Tax Reforms in the United States: An Overview of the 2017 Tax Law Impact in 2019

Many individuals and businesses in the United States were under the impression that their taxes remained unchanged in 2019. However, the Tax Cuts and Jobs Act of 2017 led to significant changes in the Internal Revenue Code, which started taking effect on January 1, 2018. This comprehensive article provides an in-depth look at the changes brought about by the new tax law.

Introduction to the 2017 Tax Reform

The Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017. It marked one of the most significant overhauls of the U.S. tax system in decades, aiming to stimulate economic growth by reducing tax rates and simplifying the tax code. While many changes took effect in 2018, some provisions have been phased in and will continue to impact taxpayers in the years to come.

Changes to Individual Income Tax Rates

One of the most visible changes brought about by the 2017 tax law was the reduction of individual income tax rates. The number of tax brackets was reduced from seven to four, and the rates for each bracket were lowered as follows:

10% Bracket: The threshold was raised to $10,000 for single filers and $20,000 for married couples filing jointly. 12% Bracket: The threshold was raised to $38,700 for single filers and $77,400 for married couples. 22% Bracket: The threshold was raised to $82,500 for single filers and $165,000 for married couples. 24% Bracket: The threshold was raised to $157,500 for single filers and $315,000 for married couples. 32% Bracket: The threshold was raised to $200,000 for single filers and $400,000 for married couples. 35% Bracket: The threshold was raised to $500,000 for single filers and $1,000,000 for married couples. 37% Bracket: The threshold was raised to $400,000 for single filers and $800,000 for married couples.

The phase-out of personal exemptions for certain income levels, scheduled to begin in 2018, also became an immediate part of the new laws. Personal exemptions, which allowed individuals to claim a set amount as a deduction from their taxable income, were no longer available under the new rules, significantly impacting many taxpayers.

Corporate Tax Reforms and Impact on Businesses

Corporate taxes also received a significant overhaul under the 2017 tax law. The corporate tax rate was reduced from 35% to 21%, aimed at making U.S. companies more competitive globally. This reduction in the corporate tax rate was a major highlight of the law and has had widespread implications for businesses across various sectors.

The law also addressed international taxation and repatriation of offshore profits. The base erosion and anti-abuse tax (BEAT) was introduced to prevent large companies from shifting profits to tax havens, while the provision for the repatriation of earnings from foreign subsidiaries allowed companies to bring back previously untaxed foreign income at a reduced rate. These changes have reshaped the tax landscape for both small and large corporations.

Impact on Pass-Through Entities and Investments

The 2017 tax law also provided benefits to pass-through entities, such as partnerships and S corporations, and other types of investment income. A 20% deduction was introduced for qualified business income (QBI) from qualified trades or businesses, which is significantly lower than the previous tax rate for these types of income. This deduction was available to both individuals and pass-through entities and has made investing in and operating small businesses more attractive.

This deduction, however, came with limitations. High-income individuals and businesses had to navigate complex rules to ensure they could qualify for the full deduction. The phase-out of state and local tax (SALT) deductions, limiting the amount of SALT deductions to $10,000, was another adjustment that significantly impacted certain regions and taxpayers.

Key Provisions of the Tax Law

Higher Standard Deductions: The standard deduction was more than doubled, from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples filing jointly. This increase simplified tax filing for many taxpayers, reducing the need to itemize deductions. Child Tax Credit: The child tax credit was increased from $1,000 to $2,000 per child. The age limit for qualifying children was raised to 17 years instead of 16, making the credit more accessible to a broader range of families. Repeal of Estate and Gift Taxes: The estate and gift tax exemption was increased to $11.58 million (adjusted for inflation in 2022). This higher exemption generally meant fewer estates and gifts would be subject to these taxes. Retroactive Changes: Some of the changes, such as the child tax credit, were set to expire after 2025. Their future remains uncertain and will depend on ongoing legislative actions.

Conclusion: The Ongoing Impact of Tax Reforms

The Tax Cuts and Jobs Act of 2017 has had a profound impact on the U.S. tax system, altering both individual and corporate tax landscapes. While the actual implementation of the law was phased in, its long-term effects are still being felt in ways that didn't become fully apparent until 2019. As the law continues to evolve, taxpayers and businesses need to stay informed to make the most of the changes and comply with the ongoing requirements.

Understanding the nuances of these tax reforms is crucial for navigating the complexities of tax compliance in the United States. Whether it's optimizing personal finances, structuring business operations, or planning for future income tax scenarios, the insights gained from these reforms can help individuals and businesses make well-informed decisions.