The Tax Cuts and Jobs Act, also known as the TCJA, was brought into existence on December 22, 2017, when President Donald Trump signed the aforesaid bill into law under the ambit of significant tax reform.
This legislation, the most substantial of its kind since the Tax Reform Act of 1986, brings about a series of changes that stand to be of utmost essentiality for the betterment and development of the individuals residing in the United States.
From bringing into play modifications to both individual and corporate income tax rates and bases to reducing the maximum corporate income tax rate to 21 percent as well as radically restructuring and redeveloping the international tax regulations, the Tax Cuts and Jobs Act encompassed several aspects pertaining to tax.
Not only the aforesaid, but the said legislation, brings into play such a concept that revolves around a deduction for pass-through income from certain businesses.
The Tax Cuts and Jobs Act also encompasses provisions that stand inclusive of immediate expensing for equipment investments, the elimination of personal and dependent exemptions, the removal of the tax penalty for individuals lacking adequate health insurance coverage, as well as the dismissal of the corporate alternative minimum tax.
On the same lines, the act also has the power to raise the standard deduction, the estate tax exemption, and the individual alternative minimum tax exemption for better working of the taxation law in the United States.
What makes the development of the taxation law more intriguing is the fact that all individual income tax and estate tax provisions that fall under the ambit of the Tax Cuts and Jobs Act, are set to expire after the year 2025. However, the aspects that stand permanent are the majority of corporate provisions.
Running parallelly to the aforesaid, the concept that the Tax Cuts and Jobs Act has projected to have a stimulating impact on the economy in the short term is a hot topic.
However, it has been put forth that, especially, as per the most utilized economic models, the long-term impact on gross domestic product commonly known as GDP, due to the Tax Cuts and Jobs Act is projected to be modest.
Complementing the essence as stated above, the effect on GNP, which stands for gross national product, has been anticipated to be even less pronounced compared to the gross domestic product, given that the law is expected to generate net capital inflows from foreign capital markets that will be required to be repaid at the earliest in the future.
Though the potential economic growth effects are much expected, the Tax Cuts and Jobs Act will still result in substantial reductions under the ambit of federal revenues. Persisting even after accounting for the impact on economic growth is the impact of the said outcome.
Not only the aforementioned but the new law is predicted to contribute to a greater level of inequality in the field of after-tax income distribution. From leading to increased federal debt to placing financial burdens on future generations, if the Tax Cuts and Jobs Act is not financed through simultaneous spending reductions or other tax increases, then there will be consequences witnessed.
On the other hand, it deems it essential to state that if the financing for the said legislation is bestowed through spending cuts or increases seen in other taxes, then it is most likely to cause the majority of households to worsen in terms of their livelihood compared to a scenario where the law was not enacted.
While the new law, that is the Tax Cuts and Jobs Act brings into existence certain modifications and developments to the tax code, it also introduces new complexities followed by compliance challenges in other aspects of the same.
Provisions Under the Tax Cuts and Jobs Act –
1. Individual Income Tax and Estate Tax
The Tax Cuts and Jobs Act, as a newly developed portion of the tax code, brought into play several crucial amendments to the aspects of individual income tax and estate tax regulations.
Though the initial intention of curating such changes was only temporary and was made to reach its fruition by the end of 2025, some of the provisions stood at the position of permanency.
From eliminating the Affordable Care Act’s individual mandate penalty, and crafting adjustments in inflation indexing, to ensuring alterations are made in the tax base which is used to measure business income standing exclusive of the pass-through deduction, which was applicable to both corporations and pass-through entities, the legislation brought major developments to the field of tax.
1.1 The Tax Rates
The Tax Cuts and Jobs Act has been authorized with the power to bring in changes pertaining to the reduction in marginal statutory tax rates across nearly all ranges of taxable income, complemented with modifications made to the thresholds for various income tax brackets.
Declining from 39.6 percent to 37 percent, is the highest marginal rate drop, which has been specifically noticed, whereas the other applicable rates under the ambit of the said legislation are 10, 12, 22, 24, 32, and 35 percent.
1.2 The Family Benefits- Exemptions, Child Credit
To wipe out the personal and dependent exemptions, which held a value of $4,150 for every taxpayer, spouse, and eligible dependent in the year 2018 was one of the key powers bestowed by The Tax Cuts and Jobs Act. However, the aforesaid value was adjusted for changes in the price level thereafter.
On the same lines, in lieu of such personal exemptions, the legislation brought into existence various enhancements pertaining to the child tax credit as well as established a new $500 tax credit for dependents who aren’t eligible to file for credit under the ambit of child tax.
The expansion of the child tax credit under the umbrella of The Tax Cuts and Jobs Act encompasses various developments as well as modifications. The previous tax framework comprised the fact that the credit, per child who is below the age of 17, stood at $1,000, without any adjustment given for inflation.
On the same lines, it was also stated that a sum equivalent to 15 percent of the earnings exceeding $3,000 was refundable, which meant a full value of $1,000 for each child under the aspect.
The phaseout of the child tax credit for married couples filing in conjunction commenced at an income of $110,000 and of $75,000 for single filers. While understanding the same, it deems it vital to pinpoint that the aforesaid credit values as well as the income thresholds were not subject to inflation indexing.
This is where The Tax Cuts and Jobs Act came in as a saviour. Under the supervision of the said legislation, the maximum credit amount rises to $2,000 per child aged below 17 years in the year 2018.
The refundable portion had also been modified and upgraded to 15 percent of household earnings that surpass $2,500, up to a capital of $1,400 per child in the said year.
Focusing on a particular section, the phaseout range for the credit experiences a substantial increase and has been said to only come into play once the income for married couples who filling together for the aforesaid surpasses $400,000 and for individuals dealing separately, the aforesaid must cross $200,000.
While the upper limit stands at $1,400 as the refundable amount which is adjusted for inflation, the maximum total credit amount as well as the income phaseout scope remains unindexed.
Not only the aforesaid but when speaking of such a credit, unlike the previous legislations and rules, the concept of eligibility for the credit under the scope of The Tax Cuts and Jobs Act stays limited to only those children who possess a valid Social Security number.
On the same lines of thought, the legislation has also been responsible enough to bring into force a novel nonrefundable credit of $500 for additional dependents that the said taxpayer can demand and claim.
From children who surpass the age limit for eligibility in the child tax credit, full-time college students, to any other adult household member for whom the taxpayer offers substantial financial support, the non-refundable credit has been applicable to the aforesaid individuals.
Unlike the child tax credit, the said amount as credit is not subject to refundability as well as is made sure that it does not extend beyond the taxpayer’s tax liability.
1.3 Standard and Itemized Deductions
To drastically increase the standard deduction, that resulted in amounts of $24,000, which was previously at $13,000 for married couples who are filling together, $12,000 that rose immensely from $6,500 for individual applicants, and $18,000 for heads of households which stood previously at $9,500, is one of the main motives of The Tax Cuts and Jobs Act.
However, it is important to put across that this section is heavily affected by any kind of inflation developments. Such an immense boost in the ambit of standard deductions will lead to a great reduction in the number of taxpayers who opt to itemize their deductions.
Not only the aforesaid, but The Tax Cuts and Jobs Act as a new legislation, utilizes its power in order to curate developments pertaining to the structure of several key itemized deductions.
Under the former tax regime, taxpayers who chose to itemize deductions had the authority to claim deductions for their state entirely as well as the local property taxes, not to forget the larger of either income or sales taxes, that fell within the limits of the itemized deductions overall.
However, with the initiation of The Tax Cuts and Jobs Act, an imposition of $10,000 has been placed as an annual cap on itemized deductions not only for all state and local taxes but also for joint and individual applicants.
It is also important to highlight that such a cap is not subject to modification, adjustment or development pertaining to inflation.
In terms of mortgage interest deductions, as per the former law, it was said that the taxpayers were allowed to deduct interest on mortgage payments that were attached to the first $1 million of principal on debt, incurred either for purchasing or renovating primary and secondary residences, along with the initial $100,000 under the ambit of home equity debt.
Overpowering the aforementioned, with the assistance of The Tax Cuts and Jobs Act, the above-mentioned deductions for mortgage interest on new loans have now been made limited to the interest on the initial $750,000 of loan principal, which only targeted primary residences as well as only new loans following the effective date.
Not only this but the deductibility of interest on home equity debt has also been eliminated effective immediately.
1.4 Affordable Care Act Penalty Tax
Initiated in the year 2019, the Tax Cuts and Jobs Act was bestowed with the power to effectively nullify the penalty tax associated with the Affordable Care Act’s individual mandate.
Under the previous tax framework, the households had tremendously lacked valid health insurance, for which they were obligated to pay a penalty, which amounted to the lesser of 2.5 percent of their household income or to dive into the specifics, adults were ordered to pay $695 and $347.50 per child, the outcome of which resulted as a maximum of $2,085.
Thanks to The Tax Cuts and Jobs Act, the said legislation allowed the individuals who chose not to enrol in sufficient health coverage be given a leeway meaning that they were no longer subjected to penalties starting from the year 2019.
The aforesaid development has been expected to result in a reduction in the federal budget deficit. This outcome is due to the fact that there are fewer individuals who are on the path of seeking free or subsidized coverage, which leads to decreased expenditures not just for Affordable Care Act premium tax credits and other subsidies, but also for Medicaid benefits.
Such aforesaid cutback in costs has been speculated to jump beyond the set target for revenue loss which stood as an outcome of eliminating the penalty tax rate.
It deems it highly to state that the aforementioned aspect stands exclusive of the sunset clause, which refers to the fact that it remains in effect beyond its enactment as well as into the foreseeable future.
1.5 Inflation Indexing
A lasting alteration to the method of inflation indexing, which brought in a shift from the Consumer Price Index for All Urban Consumers, known as CPI-U to the Chained Consumer Price Index for All Urban Consumers, called chained CPI-U was introduced by The Tax Cuts and Jobs Act.
Designed to reflect changes more accurately in consumer welfare, this modification was executed due to the constant fluctuations in prices that were witnessed.
The Chained Consumer Price Index for All Urban Consumers considers the very fact that individuals adapt to their purchasing habits which stand in response to the varying price movements, the outcome of which was a more realistic assessment of inflation’s impact on consumer behaviour.
As an effect, the Chained Consumer Price Index for All Urban Consumers generally puts forth a slower rate of increase than compared to the traditional Consumer Price Index for All Urban Consumers.
Serving as a significant issue for taxpayers, over time, the use of the Chained Consumer Price Index for All Urban Consumers as an indexing measure refers to the fact that citizens will experience a gradual shift from a lower to a higher tax bracket.
Not only this, but the indexed tax credits standing inclusive of the Earned Income Tax Credit, commonly known as the EITC are known to grow at a more moderate pace than they would have under the ambit of the previous indexing regime.
1.6 Estate Tax
The doubling of the exemption translating to $11.2 million for individual applicants and $22.4 million for couples, was a vehement rise witnessed in the sector of estate tax exemption as the Tax Cuts and Jobs Act was brought into play.
On the same lines, these exemption limits are curated to be adjusted and modified for inflation which will occur over time.
Deeming it important, to highlight the fact that despite this expansion of the aforementioned, the highest estate tax rate remains the same that is at 40 percent. Such a step aims to reduce the impact of the estate tax on a larger portion of estates as well as maintain the existing top tax rate.
2. Corporate Income Tax
2.1 Tax Rate and Alternative Minimum Tax
The Tax Cuts and Jobs Act, as newly brought in-action legislation, enacts a substantial reduction in the highest corporate income tax rate, which lowers the aforesaid from 35 percent to 21 percent.
With the said modification, it places the United States, in terms of the corporate tax rate, below the average of many other countries that stand within the ambit of the Organization for Economic Co-operation and Development, also known as the OECD.
Not only the aforementioned, but the statute does away with the graduated corporate rate schedule, meaning it is bestowed with the authority to organize and streamline the taxation structure.
On the same lines, abolishing the corporate alternative minimum tax, which stood as a separate tax system, the intention of which was to ensure that corporations paid a minimum level of taxes even if they had various deductions or credits, was another key step taken by the Tax Cuts and Jobs Act.
The aforesaid repeal not only simplified the tax system for corporations but also acted as a catalyst in order to align with the broader changes in corporate taxation that were brought to play by the said legislation.
2.2 Corporate Tax Base
Introducing a way, as a provision that permits full expensing or 100 percent bonus depreciation for qualified property over a span of five years was another feather in the cap of the Tax Cuts and Jobs Act.
Diving deeper into the said concept, following this initial period, the bonus depreciation is said to witness a phase down at an incremental speed which is 20 percentage-point reductions falling every year.
Taking as an illustration, the aforesaid, starting in 2023 must see an 80 percent drop, which is to be followed by 60 percent in 2024, 40 percent in 2025, 20 percent in 2026, and finally zero percent in 2027.
However, speaking as a difference, prior to the Tax Cuts and Jobs Act, the bonus depreciation was authorized for only 50 percent of the adjusted basis in the year 2017, with the subsequent years observing a decrease until the complete elimination of the same post-2020.
The newly added provision under the guidance of the Tax Cuts and Jobs Act, doubles the small business expensing threshold under Section 179 to $1,000,000. Not only the aforesaid but there is also another element called a phaseout threshold, which is set at $2,500,000 for qualified property.
Such an aforesaid development authorizes eligible small businesses to expense a larger portion of their capital investments and make them equal in the market.
Running parallelly with the thought of how beneficial The Tax Cuts and Jobs Act is, the legislation also had the power to grant a limitation on the deduction of net business interest, which refers to the interest paid minus the interest received.
The aforesaid has been curated to be placed at 30 percent of the business income before accounting not only for interest but also for depreciation as well as amortization.
However, beginning in 2022, the limitation was no longer held accountable for the adjustments related to amortization and depreciation.
On the same lines, it deems it highly essential to put across that businesses with gross receipts below $25 million are marked as exempted pertaining to the aforesaid limitation.
Prior to The Tax Cuts and Jobs Act, businesses were generally allowed to fully deduct interest paid when computing any kind of taxable income.
Commenced in the year 2022, a shift in the tax treatment of research and experimentation expenditures had been very evidently noticed.
From the said expenditures being amortized over a period of five years, rather than being eligible for immediate deduction to the period of amortization being extended to 15 years for offshore research and experimentation, numerous developments in the said field have been seen.
2.3 International Issues
A series of comprehensive changes to the taxation of foreign source income and international financial activities was brought into play when The Tax Cuts and Jobs Act was introduced.
To compare, under the previous tax computing system, it was put forth that multinational corporations were subject to worldwide taxation, which meant that their income was taxed regardless of where it was earned, with a credit provided for foreign taxes paid.
The former regime stated that active foreign-source income earned by foreign subsidiaries of the United States-based multinational corporations was deferred until repatriation to the aforesaid country’s parent company.
Considering how difficult the aforementioned was, The Tax Cuts and Jobs Act acted as a saviour and introduced a modified territorial tax system.
Under the supervision of the new legislation, changes ranged, not only from making sure the United States corporations are still being held liable to pay taxes on profits earned within the country but also exempting the dividends received by domestic corporations from foreign corporations wherein they hold at least a 10 percent ownership stake.
While this system aligns with a territorial tax approach, the legislation also stands inclusive of provisions that are aimed at curbing the extent to which companies might manipulate these rules.
The Global Intangible Low-Taxed Income, commonly called the GILTI, a provision under the ambit of The Tax Cuts and Jobs Act, brought into force a concept where a minimum tax of 10.5 percent was placed on foreign profits exceeding a firm’s normal return, which is defined as 10 percent on the adjusted basis of tangible property held abroad, without allowing for any deferral of the sorts.
The said companies are authorized to utilize 80 percent of their foreign tax credits to offset this minimum tax. Not only this but in most cases, The Global Intangible Low-Taxed Income tax and the credit for foreign taxes mean that the minimum tax wouldn’t apply to foreign profits, which are taxed at a foreign rate of either 13.125 percent or higher.
Apart from the aforementioned, the newly added legislation to the tax reform was also responsible for getting through another provision called the Base Erosion and Anti-Abuse Tax, called BEAT, which refers to a mechanism that discourages erosion of the United States tax base.
The aforesaid provision imposes a minimum tax rate of 10.5 percent on certain deductible payments that commenced between a United States corporation and its foreign subsidiary, which typically ensures that a company pays the higher of its Base Erosion and Anti-Abuse Tax burden or regular corporate tax.
3. Excise Tax Changes
One of the major developments, apart from the aforementioned, that the Tax Cuts and Jobs Act brought with its birth was the tax reductions for a majority of alcohol producers through a reduction in excise taxes.
Talking specifics, the excise tax on the initial 60,000 barrels of beer produced by a seller has been lowered from $7.00 to $3.50.
Not only this but for distilled spirits, the tax on the first 100,000 proof gallons has been reduced from $13.50 to $2.70 as well and in the case of wine, the said tax on the initial 30,000 gallons has been decreased from $0.17 to $0.07.
A boon to the tax regime is called the Tax Cuts and Jobs Act. From marking changes in the individual field of taxes to corporate, not to forget the excise taxes, the newly added legislation has served to be of such an aid, that knowing the taxation system without it, now seems impossible.