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| Tax Year 2024 | |||
|---|---|---|---|
| Marginal Rate | Single Filers | Married Filing Jointly | Heads of Household |
| 10% | $11,600 or less | $23,200 or less | $16,550 or less |
| 12% | $11,601 to $47,150 | $23,201 to $94,300 | $16,551 to $63,100 |
| 22% | $47,151 to $100,525 | $94,301 to $201,050 | $63,101 to $100,500 |
| 24% | $100,526 to $191,950 | $201,051 to $383,900 | $100,501 to $191,950 |
| 32% | $191,951 to $243,725 | $383,901 to $487,450 | $191,951 to $243,700 |
| 35% | $243,726 to $609,350 | $487,451 to $731,200 | $243,701 to $609,350 |
| 37% | $609,351 and over | $731,201 and over | $609,351 and over |
Source: Internal Revenue Service
State and Local Tax
The new law capped the deduction for state and local taxes at $10,000 through 2025.
2021 State and local tax burdens
Businesses and the TCJA
- Corporate Tax Rate: The law created a single corporate tax rate of 21% and repealed the corporate AMT. Unlike tax breaks for individuals, 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. Combined with state and local taxes, the statutory rate under the new law is 26.5%. In 2023, the U.S. was above the weighted average for EU countries (25.21%).
- 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 $2 million.Â
- 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 was limited to 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA). After four years, it 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 $5 million from the old tax code.
- Net Operating Losses: The law scrapped net operating loss (NOL) carrybacks and caps carryforwards at 90% of taxable income, falling to 80% after 2022.The 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily reinstated a carryback period for all net operating losses generated in years beginning after December 31, 2017, and before January 1, 2021.
- Section 199: The law eliminated the section 199 (domestic production activities) deduction for businesses that engage in domestic manufacturing and other production work. This is also known as the domestic manufacturing deduction, U.S. production activities deduction, and domestic production deduction.
- Foreign Earnings: TCJA deemed repatriation of overseas profits at 15.5% for cash and equivalents and 8% for reinvested 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. Tax credits can offset up to 80% of BEAT liabilities.
Intangible Property
TCJA altered the treatment of intangible property held abroad, such as patents, trademarks, and copyrights. For instance, Nike (NKE) houses its Swoosh trademark in an untaxed Dutch subsidiary.Â
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.The European Union has accused the U.S. of subsidizing exports through this preferential rate violating World Trade Organization (WTO) rules.
Economic Growth
Treasury Secretary Steven Mnuchin claimed that the Republican tax plan would spur sufficient economic growth to pay for itself and more, saying of the “Unified Framework” released by Senate, House, and Trump administration negotiators in September 2017:
“On a static basis our plan will increase the deficit by a trillion and a half. Having said that, you have to look at the economic impact. There’s $500 billion that’s the difference between policy and baseline. That takes it down to a trillion dollars. And there’s two trillion dollars of growth. So with our plan we actually pay down the deficit by a trillion dollars, and we think that’s very fiscally responsible.”
On December 11, 2017, the Treasury released a one-page analysis claiming that the law will increase revenues by $1.8 trillion over 10 years. By contrast, 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.
Baseline versus expected growth under GOP tax bill
Who Benefited From TCJA?
The TCJA cut the corporate tax rate, benefiting 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.
Once individual tax cuts expire after 2025, the TPC estimates that the majority of taxpayers—53.4%—will 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 22,000 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 households making over $1,000,000 will pay 1% less.
Conference bill: change in taxes by income group (thousands), compared to projections under current law
When Did Tax Code Last Change Before TCJA?
The last time a major tax overhaul became law before TCJA was in 1986.
How Did TCJA Change How the IRS Measures Inflation?
The law changed the measure of inflation used for tax indexing. The IRS’ use of the consumer price index for all urban consumers (CPI-U) was replaced with the chain-weighted CPI-U. The latter takes account of changes consumers make to their spending habits in response to price shifts, so it is considered more rigorous than standard CPI. It also tends to rise more slowly than standard CPI, so substituting it will likely accelerate bracket creep. The value of the standard deduction and other inflation-linked elements of the tax code will also erode over time, gradually pushing up tax burdens. The change is not set to expire.
How Did TCJA Affect Carried Interest?
The law does not eliminate the carried interest loophole. Hedge fund managers typically charge a 20% fee on profits above a certain hurdle rate, most commonly 8%. Those fees are treated as capital gains rather than regular income, meaning that—as long as the securities sold have been held for a certain minimum period—they are taxed at a top rate of 20% rather than 39.6%.
The Bottom Line
Did the new tax code provide what it promised Americans? According to the Tax Foundation, the long-term effects of TCJA on investment are difficult to gauge due to the COVID-19 pandemic and its impact on the economy. However, in the pre-pandemic years, investment rose in 2018 following the implementation of TCJA policies.Â