The Standard Deduction
The standard deduction nearly doubled under the terms of the TCJA. It was $6,350 for single taxpayers and $12,700 for married couples filing jointly in tax year 2017 before the TCJA took effect. It’s $13,850 for single filers in 2023, $27,700 for married taxpayers filing joint returns, and $20,800 for those who qualify for the head of household filing status. These deductions are up from $12,950 for single filers in 2022, the year for which you’ll file a tax return in 2023. The standard deduction for married couples filing jointly was $25,900 in 2022 and it was $19,400 for head of household filers.
Tax Brackets Under the TCJA
There are still seven brackets, but most tax rate percentages were reduced by the TCJA and each was adjusted to accommodate slightly more earnings. You would have fallen into a 15% tax bracket if you earned $35,000 under the 2017 tax system and you were single. That dropped to 12% in 2018 under the TCJA. You would have paid 25% on your top dollars if you earned $75,000. That went down to 22%. You would have paid 28% in taxes on your top dollars at $100,000. This was reduced to 24%.
Who Benefited?
The Tax Policy Center indicated in 2018 that the TCJA would reduce taxes “on average” for all income groups, and the Tax Foundation agreed with this opinion. But the key word here is “average.” Some taxpayers have fared a little worse, while some have fared better. A taxpayer who earns $100,000 and sees a 4% reduction in their effective tax rate would realize a far greater dollars-and-cents increase—$4,000—in after-tax income than a low-income taxpayer earning only $10,000 a year and seeing the same 4% reduction of just $400.
Low-Income Earners
Low-income earners (those making $25,000 or less) saw a 0.3% increase in after-tax income.
Middle-Income Earners
Those with incomes between $49,000 and $86,000 enjoyed an increase of about 1.4%, or an additional $800 a year or so in after-tax income, according to the Tax Policy Center. The Tax Foundation estimated in 2018 that the “bottom” 80% of American earners, including low-income and middle-income households, would see an increase in after-tax income of anywhere from 0.8% to 1.7%.
High-Income Earners
The highest-income earners (those earning between $308,000 and $733,000 a year) saw an additional $11,200 in after-tax income on average. The top 1% of earners (those making more than $733,000 a year) cut nearly $33,000 (2.2%) from their tax bills. The Tax Foundation was more conservative in its estimates on the effects on high-income earners and put the number at only 1.6%.
Itemizing Deductions Became Less Beneficial
The 2018 tax bill made changes to several itemized deductions. This affected taxpayers who historically itemized rather than claim the standard deduction. In addition to changing what expenses could be itemized, the TCJA substantially increased the standard deduction, so even if you could itemize the same deductions, it might not be worthwhile to do so under the TCJA. On the flip side are taxpayers whose total itemized deductions would exceed even the TCJA standard deduction amount. You might be among those who were hurt by this legislation if you qualify to claim a good many itemized expenses. Some pivotal factors can influence the benefits of itemizing.
How Much Is Your Home Mortgage?
The TCJA capped the mortgage interest itemized deduction at mortgage values of $750,000. The previous limit was $1 million. This shouldn’t affect you unless you have a very expensive home. Experian calculated in early 2019 that the average mortgage debt at that time was $202,284. There was still a whole lot of room between that average and the TCJA’s cap.
Interest on Refinance Loans
The home interest mortgage deduction previously covered both acquisition debt (mortgages taken out to purchase or build a home) and equity debt (when you refinance and take some cash out of your home’s value to spend on other things, such as your child’s college education). The TCJA eliminated the provision for equity debt. You can no longer claim the interest on refinance loans as a tax deduction unless you use the proceeds to “buy, build, or substantially improve” your home.
The State and Local Tax Deduction
The itemized deduction for state and local taxes wasn’t entirely eliminated by the TCJA, but it was capped at $10,000. That limit applies to all state and local taxes (SALT), including sales, income and property taxes that a taxpayer is liable for in their home state. This would be a negative aspect of the TCJA if you pay more than $10,000 a year in state and local taxes. According to the Tax Policy Center, taxpayers who claimed the SALT deduction fell from about 25% in 2017 to 10% in 2018.
The Medical Expense Deduction
The itemized deduction for medical expenses actually improved under the TCJA. This deduction includes out-of-pocket uncovered medical costs, deductibles, copays, and insurance premiums that aren’t reimbursed by your employer. The deduction used to be limited to expenses that exceeded 10% of your adjusted gross income (AGI). That dropped to 7.5% in 2017 and 2018 under the TCJA, and later legislation extended this tax break through 2020. The 7.5% threshold was made permanent by the Consolidated Appropriations Act in 2021.
The Alimony Adjustment
Alimony payments were an “above the line” adjustment to income on the first page of the Form 1040 tax return before the TCJA. You could subtract alimony payments you made from your taxable income, then claim either the standard deduction or itemize your deductions as well. Meanwhile, your ex had to claim that alimony as income and pay the taxes on it. You have to pay taxes on the portion of your income that you send to your ex as part of an alimony settlement under the terms of the TCJA. As for your ex, they get to collect that income tax free.
Those Lost Personal Exemptions
Personal exemptions were dollar amounts that taxpayers could deduct from their taxable incomes for themselves and each of their dependents. They were set at $4,050 per person as of the 2017 tax year. The TCJA eliminated these exemptions from the tax code. Taxpayers with no children likely come out ahead anyway because the TCJA significantly increased standard deductions. But large families with several children have probably experienced a tax increase after losing exemptions worth $4,050 per child.
The Expanded Child Tax Credit
The Center on Budget and Policy Priorities has consistently argued that the TCJA’s changes to the Child Tax Credit didn’t serve the lowest-income families. The true impact of this tax credit has always been tricky to calculate. Technically, it’s nonrefundable, so all it can do is eliminate any tax bill you might owe. But there’s a tack-on credit: the Additional Child Tax Credit. This allows a portion of the credit to become refundable. You can expect to receive a check from the Internal Revenue Service (IRS) for part of the balance after it erases your tax bill. The nonrefundable part of the old credit was $1,000 per child before the TCJA took effect. The legislation ramped that up to $2,000, and it made up to $1,400 of that amount refundable while eliminating the “extra” Additional Child Tax Credit. But the refundable portion of the credit is 15% of a taxpayer’s or family’s earnings up to the $1,400 limit. This means that lower-income families won’t benefit as much from this tax break. A single mom earning $10,000 doesn’t have enough income to qualify for the full $1,400 refundable part of the credit. Meanwhile, high-income families benefit from this change. They used to be unable to claim this tax credit because they earned too much, but the TCJA expanded the income limits. Many high earners can now take advantage of it.
