Arguably, job creation and tax collection are the most significant duties for every government. Taxation is the compulsory imposition of levies on entities and individuals to generate revenue for government expenditures, among other purposes. For instance, governments use the money collected as tax to finance their social projects, including social security, social healthcare, medical research, their employees’ salaries, and support common resources. However, it set good measures for job creation to enhance economic growth for the government to collect adequate levies. Besides, it should set reasonable tax rates that are fair to every citizen and organization. As a result, the United States government passed the Tax Cuts and Jobs Act (TCJA) of 2017, one of the biggest reforms in the United States tax code. This paper will explain various tax reform changes brought about by the TCJA. Additionally, it will analyze the impact that the changes in question have on individual taxpayers and identify related tax planning strategies.
Purpose of the Tax Cuts and Jobs Act (TCJA)
The TCJA was passed into law to reduce tax rates on both individual and business income and firms’ enhanced incentives for investment. For instance, the primary purpose of this Act was to lower the cost of capital and marginal tax rates significantly. This reduction was to be achieved by minimizing the corporate federal income tax. As a result, these minimizations would increase GDP, higher wages, and enhance more job creation, thus improving the American economy (Bauer, 2019). In return, the Act would spur federal revenues due to the economic growth.
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Although the implementation of this Act would maintain the seven-bracket rate structure, it would achieve its intended objective by lowering individual income tax rates. For instance, the bill suggested lowering the corporate income tax rate to 21% from the prior rate of 35% (Bauer, 2019). The move would enable a trader to have more money, thus being capable of investing more. Additionally, the bill’s elimination of various business expenditures and taxes, such as corporate alternative minimum tax and net interest deductibility, would attract more individuals to do business. Subsequently, the move would create more jobs, thus boosting the economy.
Significant Changes brought by the Tax Cuts and Jobs Acts
Notably, the TCJA of 2017 made significant changes in the United States tax payment. Some of the crucial changes brought by the Act include the individual income tax, corporate tax, and itemized deduction.
Individual Income Tax
The new tax bill preserved the present seven tax brackets and simplified the individual income tax. According to Gale et al. (2018), household taxes were reduced based on the size of the household. The baseline of the personal tax is the adjusted gross income. Before enacting the TCJA, the state tax codes included significant requirements that minimized income taxes to align with the people in a single household.
Gale et al. (2019) noted that a significant advantage of the individual income tax is reduced tax. The Act lowered tax rates for five of the tax brackets. It thus reduces the tax burden of the majority of the citizen, thus increasing their savings. Another advantage of the individual income tax is that it allows the taxpayers to choose the standard deductions instead of the itemized deduction. Hence, the individual income tax allows the taxpayers to choose the most appropriate tax deduction.
Corporate Tax
According to the TCJA 2017, the corporate tax rate shifted from a tiered rate stretching from 15% to 39% depending on the individual’s taxable income to a flat rate of 21%. According to Gale et al. (2018), some related corporate credits and deductions were minimized or excluded.
One advantage of the corporate tax is that the territorial tax system saves corporations a lot of money. The Act allows corporates to pay tax rates following the tax rates of other countries in which they are established. Hence, it reduces the tax burden of companies that have an establishment in other countries.
Another advantage of corporate tax is eliminating the corporate alternative minimum tax (Gale et al., 2018). According to the Act, companies with major losses can obtain a tax refund by calculating the losses as part of the previous financial year’s tax return. Hence, the corporate act tax help to reduce the financial burden of companies that are making losses, thus allowing them time for growth.
Itemized Deduction
The provision of the itemized deduction eliminated tax of most items except mortgage interest, medical expenses, local charitable contributions, medical expenses, and investment interest expense.
One advantage is lowering the mortgage interest. The code allows taxpayers to reduce and deduct interest on mortgage loans up to $1 million (Gale et al., 2018). The deductions on loan interest loans enable the taxpayers to save a considerable amount of money.
Another advantage is that people can avoid those items that attract significant interest rates. This will allows the taxpayers to make conscious financial choices that will ensure that they save money.
Impact of the Tax Cuts and Jobs Act
The TCJA significantly affect both the individual and the family in various ways. The reduction of individual income tax income implies that taxpayers will save more after taxation. As a result, individuals and families will have more money to spend to cater to personal and family needs. Additionally, the reduced individual income rate can motivate individuals to work for more hours to increase the after-tax saving (Li, 2020). Therefore, the reduced individual tax will significantly increase income saving for the individual and family.
The lowered corporate tax will encourage companies to expand their capital investment both locally and internationally. The increase in capital investment by the corporate sector will provide more job opportunities for the individual and other unemployed family members (Li, 2020). New job opportunities will significantly reduce the financial burden for both the individual and the family. Additionally, the increased job creation will help in boosting the economy.
Similarly, Itemized deduction has a great impact on most individual’s lives as it makes most items affordable. For instance, the bill facilitated mortgage interest deduction limitation to the first principal value of $750,000 (Li, 2020). As a result, mortgages became more affordable to most individuals and families, hence helping them improve their living standards. Besides, this limitation helped most individuals have affordable and decent housing.
Recommendation for Planning Strategies to Maximize Tax Savings
Search for part-time jobs
Reductions in income tax should encourage individuals and family members of employable age to maximize their potential and search for part-time jobs. Putman investment (2021) noted that the Act reduced taxes for certain wage brackets. Seeking part-time jobs grouped under these wage brackets will ensure that one accumulates more savings after the income tax.
Maximizing Deductions in years When Itemizing
The recent law increases the standard deduction. According to a report by Putman investment (2021), most taxpayers can opt to itemize their returns. In addition, some taxpayers can benefit from alternating between claiming standards deductions and itemizing deductions for other years. For instance, a taxpayer can consider making a considerable charitable contribution during a tax year when itemizing as a substitute for making regular annual gifts.
New Investment Purchase
A significant recommendation for the corporate tax is encouraging companies to invest in foreign countries that do not tax foreign companies a lot of money. According to Clausing (2018), in the United States, corporate taxes are advanced than in other parts of the world. Since the Act allows companies to pay taxes according to the tax payment of the countries they are legally registered, the move will save companies a lot of money.
References
Bauer, M. (2019). Protecting the (Tax) base: Anti–base erosion provisions in the Tax Cuts and Jobs Act. Pittsburgh Tax Review , 16 (1). https://doi.org/10.5195/taxreview.2018.82
Clausing, K. A. (2018). Profit shifting before and after the Tax Cuts and Jobs Act. SSRN Electronic Journal . https://doi.org/10.2139/ssrn.3274827
Gale, W. G., Gelfond, H., Krupkin, A., Mazur, M. J., & Toder, E. J. (2018). Effects of the Tax Cuts and Jobs Act: A preliminary analysis. SSRN Electronic Journal . https://doi.org/10.2139/ssrn.3280582
Li, S. (2020). The impact of the Tax Cuts and Jobs Act on the U.S. defined benefit plans. https://doi.org/10.26226/morressier.5f0c7d3058e581e69b05d114
Putman investment. (2021). Ten income and estate tax planning strategies for 2021. https://www.putnam.com/literature/pdf/II922-52afc63edac44a10bb7ba96c0a8a096b.pdf
