code, specifically Title 26. It is made available to the public by Congress, and electronic versions can be accessed online. The IRC is subject to interpretation by the U.S. Department of the Treasury, which provides official guidance in the form of Treasury Regulations. These regulations direct taxpayers on how to comply with the IRC's requirements.
The IRC covers a range of tax-related matters, including individual tax provisions and business taxes. Amendments to the IRC have included changes to tax brackets, capital gains brackets, excess business losses, standard deductions, and tax credits.
The Tax Cuts and Jobs Act (TCJA) specifically altered deductions, depreciation, expensing, tax credits, and other items that affect businesses. It is considered a significant tax overhaul, with impacts on federal debt and after-tax incomes, particularly for high-income households.
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The impact of the TCJA on the US economy
The Tax Cuts and Jobs Act (TCJA) was enacted under a process known as reconciliation and resulted in substantial tax cuts from 2018 through 2025. The TCJA amended the Internal Revenue Code of 1986 and is officially known as the Trump Tax Cuts. The New York Times described the TCJA as "the most sweeping tax overhaul in decades".
On the other hand, the TPC's macroeconomic analysis projected that gross domestic product (GDP) would be 0.4% higher on average each year during the 2018-2027 period, a cumulative total of $961 billion higher over ten years. The Penn Wharton Budget Model (PWBM) estimated that by 2027, the GDP level would be between 0.6% and 1.1% higher. The JCT also found that the TCJA would boost economic activity by an average of about 0.7% over the budget window, reducing the deficit impact by about $385 billion.
Additionally, the TCJA made changes to deductions, depreciation, expensing, tax credits, and other tax items that affect businesses. It eliminated the Corporate Alternative Minimum Tax and the net operating loss carryback, which provided liquidity to companies during recessions. The TCJA also established Opportunity Zones to spur economic development and job creation in distressed communities.
The TCJA's impact on the US economy has been complex, with both positive and negative effects. While it increased the federal debt and reduced revenues, it also boosted economic activity and increased GDP and corporate investment. The overall effect on economic growth and wages, however, was modest.
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Frequently asked questions
The Tax Cuts and Jobs Act (TCJA) was a major overhaul of the US federal tax code, signed into law by President Donald Trump in 2018. The act reformed individual and business taxes, reducing tax rates for both.
The TCJA increased the standard deduction, suspended the personal exemption, and ended the individual mandate, a provision of the Affordable Care Act that levied tax penalties for individuals without health insurance coverage. The act also raised the child tax credit and created a non-refundable credit for non-child dependents.
The TCJA greatly reduced the corporate tax rate, changed flow-through taxation, increased depreciation, and made fundamental changes to taxing international income. The act also enacted a 100% bonus deduction for business assets purchased through the end of 2022.
The Tax Policy Center reported that the TCJA would increase Gross Domestic Product (GDP) by 0.4% on average each year during the 2018-2027 period. The act was also estimated to reduce federal revenue by $1.47 trillion over 10 years before accounting for economic growth.
The TCJA increased the number of full-time equivalent jobs by 339,000 and led to an estimated 11% increase in corporate investment. The act also impacted Opportunity Zones, tools designed to spur economic development and job creation in distressed communities.
