The Tax Cuts and Jobs Act, Tax Reform Changes and Impact on Individual Taxpayers

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act was signed on December 22, 2017, and produced some of the most significant impacts on tax law in over 30 years. This research covers the tax reform changes brought about by the Tax Cuts and Jobs Act and, analyzes the impact these changes have on individual taxpayers and identifies related tax planning strategies.

Instructions

Write a 3–5 page paper in which you:

  • Summarize the purpose of the Tax Cuts and Jobs Act and explain the main objective(s) for its implementation.
  • Examine three significant changes brought forth by the Tax Cuts and Jobs Act and discuss at least two advantages and/or disadvantages of each.
  • Analyze the impact that each of the three significant changes has on the taxpayer as an individual and a family.
  • Recommend tax planning strategies to maximize tax savings based on the three significant changes identified. Provide a rationale.

Read also Tax Cuts and Jobs Act – BUS 360

The Purpose of the Tax Cuts and Job Act

The Tax Cuts and Job Act was developed based on the idea that lower corporate and business tax rates, guardrails over international profit shifting, and novel domestic investment incentives would increase investment, make employees more productive, and eventually raise wages and output. The Act’s main purpose was to lower marginal effective tax rates (MERTs) on novel investment and lower the MERTs differences across asset forms, organizational forms, and financing methods. The main objective of this purpose is that it would encourage investment in the country. The Act would substantially reduce the cost of capital and marginal tax rates, which would result in an increase of the GDP by 3.9% in the long-term, increase wages by 3.1% and increase full-time equivalent jobs by 9750000. The Act anticipated reforming both corporate income taxes and individual income tax, shifting the United States to a business taxation territorial system. The Act also focused on reducing individuals’ tax burden by increasing tax standard refunds, reducing the tax blanket rates, and increasing the number of refunds from child dependents (Tax Foundation, 3).

Significant Changes Brought Forth by the Tax Cuts and Job Act

The Tax Cuts and Job Act employed several changes. One of the changes was increasing the child tax credit to $2000 for children below 17 years, with a partial refund of $1400. Other dependent were offered $500 non-refundable credit. The main advantage of this is that it will offer considerable relief to parents investing their money in taking care of their children. This will increase the amount of money available for parents to cater to their children’s needs. The main disadvantage is that the process of acquiring these deductions may be tedious as they require one to even have the child’s social security number (Congress.gov, 1).

The Act raised the individuals’ standard deductions to $12000 for single filers from $6350, from $9350 to $18000 for heads of household, and from $12700 to $24000 for a married couple filing jointly. It also reduced taxation percentage in every tax blanket. The main advantage of this change is that it increased the amount families can save from taxes. This means an increase in the amount that can be dedicated to household management and wellbeing. The main disadvantage is that the change will increase deductions claims, reducing the total tax revenue. This will general reduce the money at the government’s disposal to manage its expenses (Congress.gov, 1).

There were also changes in itemized deductions. Medical expenses exceeding 7.5% of adjusted gross income were deductible for all taxpayers rather than just those aged 65 and above. It also suspended various miscellaneous itemized deductions including home office expenses, regulatory and licensing fees, moving expenses deductions, laboratory breakage fees, business bad debts, union dues, and work clothes that are not appropriate for everyday use. Passing medical deductions to all will help in reducing medical costs for all and not just a few. Eliminating all other miscellaneous deductions will help in increasing government revenue by reducing the amount of money it has to give back to taxpayers (Congress.gov, 1).

Impact of Each of the Three Significant Changes has on the Taxpayer as an Individual and a Family

The increase in child credit and refunds will help in reducing parents’ spending on their children. This will help in improving the general family welfare, especially children depending on their parents for total care. An increase in the amount of deduction for all the three groups of taxpayers will reduce the total amount of tax that people pay, also a reduction of tax rate reduces the amount families or individuals have to give up on taxes, increasing the available money for the families. This means improved family purchasing power and general happiness in families. Deducting medical expenses exceeding 7.5% of adjusted gross income for all means that no citizen experiences excess medical cost and that they all enjoy benefits of deductions when it exceeds the stated percentage. The elimination of other deductions will increase individuals and business costs from bad debts or business-related purchases, reducing the total earnings. This will reduce the amount available for the family. It will also make individuals more cautious and reluctant from purchasing business items with personal earnings or covering business expenses with personal incomes (Gale, 2).

Recommendation of Tax Planning Strategies to maximize tax savings based on the Three Significant Changes Identified

One can maximize tax savings from the first change by ensuring all child dependent and non-child dependent are documents, and all needed documents are filed to ensure effective processing of deductions. This includes proving their age and their social security number among other requirements. This will ensure all refunds are offered without hitches.  To maximize tax savings from the second change, one should always be subtracting total standard deductions based on the right category to save as much as possible while filing for the tax, irrespective of the group. Considering standard tax deductions will help in selecting the right tax class. One should ensure he or she computes taxes using the right tax class to ensure maximum saving as provided by the new law. From the third option, one should always ensure to calculate the medical expenses properly to subtract the amount exceeding 7.5% of the adjusted gross income where necessary. This will help to save some money when the medical expenses are too high. Also, one should minimize or completely stop using personal money to cater to work-related expenses. Individuals should avoid purchasing office items with personal cash or paying for other expenses that should be incurred by organizations other than individuals. This will reduce tax liabilities, as money spent on business expenses cannot be recovered as per the current Act provision. These measures will help in maximizing tax savings.

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