Has the TCJA Lowered Your Taxes?

We now have two years of the Tax Cuts and Jobs Act (TCJA) changes under our belts: 2018 and 2019. Are your taxes lower than before the law went into effect? Not surprisingly, the answer depends on your specific situation.

Perception vs. Reality

After most people filed their 2018 tax returns, only 40% believed that they had received a tax cut under the TCJA, according to an online survey conducted for The New York Times in April 2019. Only 20% were certain they had received a tax cut.

In contrast, a study conducted by the independent Tax Policy Center concluded that 65% of households actually got a tax cut in 2018, while only 6% actually paid more. The rest saw little or no change in their tax bills.

Here's a table comparing the results of the Times survey and the Tax Policy Center study based on household income levels:

As you can see, perceptions overrode reality, especially at higher income levels. Since the TCJA changes were fully phased in for the 2018 tax year, we would expect the "got tax cut" percentages for 2019 to be about the same as for 2018. It remains to be seen whether perceptions will change after 2019 returns are filed this year.  

Why the Big Disconnect?

There are several reasons for the gap between tax cut perceptions and reality for the 2018 tax year. The first was the way the TCJA was portrayed by some members of the media and some politicians — essentially as tax cuts exclusively for businesses and wealthy people.

The second reason has to do with the federal income tax withholding tables. The tables weren't properly updated in 2018 to account for changes made by the TCJA, causing many people to have their taxes under-withheld. Though most people paid lower taxes overall for the year, many received lower refunds compared to previous years. For those who depend on tax refunds for an annual "spring bonus," a lower-than-expected refund felt like a tax increase.

Employer tax withholding tables were adjusted for 2019. So, tax refunds collected during this year's filing season may be more in line with expectations.      

Winners and Losers

Regardless of public perception, the TCJA changes clearly resulted in some winners and losers. As stated, outcomes depend on specific circumstances. Here are five key takeaways from last tax season:

1. In general, when it comes to individual taxpayers, higher-income taxpayers received the biggest tax savings from the TCJA, because tax rates were significantly reduced. Simple math dictates that people who pay heavy taxes are benefiting the most from that change.
2. If you live in a high-tax state and have significant home mortgage debt, the TCJA provisions that limit your itemized deductions for state and local taxes and home mortgage interest expense may have increased your tax bill for 2018 compared to previous years.
3. If you were hit with the alternative minimum tax (AMT) before the TCJA, you're probably now AMT exempt. If you still owe the AMT, you probably owe much less than before.
4. Most young lower-income and middle-income families with kids under age 17 probably came out ahead under the TCJA — even though personal and dependent exemption deductions were eliminated. These taxpayers benefited from 1) lower individual tax rates, 2) increases in standard deductions, and 3) increases in the child tax credit.
5. Many self-employed individuals benefit from the new deduction for up to 20% of qualified business income from so-called "pass-through" entities (sole proprietorships, LLCs, partnerships and S corporations). Self-employed individuals also benefit from increased first-year depreciation write-offs for business vehicles and equipment.  

Strong Economy

The U.S. stock market has soared over the two years that the TCJA has been in effect. The following table shows the growth in two leading stock market indices from December 2017 to December 2019.

Together with other macroeconomic factors, the TCJA has contributed to economic growth by lowering the maximum corporate federal income tax rate from 35% to 21% and expanding first-year depreciation write-offs for business equipment additions. Tax cuts can stimulate the economy by providing an influx of cash that businesses can use for a variety of purposes, including buying equipment, hiring workers, paying off debt and buying back stock.

Roughly seven million jobs have been created since January 2017, and the unemployment rate hit a 50-year low in 2019, according to the U.S. Department of Treasury. Wages also have risen significantly for blue collar workers over the last two years. As a result, the Council of Economic Advisers (CEA) estimates that real disposable personal income per household has increased by $6,000 since the TCJA became law. You can't give the TCJA all the credit for these positive economic results, but it has played a part in recent economic growth.

Stay Tuned

Economists generally agree on two things related to the TCJA. First, it's hard to isolate the effects of the TCJA from other economic factors. Second, not enough time has passed to evaluate the full effects of the TCJA on the U.S. economy.

Most individual and business taxpayers have benefited from the TCJA in some way. However, some people will pay more tax under the TCJA than under prior tax law. To evaluate exactly how the TCJA changes have affected you or your business, contact your tax professional.