The Tax Cuts and Jobs Act (TCJA), which took effect in 2018, changed individual income taxes: lowering tax rates, adjusting tax brackets, nearly doubling the standard deduction, and capping the state and local tax (SALT) deduction. It also made changes to federal corporate taxes.
It was one of the biggest tax reform laws in recent years. But the individual tax changes were provisional, and most expire at the end of 2025 unless Congress extends them.
TCJA lowered effective tax rates across income groups
When TCJA was passed in 2017, the average effective federal individual income tax rate — the percentage of their income most taxpayers pay in taxes — was 14.4%. In 2018, it dropped to 13.0%.
By 2022, the average effective federal income tax rate had risen to 14.1%: a 1.1 percentage point increase from 2018, but still below the pre-TCJA rate of 14.4%. This uptick was probably a result of broad economic factors like income growth, employment shifts, and taxpayers moving into higher income brackets, rather than a result of TCJA.
Between 2017 and 2018, the effective federal income tax rate declined for people of every adjusted gross income (AGI), with decreases ranging from 0.8 to 2.3 percentage points.
Average taxes paid also declined across all income levels. High-income earners had larger absolute dollar reductions; those earning over $1 million per year paid $55,033 less on average in 2018 than in 2017. Average taxes paid by middle-income filers also declined, dropping $359 for those earning between $25,000 and $50,000.
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Standard deductions increased, and itemized deductions decreased
Deductions reduce adjusted gross income, which lowers a filer’s taxable income. Filers can deduct in one of two ways: by claiming the standard deduction or by itemizing deductions:
- The standard deduction is a fixed amount subtracted from income before calculating taxes. The amount varies based on filing status (single, married, or head of household).
- Itemized deductions let filers subtract specific expenses, like mortgage interest, SALT, or large medical bills. Taxpayers typically choose this option when their total itemized deductions exceed the standard deduction they’re eligible for. All these expenses must be documented individually.
The TCJA nearly doubled standard deduction amounts: the standard deduction for a single filer increased from $6,500 to $12,000. At the same time, the TCJA limited some itemized deductions, capping deduction for state and local taxes to $10,000 (previously there had not been a cap and reducing the allowable mortgage interest deduction).
Since these changes, fewer filers are itemizing deductions. In 2017, 30.6% of filers itemized deductions; in 2022, 9.5% did. In that same timeframe, the portion of returns claiming the standard deduction grew from 69.4% to 90.5%.
The largest drops in eligible itemizations were SALT (30.4% of filers in 2017 to 9.3% in 2022), charitable deductions (24.8% to 7.5%), and mortgage interest (22.1% to 7.2%). In dollar terms, the value of itemized deductions went from $1.4 trillion in 2017 to $668.0 billion.
TCJA introduced the Qualified Business Income deduction
The TCJA introduced a new Qualified Business Income (QBI) deduction for owners of sole proprietorships, partnerships, S corporations, and some trusts and estates. These business types are known as pass-through entities because their income is passed through to the owner’s individual tax return.
This deduction, separate from standard and itemized deductions, lets eligible filers deduct up to 20% of their qualified business income, up to 20% of qualified Real Estate Investment Trust dividends and qualified Publicly Traded Partnership income.
QBI deductions reduced taxable income nationwide by $216.1 billion in 2022. That year, the deduction was most often claimed by high-income taxpayers, who are most likely to own pass-through entities. Almost three-quarters — 73.8% — of those earning $1 million or more per year claimed the QBI deduction, lowering their taxable incomes by an average of $159,978. The average QBI deduction across all income groups was $8,423.
Overall, more than one in ten tax returns have claimed a QBI deduction since it was introduced in 2018.
What happens when TCJA expires?
TCJA’s changes expire in phases from 2025 through 2028. Unless extended, multiple individual tax provisions will expire at the end of 2025.
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