How the TCJA Tax Law Affects Your Personal Finances

The Child Tax Credit

The TCJA increased the Child Tax Credit from $1,000 to $2,000 per child under the age of 17. This credit is also partially refundable and this portion of the credit is subject to adjustment for inflation. It’s $1,600 for tax year 2023, increasing to $1,700 in 2024.

A tax credit subtracts directly from the tax you owe the IRS, unlike a deduction which subtracts from your income. Most tax credits are not refundable so the IRS keeps the money if you don’t owe tax from which to subtract the credit. But you can still receive a portion of the child tax credit in the form of a tax refund even if you don’t owe any tax because it’s partially refundable up to these limits.

Single parents couldn’t claim the full Child Tax Credit in 2017 if they earned more than $75,000. Married parents couldn’t claim it if they earned more than $110,000. Those thresholds increased to $200,000 and $400,000 through 2025 under the TCJA.

The prior law applied to children under the age of 17 as of the last day of the tax year. The TCJA didn’t change this age threshold but it requires that parents provide the Social Security number (SSN) for each child for whom they’re claiming the credit. The child must have the number before the due date of the return.

Using 529 Plans for School

The TCJA expanded 529 plans. Parents can use $10,000 per year from 529 accounts tax-free to pay for K-12 education tuition at the public, private, or religious institution of choice in addition to using the money to fund college expenses.

The rules were expanded even further after the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act that was signed in December 2019. This bill allows 529 account holders to withdraw funds to pay for expenses that are related to a beneficiary’s apprenticeship. The program must be registered with the Department of Labor to qualify.

Another addition to the 529 plan is the ability to use the funds to pay down student loan debt. A plan holder can withdraw a maximum lifetime of $10,000 to pay down a qualified education loan for a beneficiary or their sibling under Section 302. These withdrawals are tax- and penalty-free at the federal level but they may count as nonqualified distributions under state tax laws.

Elderly Dependents or Children Over 17

The TCJA allows taxpayers to claim a nonrefundable $500 tax credit for dependents who don’t qualify for the child tax credit, such as college-aged children and dependent parents. This Credit for Other Dependents is subject to the same income limits as the child tax credit. But caregivers can no longer claim the $4,050 personal exemption for an elderly parent due to the repeal of this provision.

Buying Insurance Through the ACA

The TCJA repealed the individual health insurance mandate penalty that people who didn’t buy health insurance had to pay to the IRS.

Federal and Private Student Loans 

Federal and private student loan debt that’s discharged due to death or disability will not be taxed from 2018 through 2025 under the TCJA. Unfortunately, the law doesn’t require private lenders to discharge the debt in the event of a death or disability.

You or your estate would receive an income tax bill on $30,000 under the old law if you’re married, you have $30,000 in student loan debt, you died or became permanently disabled, and your lender discharged your debt and reduced it to zero. Your heirs or survivors would owe $7,200 in taxes if your marginal tax rate was 24%. The TCJA tax reform eliminated that burden.

$12 Million Estate Tax Relief

The federal estate tax exemption threshold was $5.49 million for individuals before TCJA reform. No estate tax was owed if someone died with assets worth less than this amount. The threshold was increased significantly and it’s adjusted for inflation. It’s $12.92 million in 2023, increasing to $13.61 million in 2024.

The top estate tax rate remains at 40%. The estate tax uses a bracketed system with increasing marginal rates just as the individual income tax does. It begins at 18% but escalates quickly. You’re already in the 28% bracket when your taxable estate, the amount above the exemption, reaches six figures.

Changes in Tax Brackets

The TCJA tax bracket changes expire in 2026 absent further legislation to renew the terms. The 2017 rates can return, adjusted for inflation. The individual cuts were not made permanent because of their effect on increasing the budget deficit. 

The nonpartisan Tax Policy Center projects that everyone, on average, will have saved money from the TCJA tax bracket changes. The top 95% to 99% are the biggest winners with an average tax cut of about 3.4%. The top 1% will see an average tax cut of about 2.2%.

The TCJA tax brackets eliminated the marriage penalty. The income brackets that apply to each marginal tax rate for married couples filing jointly are exactly double those for singles under the Act. Some couples found themselves in a higher tax bracket after marriage and combining their incomes than they were before the TCJA legislation.

The tax bill also changes how tax brackets are increased for inflation. They’re indexed to a slower inflation measure called the Chained Consumer Price Index for All Urban Consumers (CPI-U).

High-Income Households’ Tax Liability

The top 25% of U.S. taxpayers paid about 88% of all the federal income tax collected by the government in 2020, according to the Tax Foundation. The top 1% paid more than 42%. This table shows how high-income earners saw their tax brackets change between 2017 and 2018 after passage of the TCJA.

Source: U.S. Congress. “Tax Cuts and Jobs Act Conference Report.” Pages 2-3 and 191-192.

Middle-Income Households’ Tax Liability

According to the Tax Policy Center, the second quintile of income earners got an average tax cut of a little over 1%. The third quintile will get an average tax cut of about 1.4%. Overall, middle-income families save about $800 in taxes. 

This table shows how middle-income earners saw their tax brackets change between 2017 and 2018.

Source: U.S. Congress. “Tax Cuts and Jobs Act Conference Report.” Pages 2-3 and 191-192.

According to the Tax Policy Center, about 82% of middle-income-quintile households got a lower tax bill and 9% got a higher one. Households in the third and fourth quintiles pay about 16% of all federal income taxes. 

Low-Income Households’ Tax Liability

The Tax Policy Center indicates that there was no substantive change under the TCJA in the tax bills for over 70% of low-income households.

Many in the lowest brackets don’t earn enough to owe federal income tax. The Tax Policy Center says that the lowest 20% of income earners get 0.4% back in total federal income taxes paid each year, with an average tax bill of ~$60. The second-lowest 20% are in a similar situation.

Lower-income workers still pay Social Security and Medicare taxes, however, even if they don’t always have to pay federal income taxes. This table shows how low-income earners saw their tax brackets change between 2017 and 2018.

Source: U.S. Congress. “Tax Cuts and Jobs Act Conference Report.” Pages 2-3 and 191-192.

Pass-Through Business Taxes

A pass-through business is one that pays taxes according to the individual income tax code rather than through the corporate tax code. Income from the business passes through to be reported on the owner’s personal tax return. Sole proprietorships, S corporations, partnerships, and limited liability companies (LLCs) are all pass-through businesses. C corporations are not.

Pass-through business owners can deduct 20% of their business income under the TCJA under the terms of the Qualified Business Income (QBI) deduction. However, professional services business owners such as lawyers, doctors, and consultants filing as single taxpayers and earning more than $182,100 in 2023 are not considered to be qualified businesses. The threshold is $365,200 for those who file joint returns with their spouses.

Both pass-through and corporate business owners can write off 100% of the cost of capital expenses for five years instead of writing them off gradually over several years beginning in 2018. It will be less expensive for businesses to make certain investments.

Taxing Multinationals

The TCJA changed the U.S. corporate tax system from worldwide to territorial. U.S. corporations no longer have to pay U.S. taxes on most future overseas profits. U.S. corporations paid U.S. taxes on all profits no matter where they were earned under the previous system.

The tax bill also changed how repatriated foreign earnings are taxed. U.S. corporations pay a tax of 8% on illiquid assets such as factories and equipment and 15.5% on cash and cash equivalents when they bring profits held overseas back to the United States. The tax is payable over eight years.

Both rates represent substantial drops from the prior rate of 35%. The anti-base-erosion and anti-abuse tax also intend to discourage U.S. corporations from shifting profits to lower-tax countries moving forward. These cuts also affect how much corporate tax is applied to the deficit but they don’t expire after 2025 as the individual cuts and provisions do. 

Tax bill proponents point out that Americans who own stocks, mutual funds, or exchange-traded funds (ETFs) in their retirement and investment accounts will also profit from these changes because their investments rise in value when multinational stocks rise in value.

They also note that the prior system of worldwide taxation harms Americans by sending jobs, profits, and tax revenue overseas. It effectively double-taxed foreign-earned income. Most developed countries use a territorial system and the United States joined them on Jan. 1, 2018.

Corporate Tax Rates

Corporations pay taxes under a bracketed system with increasing marginal rates just as individuals and estates do. Those rates were as follows in 2017 before the TCJA:

The corporate tax permanently became a flat rate of 21% beginning in 2018. Most corporations end up with a lower federal tax bill because the flat rate is lower than most of the previous marginal rates. Those with profits under $50,000 have a higher tax bill because their rate increased from 15% to 21%.

According to an analysis by The Wall Street Journal, the types of companies most likely to benefit from the lower corporate rates include retailers, health insurers, telecommunications carriers, independent refiners, and grocers.

Aetna had a median effective tax rate of 35% over the last 11 years as of 2017. Time Warner paid 33%, Target paid 34.9%, and Phillips 66 paid 31.3%. 

The top marginal tax rate for U.S. corporations under the former law was 35% and the global average was 25.44% when weighted for gross domestic product (GDP). Critics have long contended that America’s high corporate tax rates put the country at a competitive disadvantage compared to lower-tax nations such as Ireland, pushing American corporations’ profits overseas.

In theory, companies may allow more profits to be earned domestically and they might spend fewer resources lobbying for lower tax rates and more resources on improving their products and services since rates have dropped. The corporate alternative minimum tax of 20% was repealed under the TCJA.

However, the Tax Foundation’s models found that the tax plan would have several effects when the law was passed. It would:

• Increase GDP by 1.7% over the long term
• Increase wages by 1.5%
• Add 339,000 full-time equivalent jobs

The organization expected GDP to grow by an average of 0.29% per year over the next decade, an increase from 1.84% to 2.13%. It also expects the growth generated by the tax cuts to increase federal revenues by $1 trillion.

What’s Permanent and What Isn’t?

All the changes to the tax code that affect individuals are temporary, including the 20% deduction for pass-through income. Most changes expire after 2025. The corporate tax rate cut, international tax rules, and the change to a slower measure of inflation for determining tax brackets are permanent.

The House released the first version of the tax bill on Nov. 2, 2017. Groups who stood to gain or lose significantly fought hard to protect their interests:

• Graduate students felt threatened that their tuition waivers would be taxed. Many graduate schools don’t charge tuition to students who teach or who work as research assistants. Students were opposed to getting tax bills for the income they never received. The tax bills may have been several thousand dollars depending on what tax bracket the grad student fell into. Grad students will continue to receive this tuition benefit tax-free.

• Teachers also worried about losing their up-to-$300 deduction for expenses related to their classrooms and jobs but this didn’t happen. They can take this deduction whether they itemize deductions or take the standard deduction. 
• The low-income housing tax credit was also saved. The president of the National Low Income Housing Coalition told NPR that a provision of the bill that would have revoked the tax-exempt status of private activity bonds, a benefit that encourages investment in affordable housing construction by lowering its cost, would have meant “a loss of around 800,000 affordable rental homes over the next 10 years.” These bonds also finance infrastructure projects such as roads and airports. 
• The TCJA also failed to eliminate the individual alternative minimum tax (AMT) but it did increase the income threshold for paying the AMT so fewer taxpayers are affected by it. 
• The House bill wanted to eliminate medical expense deductions but the final bill keeps them and provides a small boost.  
• The Earned Income Tax Credit gives a tax break to low- and middle-income workers. It was not expanded. 
• The expansion of 529 plans to cover K-12 education did not include homeschooling.

The Bottom Line

The Tax Cuts and Jobs Act will affect all taxpaying Americans to some extent from the 2018 tax year through at least 2025. Overall, the TCJA lowers tax rates across income levels, helping to reduce Americans’ income tax burden. Understanding how the Act affects you in your tax bracket and individual circumstances can help you to ensure that you’re taking advantage of all the deductions you deserve and ultimately paying the lowest tax bill possible.