The Tax Cuts and Jobs Act (TCJA) of 2017 aimed to simplify the U.S. tax code and boost the economy. While it achieved some success in streamlining individual tax filings, its impact on businesses was more complex.
Simplifying Taxes for Individuals
One of the TCJA’s primary goals was to make tax filing easier for individuals. This was accomplished primarily through:
- Expanding the standard deduction: By nearly doubling the standard deduction and suspending personal exemptions, the TCJA encouraged more taxpayers to opt for this simpler calculation rather than itemizing deductions. This significantly reduced the number of people claiming itemized deductions, which involve more detailed record-keeping.
- Reforming the Alternative Minimum Tax (AMT): The AMT is a parallel tax system designed to ensure high-income individuals pay a minimum amount of tax. The TCJA increased the AMT exemption and phaseout thresholds, reducing the number of taxpayers subject to this complex calculation.
These changes combined to save taxpayers billions of dollars in compliance costs annually.
The Business Side: A More Complex Picture
While the TCJA simplified taxes for many individuals, it introduced new complexities for businesses. Key changes include:
- Pass-through deduction: Created to benefit pass-through businesses (like partnerships and S corporations), this deduction came with intricate rules to prevent abuse. As a result, businesses incurred significant compliance costs.
- Research and development (R&D) amortization: Requiring companies to spread R&D deductions over five years added complexity and discouraged investment.
- International tax overhaul: Replaced one complex system with another, offering little net simplification.
Potential Consequences of TCJA Expiration
If individual provisions of the TCJA expire, taxpayers could face a return to a more complicated tax system. This would likely lead to:
- Increased tax filing burdens: More taxpayers would need to itemize deductions, requiring additional time and effort.
- Higher compliance costs: Taxpayers and businesses would spend more money on tax preparation and administration.
- Challenges for IRS initiatives: Programs like Direct File, designed for simple tax returns, could be hindered by a more complex tax code.
In conclusion, while the TCJA brought meaningful tax relief to many individuals, its impact on businesses was less positive. The potential expiration of key provisions could reverse some of the gains made in simplifying the tax code and increase costs for taxpayers and the government.