What Is the Tax Cuts and Jobs Act (TCJA)?

The Tax Cuts and Jobs Act (TCJA) was a major overhaul of the tax code, signed into law by President Donald Trump in his first term on Jan. 1, 2018. The Senate passed TCJA on Dec. 2, 2017, by a party-line vote of 51 to 49. The House passed its version by a vote of 224 to 201. No House Democrats supported the bill, and 12 Republicans voted against it.

The reform impacted taxpayers and business owners, particularly through tax cuts. Many of the tax reform benefits for individuals expire in 2025.

Effects on Individuals

TCJA impacted individuals based on their income level, filing status, and deductions. It permanently removed the mandate requiring individuals to purchase health insurance, a key provision of the Affordable Care Act. The highest earners were expected to benefit most from the law, while the lowest earners are expected to pay more in taxes after individual tax provisions expire in 2025.

• Income Tax Rates: The law retained the seven individual income tax brackets. The top rate fell from 39.6% to 37%, while the 33% bracket dropped to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. The lowest bracket remained at 10%, and the 35% was unchanged.
• Standard Deduction: TCJA raised the standard deduction for all filers.
• Personal Exemption: The law suspended the personal exemption through 2025.
• Health Coverage Mandate: TCJA ended the individual mandate, a provision of the Affordable Care Act (ACA) that levied tax penalties for individuals who did not obtain health insurance coverage.
• Child Tax Credit: The law raised the child tax credit and created a nonrefundable credit for non-child dependents. The credit can only be claimed if the taxpayer provides the child’s Social Security number (SSN), who must be younger than 17. These changes expire in 2025.
• Estate Tax: The law temporarily raised the estate tax exemption. This change will be reversed after 2025.
• Student Loans: TCJA allows 529 plans to fund K through 12 private school tuition—up to $10,000 per year, per child. Under the SECURE Act of 2019, the benefits of 529 plans were expanded, allowing plan holders to withdraw a maximum lifetime amount of $10,000 per beneficiary penalty-free to pay down qualified student debt.
• Retirement Savings: The law repealed the ability to retroactively designate a Roth contribution as a traditional IRA or vice-versa. The Setting Every Community Up for Retirement Enhancement (SECURE) Act lets individuals contribute to Individual Retirement Accounts (IRAs) past 70½. Health savings accounts (HSAs) were not affected by the law.
• Alternative Minimum Tax: The law temporarily raised the exemption amount and exemption phase-out threshold for the alternative minimum tax (AMT), a device intended to curb tax avoidance among high earners.
• Mortgage Interest: TCJA limits the mortgage interest deduction for married couples filing jointly to $750,000 worth of debt. The change expires after 2025.
• Pease Limitation: The law repealed the Pease limitation on itemized deductions and gradually reduced their value when adjusted gross income exceeds a certain threshold.
• Miscellaneous Itemized Deductions: The suspended miscellaneous itemized deductions include deductions for moving expenses, except for active-duty military personnel, and union dues through 2025.

State and Local Tax

The new law capped the tax deduction for state and local taxes at $10,000 through the 2025 tax year, but this generally affects only taxpayers who live in states with notably high tax rates and who are willing to itemize their deductions rather than claim the standard deduction for their filing statuses.

The deduction covers property and income taxes or sales taxes, but not both. Taxpayers must choose between deducting one type of tax or the other. The TCJA further limits this deduction to $5,000 for those who are married but file separate returns.

Businesses and the TCJA

• Corporate Tax Rate: The law created a single corporate tax rate of 21% and repealed the corporate AMT. These provisions do not expire. Supporters of cutting the corporate tax rate argued that it reduced incentives for corporate inversions, in which companies shift their tax base to low or no tax jurisdictions, often through mergers with foreign firms.
• Immediate Expensing: TCJA allows full expensing of short-lived capital investments rather than requiring them to be depreciated over time. The section 179 deduction cap doubles to $1 million, and phaseout begins after $2.5 million of equipment spending, up from the previous $2 million.
• Pass-Through Income: Owners of pass-through businesses—which include sole proprietorships, partnerships, and S-corporations—gained a 20% deduction for pass-through income. To discourage high earners from recharacterizing regular wages as pass-through income, the deduction is capped at 50% of wage income or 25% of wage income plus 2.5% of the cost of qualifying property.
• Interest: The net interest deduction is capped at 30% of earnings before interest and taxes (EBIT).
• Cash Accounting: Businesses with up to $25 million in average annual gross receipts over the preceding three years can use cash accounting—up from the old tax code’s $5 million.
• Net Operating Losses: The law scrapped net operating loss (NOL) carrybacks and caps carryforwards at 90% of taxable income, falling to 80%.
• Section 199: The law eliminated the section 199 (domestic production activities) deduction for businesses that engage in domestic manufacturing and other production work.
• Foreign Earnings: The law introduced a territorial tax system under which only domestic earnings are subject to tax. Companies with over $500 million in annual gross receipts are subject to the base erosion anti-abuse tax, designed to counteract base erosion and profit shifting, a tax-planning strategy that involves moving taxable profits from one country to another with low or no taxes. BEAT is calculated by subtracting a company’s regular corporate tax liability from 10% of its taxable income, ignoring base-eroding payments.

Intangible Property

TCJA altered the treatment of intangible property held abroad, such as patents, trademarks, and copyrights. For example, Nike (NKE) houses its Swoosh trademark in an untaxed Dutch subsidiary. 

When the foreign tax rate on foreign earnings above a 10% standard rate of return is below 13.125%, the law taxes these excess returns at 21%, after a 50% deduction and a deduction worth 37.5% of FDII. This excess income, which the law assumes to be derived from intangible assets, is called global intangible low-taxed income (GILTI). Credits can offset up to 80% of GILTI liability.

Foreign-derived intangible income refers to that which is from the export of intangibles held domestically, which is taxed at a 13.125% effective rate, rising to 16.406% after 2025.

Projected Economic Growth

Former Treasury Secretary Steven Mnuchin claimed that the Republican tax plan would spur sufficient economic growth to pay for itself and more. On Dec. 11, 2017, the Treasury released a one-page analysis claiming that the law would increase revenues by $1.8 trillion over 10 years.

The Federal Reserve projected growth of 2.5% in 2018, 2.1% in 2019, 2.0% in 2020, and 1.8% over the longer run. Real GDP data for the years after the TCJA show the following growth rates:

• 0.6% in 2018
• 2.8% in 2019
• 4.4% in 2020
• 7.4% in 2021
• 3.4% in 2022
• 3.2% in 2023
• 2.3% in 2024

Who Benefited From TCJA?

The TCJA cut the corporate tax rate to benefit shareholders, who tend to be higher earners. It only cuts individuals’ taxes for a limited period. It scales back the AMT and estate tax and reduces the taxes levied on pass-through income. It does not close the carried interest loophole, which benefits professional investors.

When individual tax cuts expire after 2025, the TPC estimated that the majority of taxpayers—53.4%—would face a tax increase: 69.7% of those in the middle quintile (40th to 60th percentile) will pay more, compared to just 8% of the highest-earning 0.1%.

Change in after-tax income by income percentile

The Joint Committee on Taxation estimated that the 22 million households making $20,000 to $30,000 will collectively pay 26.6% more in 2027 than they would under the previous statute in that year. The 629,000 households making over $1,000,000 will pay 1% less.

The Bottom Line

The Tax Cuts and Jobs Act (TCJA) was a major tax code overhaul signed into law in 2018 by President Trump in his first term. TCJA cut taxes for shareholders and individual taxpayers alike. However, cuts for individuals expire in 2025 unless the Act is extended.