The Tax Cuts and Jobs Act (TCJA) was a major overhaul of the U.S. tax code that was signed into law on December 22, 2017. The legislation brought significant changes to the tax system, impacting individual taxpayers in various ways. Here is an overview of the key provisions and the impact of the TCJA on individual taxpayers:
- Changes to Tax Brackets:
The TCJA retained the seven income tax brackets but lowered the tax rates for most taxpayers. The new tax rates ranged from 10% to 37%, resulting in reduced tax liability for many individuals.
- Increased Standard Deduction:
The standard deduction was nearly doubled under the TCJA. For tax year 2021, the standard deduction is $12,550 for single filers, $18,800 for head of household, and $25,100 for married filing jointly. This increase led to more taxpayers choosing the standard deduction instead of itemizing deductions.
- SALT Deduction Limitation:
One of the most significant changes was the limitation on the state and local tax (SALT) deduction. The TCJA capped the SALT deduction at $10,000 per year. This had a notable impact on taxpayers in high-tax states who could previously deduct all of their state and local income taxes and property taxes.
- Changes to Mortgage Interest Deduction:
The TCJA reduced the limit on deductible mortgage interest for new mortgages taken out after December 15, 2017. Taxpayers could only deduct interest on mortgage debt up to $750,000 (or $375,000 for married individuals filing separately), down from the previous limit of $1 million.
- Limitation on Miscellaneous Itemized Deductions:
The TCJA eliminated miscellaneous itemized deductions subject to the 2% floor. This included deductions for unreimbursed employee expenses, tax preparation fees, and investment expenses. As a result, fewer taxpayers opted to itemize deductions.
- Expansion of Child Tax Credit:
The Child Tax Credit was expanded under the TCJA. The credit amount increased from $1,000 to $2,000 per qualifying child, and a $500 credit was introduced for other qualifying dependents. Additionally, the income phase-out thresholds were raised, allowing more families to qualify for the credit.
- Individual Mandate Penalty Repeal:
The TCJA effectively eliminated the penalty for individuals who did not have health insurance coverage, known as the individual mandate penalty. Individuals are no longer required to pay a fine for being uninsured.
- Alimony Deduction Elimination:
For divorce or separation agreements executed or modified after December 31, 2018, the TCJA eliminated the deduction for alimony payments by the payer and the requirement for the recipient to report alimony as taxable income.
- Estate and Gift Tax Exemption Increase:
The TCJA doubled the estate and gift tax exemption, resulting in a higher threshold before the estate tax applies to an individual’s estate.
- Business Income Deduction (Section 199A):
The TCJA introduced a new deduction for certain pass-through business income, allowing eligible individuals to deduct up to 20% of qualified business income from partnerships, S corporations, and sole proprietorships.
- Impact on Individual Taxpayers:
The TCJA had both positive and negative impacts on individual taxpayers. Many taxpayers experienced lower tax rates and benefited from the increased standard deduction, resulting in reduced tax liability. However, some taxpayers in high-tax states were adversely affected by the SALT deduction limitation. Additionally, the elimination of certain itemized deductions impacted taxpayers who previously relied on these deductions to lower their taxable income.
Overall, the TCJA aimed to simplify the tax code, reduce tax rates for individuals, and stimulate economic growth. Its impact on individual taxpayers varied depending on individual circumstances, including income level, family size, state of residence, and the nature of their deductions and credits.
As with any significant tax law changes, it is essential for individual taxpayers to review their specific tax situations carefully and consult with Matthew Jennings, JD, MBA, EA, RFC®, CEP®, CES™, aka Tax King Matt to understand the full implications of the TCJA on their tax liability and financial planning.