Tax Guy: Two years after the Tax Cuts and Jobs Act — who are the winners and the losers?

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With tax filing season now underway, we have two full years of the Tax Cuts and Jobs Act (TCJA) changes in the rearview mirror: 2018 and 2019. Are you better off than before? Is the country better off than before? Good questions. Not surprisingly, the answers depend on your specific situation and, just as importantly, your perceptions.

Perceptions often override reality. The TCJA is a case in point.

An online survey conducted for The New York Times and published in April of 2019 (after most returns for the 2018 tax year had been filed) found that only 40% of Americans believed they had received a tax cut under the TCJA. Only 20% were certain they had received one. A large minority thought their taxes had actually gone up.

To the contrary, a study conducted by the Tax Policy Center found that 65% of households actually got a tax cut in 2018, while only 6% paid more. The rest saw little or no change in their tax bills. More specifically, the New York Times survey and the Tax Policy Center study show the following contradictory results:

Household Income Got a tax cut Think they got a tax cut
Under $30,000 32.1% 30.0%
$30,000 – $50,000 69.1% 36.1%
$50,000 – $75,000 81.7% 41.5%
$75,000 – $100,000 86.6% 47.9%
Over $100,000 89.5% 46.4%

As you can see, perceptions overrode reality at all income levels. Even many upper-income folks who were highly likely to have gotten a tax cut did not believe it. Because the TCJA changes were fully phased in for the 2018 tax year, we would expect the “actually-got-a-tax-cut” percentages for 2019 to be about the same as for 2018. Whether perceptions will change after 2019 returns have been filed remains to be seen.

Why the big disconnect?

One reason for the large disconnect between tax cut perceptions and tax cut reality for the 2018 tax year: The updated federal income tax withholding tables used by employers in 2018.

The new withholding levels resulted in lower 2018 refunds for many. Most of these folks actually paid lower taxes for the year, but received lower-than-expected refunds after filing their 2018 returns. For the many who depend on tax refunds for an annual “Spring Bonus,” lower-than-expected refunds felt like tax increases.

While most 2018 tax bills were actually lower overall than for 2017, it didn’t feel that way at tax return time. Employer tax withholding tables were adjusted for 2019, so tax refunds collected during this year’s filing season may be more in line with expectations.

TCJA winners and losers

Regardless of perceptions, the TCJA changes clearly resulted in winners and losers.

In general, higher-income taxpayers reap the biggest tax savings from the TCJA, because individual tax rates were significantly reduced. Simple arithmetic dictates that folks who pay heavy taxes benefit the most from that change. However, if you live in a high-tax state and have lots of home mortgage debt, you could be a loser because the TCJA imposed new limitations on itemized deductions for state and local taxes and home mortgage interest expense. So, we have both winners and losers here.

As a footnote, it appears that the TCJA’s $10,000 limitation on deductions for state and local taxes has probably accelerated relocations from high-tax states like California, Illinois, New York, and New Jersey to low-tax and no-tax states like Colorado, Florida, Idaho, Nevada, Texas, and Utah.

If you were an alternative minimum tax (AMT) victim before the TCJA, you are probably now AMT exempt. If you still owe the AMT, you probably owe quite a bit less than before. Folks who were AMT victims before the TCJA are clear winners.

Most young lower-income and middle-income families with kids probably come out ahead under the TCJA, because the child tax credit was increased from $1,000 to $2,000, and standard deductions were almost doubled. Tax rates for these folks were lowered too. However, the TCJA also eliminated personal and dependent exemption deductions, which would have been $4,150 each for 2018 without the TCJA. Still, mostly winners in this category.

Many self-employed individuals benefit from the new deduction for up to 20% of net income from so-called pass-through business entities (sole proprietorships, LLCs, partnerships, and S corporations). Self-employed individuals also benefit from liberalized first-year depreciation write-offs for business vehicles and equipment. Folks in this category are clear winners.

Impact on the economy

There is some evidence suggesting that the TCJA may have given a jolt to the economy and led to more job creation. The TCJA cut the maximum corporate federal income tax rate from 35% to 21% and greatly expanded first-year depreciation write-offs for business equipment additions.

The lowest-paid workers have been experiencing higher median wage growth than workers overall over the last few years, according to the Federal Reserve Bank of Atlanta. (Overall, about half of workers said they didn’t get a pay rase in 2019 — a marked improvement from the previous year.)

Real disposable income per household has increased by an average of about $5,000 since the TCJA became law. Labor force participation has increased. The economy has added about 6 million jobs since January of 2017. Unemployment is at a 50-year low. More and better-paying jobs are good for all of us.

Impact on the stock market

On 12/29/17, one week after the TCJA became law, the Dow Jones Industrial Average DJIA, +0.60%   rested at $24,719. As this was written, the DJIA was $29,190, up 18.1%. On 12/29/17, the S&P 500 Index SPX, +0.73%   sat at $2,673. As this was written, the S&P 500 was $3,335, up 24.8%. How’s your 401(k) doing? Probably pretty good. While we certainly cannot give the TCJA all the credit for stock market’s performance, it probably didn’t hurt.

Impact on the budget deficit

For the federal government’s fiscal year 2019 (the 12-month period ending on 9/30/19), total receipts were $3.462 trillion, according to the Congressional Budget Office. That was up by $130 billion, or 3.9%, compared to fiscal year 2018. In fiscal year 22018 (the first year affected by the TCJA changes), tax revenues were $3.33 trillion, versus $3.32 trillion in fiscal year 2017 and $3.27 million in fiscal year 2 2016 (the fiscal year that ending right before the 2016 presidential election), according to the Office of Management and Budget.

So, the TCJA has not hurt the federal government’s tax revenues as many economic pundits predicted. And the TCJA is not the cause of ongoing huge federal budget deficits ($984 billion for fiscal year 2019 and a projected $1.02 trillion for fiscal year 2020). The cause is on the spending side of the equation. Federal spending in 2016 was an already whopping $3.85 trillion. By 2019, it had jumped to an even more whopping $4.447 trillion. While yearly tax revenues increased by $192 billion during this period, yearly government spending increased by $597 billion.

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