The Tax Cuts and Jobs Act of 2017 (TCJA), passed by President Trump and congressional Republicans, was the biggest reform of the U.S. tax code since 1986. The TCJA lowered income tax rates, especially for higher-income Americans, and it lowered the corporate tax rate from 35% to 21%. Some tax credits and deductions also changed. The standard deduction was nearly doubled (from $6,350 in 2017 to $12,000 in 2018) and the child tax credit was doubled (from $1,000 in 2017 to $2,000 in 2018), but some itemized deductions were limited or eliminated.
IRS data on the 2018 tax season released in May 2019 shows that savings for taxpayers were uneven. For example, the average refund was $90 higher, nationally, in 2018 than 2017. But the taxpayers who saw the largest refund increases had an adjusted gross income (AGI) of at least $200,000. Tax returns showing an AGI of less than $100,000 paid less income tax overall, but returns with an AGI just above $100,000 (many middle-class families) owed more tax, on average. Note that this AGI is per tax return, not per taxpayer: A married couple where each spouse has a salary of $65,000 could very well have an AGI of just above $100,000 if they file jointly.
On the whole, low-income families appear to have received the least savings, while high-income families saved the most. Middle-class families saw mixed results. The biggest winners from Trump’s tax cuts were probably businesses. Between 2017 and 2018, corporations paid 22.4% less income tax. The total value of refunds issued by the IRS to businesses also increased by 33.8% nationally.
High-income individuals were the most likely to see tax savings, while low-income and middle-class families saw mixed results.
88.2% of taxpayers claimed the standard deduction in 2018.
The higher standard deduction wasn’t enough to offset the loss of personal exemptions for some families.
Businesses appear to have saved the most from the Trump tax cuts; corporate income tax collected by the IRS decreased by 22.4% from 2017 to 2018.
How the new tax brackets affected taxpayers
The income tax brackets determine which tax rates you pay, based on your income. Starting in 2018, federal income tax rates ranged from 10% to 37%. There are seven rates within that range, and you only pay a particular rate on the amount of your income that falls within that rate’s income bracket.
President Trump’s tax reform lowered the rates for six of the seven tax brackets (only the 10% bracket remained the same), and expanded the income ranges for each bracket such that more taxpayers would pay a lower top rate.
(Learn more about how the tax brackets work.)
Low-income working families saw the least benefit
Low-income individuals saw the least benefit, likely because changes to the tax rates were less pronounced at low income levels. The lowest income tax rate (10%) did not change, even though all of the other rates went down.
Surprise tax bills for some middle-class families
The lower income tax rates should have helped Americans throughout the year because employers generally withheld less income tax from employee paychecks, increasing their after-tax income. Unfortunately, many workers didn’t know they needed to make changes on their W-4 forms to counteract the changes. The result was that some workers had more take-home pay, but then underpaid their income taxes and owed the IRS thousands of dollars on Tax Day.
Make sure to update your W-4 for this year, especially if you've had any unexpected tax bills int he past few years. The IRS doesn’t require anyone to make changes unless they get a new job, so you need to put in the effort to adjust your W-4 withholding yourself.
High-income taxpayers saw the biggest benefit
High-income taxpayers likely saw more benefit overall because of the cumulative effect of having the rates for six of the seven tax brackets lowered. (That is, the lower your income was, the less you saved from each tax bracket, because your income fell into fewer total tax brackets.)
In addition to the standard income tax brackets, Trump’s tax cuts lowered the capital gains tax brackets. Individuals with high investment income likely benefited the most because the changes allowed more high-income individuals to qualify for a lower capital gains tax rate.
How tax refunds changed from 2017 to 2018
The average tax refund was $90 higher in 2018 than 2017, according to 2019 IRS data. (This statistic covers tax filers who used a version of Form 1040.) However, more detailed IRS data, released February 2020, shows that the refunds were not equally distributed across the population.
Taxpayers with an AGI of less than $10,000 received 11.5% fewer refunds in 2018 than 2017, and the total value of their refunds was 17% less. (A 2018 analysis from the Government Accountability Office (GAO) found single filers who earned minimum wage and had no children were least likely to save on their income taxes in 2018.) Across tax returns with an AGI between $1 and $50,000, taxpayers received 4.5% fewer refunds in 2018 and their refunds were worth 2.7% less.
Taxpayers with AGI between $50,000 and $100,000 received 2.5% more refunds but those refunds were worth 1.8% less than in 2017. Those with an AGI of more than $200,000 received 45% more refunds in 2018 and the value of those refunds was 203.4% higher. Taxpayers with an AGI of $1 million or more received 216% more refunds than in 2017 and those refunds were worth 394.3% more.
Income tax refunds also varied greatly by state, as you can see in the table below. Individuals in 12 states had a lower average refund in 2018 than 2017. North Dakota taxpayers saw the biggest decline in average tax refunds, getting $151 less in 2018 than 2017.
Average tax refunds by state in 2018 vs. 2017
|State||2017 Average refund||2018 Average refund||Change in refund|
|District of Columbia||$2,900||$2,933||+$33|
The new standard deduction helped some taxpayers
The TCJA nearly doubled the standard deduction from $6,350 for single filers in 2017 to $12,000 in 2018. The standard deduction lowers your taxable income — the amount of your income that you actually pay income tax on — so a higher deduction means paying less income tax overall.
However, the higher standard deduction didn’t benefit everyone equally for two main reasons:
The loss of personal exemptions
Changes to itemized deductions
Some taxpayers missed personal exemptions
In 2017, each taxpayer could also claim a personal exemption worth $4,050 for themselves and for each dependent. This exemption lowered their taxable income because, along with the $6,350 standard deduction, a single filer with no kids would effectively deduct $10,400. This isn’t much lower than the new standard deduction and for certain taxpayers it wouldn’t result in much (or even any) tax savings.
Example: Let’s say a single parent has two children and qualifies as a head of household. In 2018, this parent would have gotten a standard deduction of $18,000 and their taxable income would be lowered by that amount. This is up from the head of household standard deduction of $9,350 in 2017, the last year before the tax reform took effect.
But in 2017, this parent would have been able to claim not only the standard deduction of $9,350 but also three personal exemptions worth a total of $12,150 (one for the parent and one for each child), allowing them to lower their taxable income by $21,500. The result of the Trump tax reform is that, for this household, the new standard deduction is worth less than the combined value of the standard deduction and personal exemptions in 2017. The change could leave this single parent owing more in taxes.
How itemized deductions changed
If taxpayers incur certain types of expenses, they can deduct the expenses on their federal taxes. These are called itemized expenses and you take them — as itemized deductions — instead of taking the standard deduction. That means your itemized deductions need to be worth more than your standard deduction to be worth claiming.
The TCJA made multiple changes to itemized deductions, like putting a $10,000 limit on the state and local tax deduction and eliminating a number of miscellaneous deductions. The new, higher standard deduction also means fewer taxpayers are able to itemize, because they need to have about twice as much in itemized deductions in to make itemizing worth it.
IRS data from 2020 shows that 30.9% of taxpayers itemized deductions in 2017, but only 11.3% itemized in 2018; 88.4% of taxpayers took the standard deduction in 2018.
Taxpayers claimed the following types of itemized deductions about 60% less in 2018:
The medical expenses deduction was claimed 57.2% less in 2018 than 2017.
The mortgage interest deduction was claimed 60.9% less in 2018 than 2017.
The charitable contributions deduction was claimed 63.5% less in 2018 than 2017.
The deduction for total taxes paid, which includes the SALT deduction, was claimed 64.5% less in 2018 than 2017.
State-level data on itemized deductions is not yet available from the IRS, but changes to itemized deductions most likely affected residents of states with high state and local taxes like California, New York, New Jersey, Illinois, and Texas. (Some of these states are suing to overturn the limit on the SALT deduction.)
Who the expanded child tax credit helped
The Tax Cuts and Jobs Act of 2017 greatly expanded the child tax credit (CTC). The maximum value of the CTC doubled from $1,000 to $2,000 per child, and it increased the income limits so that more taxpayers could qualify.
IRS data from February 2020, shows that the CTC was claimed on 31.4 million more tax returns in 2018 than 2017. That means the child tax credit was claimed 478% more after Trump’s tax reform. The biggest increase came from tax returns with an AGI of less than $10,000. However, all AGI ranges up to $500,000 claimed the CTC significantly more. (The maximum income for claiming the CTC was $400,000 in 2018, but current IRS data combines all returns with AGIs between $200,000 and $500,000 so it isn’t possible to tell how much taxpayers at the new income limit actually claimed.)
However, the expanded child tax credit still may not have helped everyone for two main reasons:
Low-income individuals claimed the additional child tax credit (ACTC) less, so they may not have gotten the full value of their CTC.
The CTC may have been needed by some taxpayers just to offset the loss of the personal exemption.
Did the CTC help low-income taxpayers?
The CTC can only bring your tax liability — how much income tax you owe for the year — to $0. If the CTC brings your tax liability below $0, you can get the remaining part of it refunded to you through the additional child tax credit, or ACTC.
The ACTC was claimed more in 2018, overall, but taxpayers with an AGI of less than $25,000 claimed the ACTC 10.9% less. Taxpayers with AGI under $10,000 saw the biggest decline in ACTC filings, claiming it 19.4% less in 2018 than 2017. This drop in ACTC claims suggests that low-income Americans may not have gotten the full child tax credit they were entitled to, even though more families were eligible to claim the credit overall.
CTC gains may have just cancelled out other losses
As mentioned earlier, some families may have owed more tax because the expansion of the standard deduction meant the loss of personal exemptions. The TCJA expanded a few tax credits and deductions, including the child tax credit, and families may have needed to claim them just to offset the loss of personal exemptions.
Example: A two-parent family with two children may have actually owed more in taxes in 2018 than in 2017. The following table shows how:
|Tax Break Type||2017||2018|
|Standard Deduction, Married Filing Jointly||$12,700||$24,000|
|Total Personal Exemption, Two Parents||$8,100||$0|
|Total Personal Exemption, Two Children||$8,100||$0|
|Child Tax Credit, Two Children||$2,000||$4,000|
|Total Tax Breaks||$30,900||$28,000|
This family received a standard deduction of $24,000 in 2018. The family would have effectively received a deduction of $28,900 in 2017, because of the combined standard deduction ($12,700) and personal exemptions ($4,050 per parent and child). In this scenario, the family could need to claim the child tax credit of $2,000 per child in 2018 just to break even. (This assumes the family qualifies for the maximum credit.) Even then, the total value of the combined standard deduction and CTC in 2018 ($28,000) would be less than the combined value of the standard deduction, personal exemptions, and CTC in 2017 ($30,900).
So while Trump’s tax reform allowed families to claim a higher child tax credit, some families may not have saved very much from it. As the IRS releases more data, it will be possible to look at whether the combined effect of the TCJA changes were enough to help certain working-class families save money.
Did repealing Obamacare’s individual mandate help?
From 2014 to 2017, the Affordable Care Act (Obamacare) required Americans to pay a penalty on their taxes if they did not have qualifying health insurance coverage during the year. This penalty was officially called the Individual Shared Responsibility Payment but was usually referred to as the individual mandate.
President Trump’s tax plan repealed the individual mandate starting in 2018. The repeal of Obamacare’s individual mandate saved taxpayers $3.7 million in taxes. The penalty affected 4.7 million taxpayers in 2017 — primarily for taxpayers with adjusted gross income between $5,000 and $15,000 — and it cost an average of $788 per taxpayer. Presumably, repealing the individual mandate saved people hundreds of dollars on their taxes.
However, these tax savings need to be taken in context. Going without health insurance can leave you with big medical bills if you get sick and can end up costing you more overall. This may have happened in 2018. U.S. Census Bureau data shows that fewer Americans had health insurance coverage in 2018 than 2017, while data from the U.S. Bureau of Labor Statistics (BLS) also shows that health care spending increased for 60% of Americans from 2017 to 2018. Average spending on health care (excluding health insurance payments) rose by 3.2%, while health insurance spending decreased by 0.3%, on average.
In other words, Americans spent more on health care after the individual mandate was repealed. Whether these expenses exceeded the savings from the repeal remains to be seen in future federal data.
Who used the QBI deduction in 2018?
Trump’s tax reform created the qualified business income deduction (QBI deduction). You don’t need to itemize to take the QBI deduction and it’s available for taxpayers who have certain types of business income or who earned dividends from certain types of investments (like REITs).
That means if you make money from certain types of investments, you can pay less on your income taxes thanks to the QBI deduction. Taxpayers across all income ranges did claim the deduction, but high-income taxpayers claimed the QBI deduction more frequently and received more on average.
Nationally, the average QBI deduction was $7,947 in 2018. Of tax returns with an AGI of less than $100,000, only 8.8% claimed the QBI deduction. The average value of their deduction was $2,134. Tax returns with AGI of $100,000 or more claimed the QBI deduction nearly one third of the time (28.6% of returns) for an average deduction of $15,222. Moving up the income ladder, nearly half (46.2%) of all tax returns with AGI of at least $250,000 claimed the QBI deduction in 2018, and got an average deduction of $36,455.
The potential value of the QBI deduction is even greater for high-income taxpayers because it lowers their taxable income, offering a tax break on income that is already taxed at lower rates than it was before Trump’s tax cuts. Savings from the QBI deduction could even be used to offset any capital gains tax incurred from selling other investments. Again, this could result in even greater savings than in 2017 because Trump’s tax cuts lowered the capital gains tax rates for many high-income taxpayers.
Estate tax changes help high-income Americans
Estate taxes apply to the value of a person’s estate (everything they owned) when that person passes away. Estates are only subject to estate tax if they’re worth at least a certain value, known as the estate tax exemption. The Tax Cuts and Jobs Act doubled the exemption from $5.49 million in 2017 to $11.18 million in 2018. That means only very wealthy estates have to pay estate tax. The estate tax exemption is also set to increase every year; as of 2022, the exemption is $12.06 million.
The number of estate tax returns decreased slightly from 2017 to 2018, but the total value of estate taxes collected by the IRS in 2018 was 3.8% higher than in 2017. It's unclear from currently available data if this increase is due to the TCJA, or if it's simply variation from one year to the next. Future IRS data should provide more clarity.
It’s worth noting that Trump’s tax reform did not change the actual estate tax rates. It only increased the exemption so that fewer estates would have to pay the tax, even though few estates had to pay the tax in the first place.
Gift tax payments decreased in 2018
Gift tax collections were significantly lower in 2018. Gift tax applies when people give items of value, including cash, worth more than $15,000, but you only need to pay gift tax after you’ve given more than your lifetime exemption.
Your lifetime exemption is the same as the estate tax exemption and each gift you make decreases your remaining exemption. So in 2018, the lifetime gift tax exemption was $11.18 million. If you gifted someone $1 million that year, you wouldn’t actually have to pay gift tax; it would lower your lifetime exemption to $10.18 million. (You still need to report the gifts to the IRS so it can keep track of your remaining exemption.)
If you exceed the gift tax exemption during your lifetime, you’ll have to pay the gift tax each time your gifts exceed $15,000 in a tax year.
Because of the higher exemption from the TCJA, more people can give large gifts without having to pay gift tax. The IRS collected $1.9 million in gift tax in 2017, but only $1.2 million in 2018, a 38.4% decrease.
Learn more about gift tax and who needs to pay it.
Corporate income taxes were way down in 2018
One of the biggest results of Trump’s tax cuts was lowering the corporate income tax rate to 21% from 35%. This change appears to have benefited businesses greatly, because the corporate income tax payments collected by the IRS decreased by 22.4% from 2018 than 2017.
Looking just at year-over-year returns, businesses enjoyed an increase of 33.8% in tax refunds nationally from 2017 to 2018. The average business income refund varied by state, but businesses in some states appear to have received a major windfall. In Maryland, for example, businesses received total refunds worth 238.6% more ($374.7 million in refunds in 2017 vs. $1.3 billion in 2018).
The tax savings that businesses received from President Trump’s tax plan could offset the benefits of the tax reform to workers. The lower corporate tax rate is also a permanent change to the U.S. tax code, but the lower tax rates for individuals are temporary and will expire (and return to pre-TCJA levels) in 2025. That means workers could receive a tax increase in five years even as businesses continue to pay a lower rate.
Did Trump’s tax cut improve the economy?
One major reason that President Trump said he wanted to pass his tax plan was to improve the economy. He believed there would be more business investment, which would stimulate the economy and, in turn, help working Americans.
On the basis of the stock market and gross domestic product (GDP), the economy is in fact performing very well. But those trends already existed before the TCJA became law. The unemployment rate — 3.5% in February 2020 — has reached its lowest level in more than 50 years, but data from the U.S. Bureau of Labor Statistics (BLS) shows that unemployment has been steadily declining since 2010. There isn’t currently enough evidence to show that Trump’s tax cuts lowered the unemployment rate more quickly. Preliminary data from the U.S. Bureau of Economic Analysis (BEA), released in February, also suggests that GDP has actually been slowing as of late.
Along with the U.S. bringing in less tax revenue since Trump’s tax reform, the U.S. deficit has increased significantly. Data from the Federal Reserve Bank of St. Louis shows that the federal deficit grew 17% from 2017 to 2018 and 26% from 2018 to 2019. Federal debt passed $1 trillion in 2019 and the Congressional Budget Office (CBO) expects the deficit to average $1.4 trillion from 2021 to 2030. Whether the size of the deficit should matter is an issue still being debated by economists, but it’s clear that Trump himself expected his tax cuts to not just lower the deficit but pay it off entirely.
And while the stock market has hit record highs since the TCJA passed, average Americans seemingly aren’t getting the huge benefits promised. Data from the Federal Reserve Bank of Atlanta shows that wages for Americans have not grown significantly in the past few years and American household debt is higher than ever. Whether these things improve remains to be seen, but Trump’s tax cuts do not appear to be helping the average American enough at this point.
Image: Freddie Collins / Unsplash