This new tax law includes some of the biggest changes to the federal tax code in the last thirty years. Some of these massive changes are permanent, some of them are temporary. The changes affect different people in different ways, depending on their income, family size, and employment. Below is a breakdown of the biggest and most consequential changes across the code.
Individuals
All of the changes made to the individual tax code are temporary and expire at the end of 2025 – except two. Those two permanent changes, using a slower measure of inflation and the repeal of the requirement that everyone have health insurance, will result in long-term tax increases for most lower- and middle-class families. However, in the short term, the most significant changes to the individual tax code are below:
One of the biggest changes to the individual tax code is a big shifting of the tax rates and tax brackets. There will still be seven brackets under the new law, as there were under the old law, but the rates are slightly different, and the income thresholds for the various new tax rates have changed. For example, the tax rate for the highest-income earners went down from 39.6 percent to 37 percent. This new lower top income tax rate applies only to those earning $600,000 or more annually, less than 1 percent of the population. The people at that income level will save a considerable amount on their taxes, but that specific rate cut won’t affect those lower on the income ladder. Overall, the changes in rates and brackets will cost $1.2 trillion.
The new law eliminates personal exemptions, which served to lower a household’s taxable income by $4,050 for every member of the household. Personal exemptions were available to people who itemized their deductions and to those who took the standard deduction. The new law eliminates personal exemptions entirely, meaning that the only major upfront reduction in taxable income for those who don’t itemize their taxes will be the standard deduction. This will affect almost every taxpayer in the country, who will have to pay an additional $1.2 trillion in taxes due to this change.
The Alternative Minimum Tax is meant to ensure that high-income people can’t game the system and use enormous deductions to end up paying very little in federal income tax. The new law cuts back on the efficacy of the AMT significantly by increasing the amount of income that is exempt from the AMT. This means that many fewer high-income people will be required to pay the AMT. That change to the tax system costs $637 billion.
Under the old law, only estates worth more than $11.2 million ($5.6 million for singles) were required to pay the estate tax, which meant that the estate tax was paid by just 5,460 estates across the entire country, or 0.2 percent of all estates. Under the new law, the exemption doubles, and only estates worth more than $22.4 million will owe any estate tax at all – further shrinking the number of households who will pay the estate tax in coming years. The estate tax cut costs $83 billion.
Small Businesses
The biggest change for small businesses is the introduction of the 20 percent pass-through deduction. The deduction is not available to all small businesses, and the benefit would flow mostly to the rich. The ability for individuals to deduct 20 percent of income earned as pass-through income is incredibly complex, and costs $414 billion.
Corporations
Corporations saw permanent changes to their tax code under the tax plan:
The new tax law gives a significant, permanent rate cut to corporations – from 35 percent to 21 percent. It remains to be seen whether the corporate tax cut will have a significant long-term impact – positive or negative – on the take-home pay of workers, but preliminary research shows that larger companies tend to be rewarding shareholders over workers at a much greater rate. One recent analysis found that S&P 500 companies have devoted a fraction of their savings from the tax law to bonuses and wage hikes; however, those same large companies are also paying for record-breaking stock buybacks ($178 billion thus far), which reward shareholders by boosting a company’s stock price. This 40 percent rate cut saves corporations $1.3 trillion.
As part of a shift to a territorial tax system, profits earned abroad will be taxed at 10.5 percent – half the rate of domestic corporate profits – potentially encouraging companies to shift their operations overseas to take advantage of the enormous tax savings on profits earned overseas. This change to the tax code costs $223 billion.