Child Tax Credits Saw Big Changes
Under the Trump tax plan, the Child Tax Credit increased to $2,000 per child under 17. The credit used to be $1,000. However, the Biden Administration subsequently expanded the CTC for 2021 to $3,000 per child under age 18 or $3,600 for each child you have under 6 years old. The 2021 CTC is also full refundable, so parents benefited from the credit regardless of whether they owe taxes or not.
The CTC expansion was a provision of Bidens American Rescue Plan, but was only included for tax year 2021. In 2022, the program revert to its former scope under Trump.
How Did The Tax Brackets Change
The biggest changes under the new Trump tax plan came for those in the middle of the chart. A married couple whose total income minus deductions is $250,000 would have had a 33% tax rate in 2017. For 2018, 2019 and beyond, their highest tax rate is just 24%. That led to a fairly significant difference in take-home pay.
Those who earn less may also see a bit of a break. A single person making $39,000 in taxable income in 2017 saw a rate of 25%. In 2018, 2019 and beyond, that rate dropped to 12%.
You also get a tax break if youre among the countrys highest earners. The highest tax bracket used to carry a 39.6% rate and apply to single people earning more than $418,401 and married couples filing jointly who earned more than $470,701 in taxable income. Now the highest rate, which is just 37%, applies to income over $539,900 for single people and $647,850 for joint filers.
Other notable Trump tax overhaul changes include:
Individual tax provisions are going to expire after 2025. So when you file in 2026, rates will go back to those before Trumps 2018 changes.
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 didnt benefit everyone equally for two main reasons:
The loss of personal exemptions
Changes to itemized deductions
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Corporate Revenue Has Dropped Precipitously Since Trumps Tax Cut
While the promised benefits of Trumps corporate tax cuts have yet to materialize, the costs can be seen dramatically in the data on corporate tax revenue. As a result, since the law passed in December 2017, revenues from corporate taxes have fallen by more than 40 percent, contributing to the largest year-over-year drop in corporate tax revenue that we have seen outside of a recession. This has added even more to deficits than experts had previously predicted. The U.S. Treasury reported that from fiscal year 2017 to FY 2018, the federal budget deficit increased by $113 billion while corporate tax receipts fell by about $90 billion, which would account for nearly 80 percent of the deficit increase. Though the Trump administration and the Congressional Budget Office projected corporate revenues to bounce back somewhat in FY 2019, there is no sign yet that that is happening, with 11 of 12 months having already been reported for FY 2019.
What Are The Changes For Senior And Child Care
The plan provides a credit for $500 for every dependent who isnt a child, which is beneficial for those caring for elderly parents.
The Child Tax Credit has been doubled to $2,000. Low-income parents who dont pay taxes can claim up to $1,400 in Child Tax Credits. Married and joint filers see a big increase in the income level that they can still claim the credit. It moves from $110,000 to $400,000.
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Explaining The Trump Tax Reform Plan
Lea Uradu, J.D. is graduate of the University of Maryland School of Law, a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, Tax Writer, and Founder of L.A.W. Tax Resolution Services. Lea has worked with hundreds of federal individual and expat tax clients.
For most people, tax season comes to a close on April 15 each year. In 2019, many taxpayers were surprised to find they had to pay more taxes than the previous year, while others received significantly lower refund checks from the Internal Revenue Service even though their financial circumstances didn’t change.
Many tax specialists and accountants urged their clients to update their withholdings in order to avoid a hefty bill at tax time.
But how did this happen? Let’s take a closer look at President Trump’s changes to the tax codethe largest overhaul made in the last 30 yearsand how it impacts taxpayers and business owners.
Business Tax Collections Within Historical Norm After Accounting For Pass
When looking at the tax burden on businesses over time, it is important to provide a complete picture by accounting for the different types of businesses in the U.S. and the timing effects of the 2017 tax law. Doing so provides important context on existing tax burdens and for considering the impact of raising taxes on corporations and pass-through firms.
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Losers: People Who Didn’t Adjust Their Withholding
When the IRS updated its tax-withholding tables to reflect the new law, it also revamped its Form W-4 a document employees use to ensure they’re pulling enough income tax from their paycheck.
Some taxpayers are at risk of paying too little tax during the year, including former itemizers and individuals with side gigs.
“If you’re making side income, you have no withholding on it, then you’ve underpaid the taxes and you ultimately owe money,” Perry said.
If you were significantly underwithheld in 2019, it’s too late to right the ship.
However, you can head off a similar disappointment next year if you get your prior year’s tax return and crunch the numbers on the IRS’s tax withholding calculator.
Trumps Wasteful Tax Cuts Lead To Continued Trillion Dollar Deficits In Expanding Economy
The Federal Deficit Will Total $1 Trillion in 2020 According To The Congressional Budget Office
Less than a week after Treasury Secretary Mnuchin repeated the fanciful claim that the Trump tax cuts of 2017 would pay for themselves, the non-partisan Congressional Budget Office proved him wrong. If tax cuts actually paid for themselves, they would reduce deficits based on faster revenue growth that comes from faster economic growth. Deficits immediately shot up after the 2017 supply-side tax cuts. And CBO forecasts that those deficits will continue to stay high for the foreseeable future. This is the opposite of tax cuts paying for themselves.
CBO released its regular update to the economic and budget outlook on January 28. The new estimates show a deficit of $1 trillion for 2020. This is the equivalent of 4.6% of gross domestic product. The federal budget deficit will grow to 5.4% of GDP by 2030, according to GDP.
This is a much worse outlook for the current deficit than CBO showed just before Congress passed the Trump tax cuts. In June 2017, CBO anticipated a deficit of 3.6% of GDP for 2020. The current deficit is thus 27.8% greater than CBO projected before the tax cuts. Moreover, this one percentage point difference in the current projected deficit and the prior projection equals $221 billion for 2020. This is a substantial gap that follows in large part from the tax cuts, especially since the economy continued to grow during this time.
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Promise: A Simpler Tax Code
Some aspects of the law did make filing tax returns easier.
For individuals, the law boosted the standard deduction, which allowed millions of people to skip itemizing on their annual tax returns. It also raised the threshold for a parallel system of taxation meant to target people who take an outsize amount of credits and deductions, known as the alternative minimum tax, and eliminated a similar system for corporations.
But other changes to the tax codesuch as a 20% write-off for owners of pass-through businesses, and the laws byzantine international provisionswere far from simple, even before the IRS wrote hundreds of pages of regulations for how to follow them.
Beyond the code, Republicans promised that people would be able to do their taxes on a postcard-sized form.
That was somewhat true in 2018, when the IRS shrunk the Form 1040 from two full pages to a small one-page document. However, for that year, lines for reporting income, credits, and deductions were shifted to six separate attached schedules.
Then, in 2019, the IRS reverted to a two-page 1040 form, and the agency reduced the number of schedules to threesomewhat placating accountants who complained that the previous years postcard was a mess.
Internal Revenue Code Of 1986
References to the Internal Revenue Code in the and other statutes of Congress subsequent to 1954 generally mean Title 26 of the Code as amended. The basic structure of the Title 26 remained the same until the enactment of the comprehensive revision contained in , although of course individual provisions of the law were changed on a regular basis.
Section 2 of the provides :
- Redesignation of 1954 Code. â The Internal Revenue Title enacted August 16, 1954, as heretofore, hereby, or hereafter amended, may be cited as the “Internal Revenue Code of 1986”.
- References in Laws, Etc. â Except when inappropriate, any reference in any law, Executive order, or other document â
- to the Internal Revenue Code of 1954 shall include a reference to the Internal Revenue Code of 1986, and
- to the Internal Revenue Code of 1986 shall include a reference to the provisions of law formerly known as the Internal Revenue Code of 1954.
Thus, the 1954 Code was renamed the Internal Revenue Code of 1986 by section 2 of the . The 1986 Act contained substantial amendments, but no formal re-codification. That is, the 1986 Code retained most of the same lettering and numbering of subtitles, chapters, subchapters, parts, subparts, sections, etc. The 1986 Code, as amended from time to time , retains the basic structure of the 1954 Code.
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Economic Recovery And Inflation Are Simpler Explanations
Your editorial Corporate Tax Reform Worked observes that corporate tax revenues in 2021 and 2022 are expected to meet and exceed projections made before and after the 2017 Tax Cuts and Jobs Act . The editorial includes inflation and other economic factors as explanations but argues that the Occams razor policy answer is that corporate tax reform worked as its sponsors predicted: Lowering the rates while broadening the base by eliminating loopholes created incentives for more efficient investment decisions that paid off for shareholders, workers and the government.
There is a simpler explanation for the rise in corporate profits and tax revenues: the economy. Corporate profits are procyclical. They rise quickly when the economy is growing and shrink rapidly during recessions. As the economy recovers from the Covid recession, we should expect corporate profits and tax revenues to rise.
Minor Impact On Economic Growth
Paul Krugman disputed the Administration’s primary argument that tax cuts for businesses will stimulate investment and higher wages:
- Foreigners own about 35% of U.S. equities, so as much as $700 billion of the tax cut will go overseas, as corporate after-tax income will flow to these investors as stock buybacks and dividends.
- CEOs indicate that tax cuts are not a big factor in investment decisions.
- Significantly increasing capital expenditures requires an inflow of foreign capital, strengthening the dollar, increasing trade deficits and potentially costing up to 2.5 million manufacturing and supporting jobs.
In November 2017, the University of Chicago asked over 40 economists if U.S. GDP would be substantially higher a decade from now, if either the House or Senate bills were enacted, with the following results: 52% either disagreed or strongly disagreed, while 36% were uncertain and only 2% agreed.
The Tax Policy Center estimated that GDP would be 0.3% higher in 2027 under the House bill versus current law, while the University of Pennsylvania Penn Wharton budget model estimates approximately 0.30.9% for both the House and Senate bills. The very limited effect estimated is due to the expectation of higher interest rates and trade deficits. These estimates are both contrary to the Administration’s claims of 10% increase by 2027 and Senator Mitch McConnell’s estimate of a 4.1% increase.
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A Change In Priorities
This increase in the federal debt means that formerly budget-conscious Republicans in Congress have done an about-face on fiscal policy.
For example, in 2011, Republicans supported the Budget Control Act, which automatically cut spending across the board between 2013 and 2021. These mandatory spending cuts were called “sequestration.”
In 2013, Republicans threatened to not raise the debt ceiling to force budget cuts. That would have forced the U.S. to default on its debt. Fortunately, better-than-expected revenue meant that the debt ceiling debate was postponed until the fall.
In these instances, congressional Republicans were focused on limiting debt and deficit growth at the expense of government functioning. However, with the TCJA, Congress passed a law that significantly increased both deficit spending and the federal debt.
What Does The Composition Of The Revenue Shortfalls Tell Us About The Effect Of The Tcja
The TCJAs changes mostly affected the corporate and individual income taxes . The act reduced the top corporate tax rate from 35% to 21%a 40% reduction. Actual corporate income tax revenue in FY2018 was $135 billion lower than CBOs projection from 2017almost exactly a 40% decline. The most recent CBO projections estimate further decreases in corporate tax revenue. The TCJA also reduced income taxes for most Americans, which led to a decline in revenues relative to prior projections. For individual income taxes, actual collections in FY2018 were $97 billion, or 5.4%, below pre-TCJA projections.
These effects are accentuated if one looks at taxes as a share of GDP . In 2017, before the tax cuts were considered, the CBO estimated that total revenues would be 18.1% of GDP in FY2018. With the TCJA, revenues were only 16.4% of GDP. Similar patterns hold for individual income taxes and for corporate income taxes. Due to data limitations, the revenue numbers in Table 1 are on a fiscal year basis. As a result, 2018 data include the three months prior to the acts enactment. If the values were instead on a calendar year basis so that 2018 only included post-TCJA revenues, the revenue declines would be even larger.
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