Tax reform on an office desk.
Inflation Updates – The Tax Cuts and Jobs Act (TCJA) made adjustments to tax brackets and income tax amounts, to reflect inflation changes.
Additionally, this reform eliminated estate tax and simplified capital gains treatment. Furthermore, this reform also replaced corporate income tax with a distributed profits tax similar to Estonia’s, eliminating many complex deductions, credits, and preferences.
1. Tax Rates
The Tax Cuts and Jobs Act (TCJA) reduced tax rates on individuals and businesses alike while simultaneously reforming how deductions are indexed for inflation. Furthermore, it replaced the traditional consumer price index for urban consumers (CPI-U) with one that better accounts for changes in consumer purchasing patterns to more accurately represent overall inflation.
Many Americans enjoyed higher wages and larger refunds in 2018, yet the new rules that took effect could expire by 2025. Therefore, it’s crucial that you remain informed about changes that could impact future taxes.
Marginal tax rates change with each new law that is passed, depending on your income level and income bracket (for instance, married couples filing jointly are subject to a 22% rate on any income over $384,000).
2. Deductions
When many Americans received smaller tax refund checks this spring, it could have been due to changes made under the Tax Cuts and Jobs Act (TCJA), such as its reduction of withholding amounts. This change was one of many brought forth in the massive tax reform legislation which took effect January 1, 2021.
TCJA also introduced changes to how inflation is measured for purposes of adjusting standard deduction and other tax breaks, moving away from using the Consumer Price Index-U (CPI-U). This change could cause these items to erode more quickly over time and ultimately increase tax burdens over time.
Tax deductions (also referred to as write-offs) help determine the amount of taxes owing. Under the Tax Cuts and Jobs Act (TCJA), standard deductions have nearly doubled, rising from $13,850 for single filers and qualifying widow(er)s filing jointly to $24,600 and $25,100 respectively; whether itemizing deductions may be more beneficial in your circumstances is dependent upon what expenses qualify as expenses under itemized deductions or taking the standard deduction instead.
3. Tax Brackets
Tax brackets are one of the most essential aspects of your tax situation as an individual taxpayer in the United States, given our progressive income tax system with rates increasing as you earn more; consequently, paying a greater proportion of earnings than before becomes part of your financial obligations.
To determine your tax bracket, it’s necessary to know both your filing status and taxable income. It is typically easy to do this using last year’s taxable income from Line 15 of your tax return.
The Tax Reform Law temporarily increased standard deductions for both single filers to $12,550 and couples filing jointly to $25,100; both amounts will be index to inflation until expiring in 2025.
The Internal Revenue Service also adjusts income thresholds across tax brackets in order to prevent “bracket creep,” in which inflation forces taxpayers into higher tax brackets without an actual increase in their income. They made these adjustments last November; thresholds rose approximately 7% due to inflation.
4. Tax Credits
The Tax Cuts and Jobs Act introduced several changes to deductions, tax brackets and other factors influencing how much tax you owe. Many of these provisions expire after 2025 so there may not be an impactful difference in your bill this year.
Tax credits are direct money savings that directly reduce your tax liability, unlike deductions that only lower taxable income but not your liability directly.
The Tax Cuts and Jobs Act also expands the child tax credit, benefitting about 15 million families. This policy encourages labor force participation by making work more financially attractive for people making under a certain threshold depending on status, marriage status and number of dependent children; standard economic theory indicates this policy stimulates economic activity by increasing worker numbers while simultaneously decreasing social welfare payments from government. Many states offer similar tax credits as incentives.
