Taxed
The Tax Cuts and Jobs Act (TCJA) of 2017 significantly changed the American tax landscape, impacting individuals across various income brackets and businesses of all sizes. While the legislation aimed to stimulate economic growth through broad tax reductions, its effects were not uniformly distributed. It created a complex web of winners, those with mixed outcomes and a few who saw their tax burdens increase.
For individual income levels, the TCJA's impact varied considerably. Low-income earners, generally those earning under $40,000, experienced a neutral to slightly positive tax impact.
The near-doubling of the standard deduction meant that many more individuals and families paid no federal income tax. Furthermore, expanding the Child Tax Credit, making it more refundable, led to larger refunds for numerous low-income families.
Child like
For instance, a single parent supporting two children on a $30,000 annual income would likely have seen a net tax cut due to the increased child credit and the higher standard deduction.
However, the elimination of personal exemptions sometimes offsets these gains, particularly for larger families.
Modesty is the word
Middle-income earners, typically those making between $50,000 and $150,000, saw the most consistent benefits from the TCJA. This demographic, especially dual-income households, benefited from lower tax rates and the expansion of the 12% and 22% tax brackets, which allowed them to retain more of their take-home pay. Despite these advantages, the introduction of the State and Local Tax (SALT) cap, which limited deductions for state and local taxes to $10,000, negatively affected homeowners in high-tax states such as New York, New Jersey, and California.
Consequently, while most middle-income households enjoyed a modest tax cut, those who itemized deductions in high-tax states often experienced a diluted benefit. For example, a married couple with two children and a mortgage earning $100,000 might have saved $1,000–$2,500 annually under the TCJA unless significantly impacted by the SALT cap.
On average, middle-income earners saved between $1,200 and $2,800 per year.
The more you know...
For high-income earners, those with incomes exceeding $200,000, the effects were more varied. The top individual income tax rate decreased from 39.6% to 37%, directly benefiting this group. However, like middle-income earners, high earners in high-tax states felt the sting of the SALT deduction limits. Conversely, many high-income individuals who owned pass-through businesses, such as LLCs or S-corporations, leveraged the new 20% pass-through deduction to significantly reduce their tax liabilities.
Therefore, the net effect for high-income earners was generally positive for business owners and those residing in states without state income taxes but more mixed for wage earners in high-tax regions. A tech executive in Texas, earning $500,000, for instance, likely realized substantial savings. At the same time, a similar earner in California might have seen smaller savings or even an increase in their overall tax burden due to the SALT cap.
There is always more
Beyond individuals, the TCJA brought sweeping changes to business taxation. C corporations were arguably the biggest beneficiaries. The corporate tax rate was drastically cut from 35% to a permanent 21%, providing a massive windfall, especially for large multinational corporations like Apple, Amazon, and Exxon. Guess who owns the majority of stock in these three companies? Here is the answer: The Vanguard Group, BlackRock Inc., and State Street Corp.
Interestingly, unlike most individual tax cuts, this corporate rate reduction was not set to expire. The Act also incentivized the repatriation (bringing money back to America) of trillions of dollars in overseas profits by offering a one-time low tax rate. The tax rates are 15.5% for cash and 8% for illiquid assets, payable over eight years. As a result, U.S. firms repatriated $777 billion in 2018 alone, roughly 78% of the estimated offshore cash holdings as of 2017.
Subsequently, the cumulative effect was a significant, long-term tax advantage for large corporations, often leading to increased shareholder value through share buybacks.
The gig is up
Pass-through businesses, encompassing LLCs, S corporations, and sole proprietorships, also saw significant benefits. Introducing a 20% deduction on qualified business income meant that many small business owners only paid tax on 80% of their earnings.
However, this deduction was subject to income limitations and phased out for certain service businesses (e.g., lawyers, doctors) above approximately $170,000 for single filers and $340,000 for joint filers. Additionally, the provision for 100% expensing of capital investments encouraged business growth and investment. As a result, most small and mid-sized businesses benefited, except high-income service providers in restricted categories.
Finally, the TCJA provided advantages for gig workers and freelancers. Many independent contractors qualified for the 20% pass-through deduction, directly reducing their tax obligations. The increased standard deduction also simplified tax filing for many, helping them avoid the complexities of itemization. Therefore, gig workers generally experienced lower taxes and higher net income, especially those whose earnings fell below the deduction's phaseout limits.
On average, corporations saved approximately 14 cents for every dollar of taxable income compared to before TCJA. For a typical profitable company, this translated to hundreds of thousands to tens of millions of dollars annually, depending on size.
The Monopoly Game of Life
In summary, the Tax Cuts and Jobs Act impacted the American economy differently. The clear "winners" included middle-class families, large corporations, pass-through business owners, and low-income parents with children. Those who experienced "mixed" outcomes included upper-middle earners in high-tax states and some professionals and service businesses due to deduction limitations.
Conversely, "losers" primarily comprised wealthy wage earners in high-tax states like California or New York, who were disproportionately affected by the SALT cap and the loss of personal exemptions. The TCJA thus reshaped the financial landscape, leaving a complex legacy of varied tax outcomes for individuals and businesses alike.
