Legal Definitions - Tax Cuts and Jobs Act of 2017 (TCJA)

The Tax Cuts and Jobs Act of 2017 (TCJA) is the informal name for a significant piece of federal legislation that made extensive changes to the United States tax code. Signed into law by President Donald Trump in December 2017, the TCJA represented the most comprehensive overhaul of U.S. tax law in decades, impacting individuals, families, and businesses across the country.

The primary goals of the TCJA were to simplify the tax code, reduce tax burdens for many, and stimulate economic growth. It achieved this through a variety of provisions, some of the most notable being:

• For Individuals: Generally lowered individual income tax rates across most brackets, significantly increased the standard deduction (reducing the number of people who itemize), capped the deduction for state and local taxes (SALT) at $10,000, altered the deduction for home mortgage interest, and eliminated many miscellaneous itemized deductions. Many of these individual provisions are set to expire at the end of 2025.
• For Businesses: Permanently reduced the corporate income tax rate from 35% to a flat 21%. It also introduced a new 20% deduction for qualified business income from "pass-through" entities (like partnerships, S corporations, and sole proprietorships) for many business owners, enhanced depreciation rules for business investments, and made substantial changes to the taxation of international income.

Here are some examples illustrating the impact of the TCJA:

• Example 1: The Homeowner in a High-Tax State

  Imagine Maria, a homeowner in New York, who previously itemized her deductions. Before the TCJA, she deducted her $15,000 in state income taxes and $8,000 in property taxes, along with her mortgage interest. After the TCJA, her combined state and local tax (SALT) deduction became capped at $10,000. Even though her mortgage interest deduction remained, the significant increase in the standard deduction (from $6,500 to $12,000 for individuals) meant that her total itemized deductions, now limited by the SALT cap, were no longer greater than the new standard deduction. As a result, Maria likely switched to taking the standard deduction, simplifying her tax filing but potentially reducing her overall tax savings compared to her pre-TCJA itemized deductions.

  This example illustrates how the TCJA's cap on the SALT deduction and the increased standard deduction influenced individual taxpayers, particularly those in states with high property or income taxes, by making itemizing less beneficial for many.

• Example 2: The Small Business Owner vs. The Large Corporation

  Consider two businesses: "Green Thumb Landscaping," a small business structured as an LLC owned by John, and "Global Manufacturing Inc.," a large publicly traded corporation. After the TCJA, John, as the owner of Green Thumb Landscaping, became eligible for the new 20% deduction on his qualified business income from the LLC, reducing his personal taxable income from the business. Meanwhile, Global Manufacturing Inc. saw its corporate tax rate permanently drop from 35% to 21%, significantly increasing its after-tax profits.

  This example demonstrates how the TCJA provided different types of tax relief to businesses: a new "pass-through" deduction for many small business owners and a substantial, permanent corporate tax rate reduction for larger corporations.

• Example 3: The Employee with Unreimbursed Expenses

  Prior to the TCJA, Sarah, a marketing professional, often deducted various unreimbursed employee business expenses, such as professional development courses, industry conference fees, and a portion of her home office expenses, as miscellaneous itemized deductions. These deductions were subject to a 2% adjusted gross income (AGI) floor. With the passage of the TCJA, these types of miscellaneous itemized deductions were completely eliminated. Consequently, Sarah could no longer claim these work-related expenses on her federal tax return, even if her employer did not reimburse them.

  This example highlights the TCJA's elimination of many miscellaneous itemized deductions, impacting individuals who previously used these provisions to reduce their taxable income.