Tax Law Changes of 2017

How Change in (2017) Tax Law Affected People and Economy
Introduction
Tax Cuts and Jobs Act (TCJA) of 2017 led to significant tax changes that affected individual taxpayers, businesses and the economy. The new tax legislation was signed into law on 22nd December 2017 by President Donald Trump. Three days earlier (19th December 2017) both the U.S Senate and U.S House of Representatives had passed the bill in a vote of 51- 48 and 227 -203, respectively. Most of the provisions in TCJA are valid from January 1, 2018 to December 31, 2025. This paper will compare the prior tax law with the current provisions of TCJA and highlight the impact of tax changes on individual taxpayers, businesses, and the economy in general.
Individual Tax Reforms
TCJA lowered the tax bill of individual taxpayers. Some of the individual tax reforms are explained below.
Income Tax Rate
The TCJA law lowers individual income tax rates and replaces the old tax brackets. In the prior law, the top marginal tax rate was 39.6 percent, but in the TCJA it is 37 percent. The old tax rates of 10%, 15%, 25%, 28%, 33%, 35% and 39.6% was replaced with new tax rates of 10%, 15%, 22%, 24%, 32%, 35% and 37%. The new tax rates reduced by three points at most. Table A1 and Table B2 display the changes in income tax rates for single and married, joint filers, respectively (See Appendix A and Appendix B).
The TCJA also modifies income tax bracket widths. The TCJA top marginal tax rate of 37 percent will apply to individual taxpayers with a taxable income of $500,000 and above. It is also applicable to married taxpayers filing jointly $600,000 and above. In the prior law, the top tax rate of 39.6 percent applied to individual taxpayers with a taxable income greater than $426,700 and married taxpayers filing jointly $480,050 and above. The tax brackets will also be adjusted annually to reflect changes in inflation rates. In the prior law, the consumer price index (CPI) was used to calculate inflation. TCJA specifies that the chained consumer price index (C-CPI –U) will be used to measure inflation.
Child Tax Credit
Child tax credit in the prior law was $1,000 and in the TCJA it is $2,000. TCJA also increases the phase-out credit for married couples to $400,000 (In 2017, it was $110,000). Under TCJA, the refundable amount will not exceed $1,400 per child (It was $1,000 in the prior law). Generally, tax credits are beneficial to the taxpayer because they reduce the tax bill. The changes in child tax credit will expire after 2025.
Alimony Payments
TCJA excludes alimony (maintenance) payments from the income of the recipient. In the prior law, alimony payments were deducted from the income of the payor and added to the income of the payee. This new law will increase the tax liability of the alimony payor. The provisions of alimony payments are permanent.
Education (529 Plan)
TCJA expands the 529 savings plan to include primary and secondary school expenses. The prior law, there were two savings plans and seven different education incentives. The new law also adjusts the definition of higher education expenses to include costs associated with homeschooling. Those expenses include education therapies, online education materials, curricula and curriculum materials and books. These reforms increase education choices for families.
Standard Deductions
Individual standard deductions were doubled in the new law. In the prior law, the stand deductions for single filers was $6,500, but in the TCJA law, it is $12,000. As for joint filers, it increased from $ 12,000 to $24,000. Heads of households were also affected by the new law. Their standard deductions increased to $18,000 (It was $9,550 in 2017). Expanded standard deductions are advantageous for some taxpayers because it will increase their tax savings. The standard deductions will also be adjusted for inflation.
Charitable Contributions
TCJA limits charitable contributes to 60 percent of the donor income. In the prior law, it was 50 percent. The new law also suspends charitable contributions that were made in exchange for seating rights at college athletic events.
Mortgage Interest Deduction
TCJA limits mortgage interest rates deductions to $750,000 for all new mortgages. In the prior law, the mortgage interest rate cap was $1,000,000. Therefore, the new law will not affect mortgage interest deductions for existing mortgages, but it limits interest deductions to $750,000 for new residences purchased with mortgage loans. TCJA also suspends deductions of interest from home equity debt.
Miscellaneous Itemized Deductions
TCJA suspends all miscellaneous itemized deductions that are subject to 2 percent adjustable taxable income. Such deductions include unreimbursed employee business expenses.
investment expenses, and professional fees.
State and local Tax Deductions (SALT)
TCJA limits SALT deductions to not more than $10,000 for aggregate sales, property and income taxes. In the prior law, sales, income, and property taxes were fully deductible.
Alternative Minimum Tax (AMT)
AMT tax system can be used to suspend some tax deduction or limit deductions. TCJA raises alternative minimum tax exemption thresholds to $109,400 for married taxpayers filing jointly ( In 2017 it was $88,200). The new law also increases the phase-out limit to $1 million. The new AMT provisions are not permanent (it expires after 2025).
Casualty Losses
TCJA suspends casualty loss deductions. Under the new law, a taxpayer may claim personal causality loss only if the loss was due to an event declared a disaster by the President. Natural disasters that have been declared by the President in the past include floods, wildfires, and hurricanes.
Business Tax Reforms
Business tax reforms that were proposed in the TCJA will stimulate the economy by attracting new investments and job opportunities. Some of the business tax reforms are discussed below.
Corporate Tax Rate
In the prior law, the personal service corporation rate was 35 percent while the graduated corporate tax rate ranged from 15 percent to 35 percent. Table C1 (see Appendix C) displays the corporate tax rates and taxable in the prior law. In TCJA law, the corporate tax rate is 21 percent. The flat rate also applies to the personal service corporation. The reduction in corporate tax rates promotes new investments and economic growth. Workers also stand to benefit because their wages will increase and there will be more jobs.
Repatriation Tax
Repatriation tax was introduced under the TCJA law. The repatriation tax rate is 8 percent and 15.5 percent for physical assets and liquid assets respectively. TCJA repatriation will increase the gross domestic product (GDP) in the long-run.
Corporate Alternative Minimum Tax
TCJA law eliminates corporate AMT. In the prior law, corporate AMT was 20 percent. However, corporations with annual gross income less than $7.5 million were exempted.
Pass-Through Deductions
TCJA law establishes a 20 percent deduction for small and pass-through businesses (such as partnerships and sole proprietorships). Specific service providers in the fields of law, health, consulting are excluded if their income is above $315,000. These new deductions will lower the marginal tax rates hence promote economic growth.
Business Interest Deductions
TCJA law limits deductible business interest expense to 30 percent of adjusted taxable income. Adjusted taxable income is taxable income calculated without factoring in amortization, depreciation, interest, and taxes. This provision expires after 2021. Businesses with an average annual income of $25 million or less are exempted from interest deduction caps. In the prior law, interest expense was fully deductible.
Conclusion
TCJA lowered individual tax rates, reduced corporate tax and stimulated the economy. However, most of the tax reforms are temporary. Overall, the new tax promotes economic growth and lowers the tax bill of individual taxpayers.





References
Marsan, D. (2018). The Tax Cuts and Jobs Act of 2017 (TCJA) and Its Impact on Investors, Their Trusts, Investment Entities, Retirement Plans and Estates -- Part 1 Tax Reform for Individuals. Journal of Taxation of Financial Products, 15(4), 11-52. Retrieved from https://ssrn.com/abstract=3292280
Smith & Howard. (2018, March). 2018 Tax Cuts & Jobs Act Overview. Retrieved from https://www.smith-howard.com/2018-tax-cuts-jobs-act-overview/
Tax Foundation. (2017). Preliminary Details and Analysis of the Tax Cuts and Jobs Act (241). Retrieved from https://files.taxfoundation.org/20171220113959/TaxFoundation-SR241-TCJA-3.pdf



Appendix A
Changes in Individual Tax Rates for a Single Filer
Table A1
2017 Tax Rates
2017 Tax Brackets
2018- 2025 Tax Rates
2018 – 2025 Tax Brackets

10%
$0 - $9,525
10%
$0 - $9,525

15%
$9,525 - $38,700
12%
$9,525 - $38,700

25%
$38,700 – $ 93,700
22%
$38,700 - $82,500

28%
$93,700 - $195,450
24%
$82,500 - $157,500

33%
$195,450 - $424,950
32%
$157,500 - $200,000

35%
$424,950 - $426,700
35%
$200,000 - $500,000

39.6%
$426,700+
37%
$500,000+


Changes in Tax Rates for a Single Filer
Source: Tax Foundation


Appendix B
Changes in Individual Tax Rates for Married, Joint Filer
Table B1
Changes in Tax Rates for Married, Jointly Filing
2017 Tax Rates
2017 Tax Brackets
2018 – 2025 Tax Rates
2018 – 2025 Tax Brackets

10%
$0 - $19,050
10%
$0 - $19,050

15%
$19,050 - $77,400
12%
$19,050 - $77,400

25%
$77,400 – $ 156,150
22%
$77,400 - $165,000

28%
$156,150 - $237,950
24%
$165,000 - $315,000

33%
$237,950 - $424,950
32%
$315,000 - $400,000

35%
$424,950 - $480,050
35%
$400,000 - $600,000

39.6%
$480,050+
37%
$600,000+

















Source: Tax Foundation


Appendix C
Corporate Tax Rates
Table C1
2017 Corporate Tax Rates
Taxable Income

15%
$0 - $50,000

25%
$50,001 - $75,000

34%
$75,000 - $10,000,000

35%
$10,000,000


Corporate Tax Rates in the Prior Law







Source: Smith & Howard