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New Revised Tax Rules in the TCJA
Tax practitioners, for some time now, have dedicated a substantial amount of time to discuss changes in the tax law for 2018 returns and more years to come. Even as the CPAs are busy crafting mechanisms that involve the implementation of the new revised provisions, discussions aimed at arming individuals with the necessary knowledge regarding the same. For such reason, this discussion creates an opportunity for furtherance of efforts to equip individuals with the requisite knowledge on these new provisions. The targeted group is not only tax-paying individuals but also businesses across a broad cross-section of income tax returns. In this discussion, we list two new revised tax rules that make part of the TCJA that impact on tax return result for individuals covering the period 2018 and going forward. The two identified new rules include child tax credit increment and the kiddie tax.
Child Tax Credit Increase
In the new provisions, there is a significant loss of dependency exemptions on the tax returns, while at the same time, there is an enhanced child tax credit. The new provisions popularly referred to as TCJA increased the credit amount by 100%, improved the portion for refunding as well as expanded the previous limits, thereby including dependents in addition to children as was the old law. Also, the new law increased the pool of taxpayers qualifying for the credit through the significant increment of the phase-out ranges of adjusted-gross-income (AGI) (Gale et al., 2018). The difference between the old provisions and the new provisions can be summarized in three major issues; doubling the amount of basic credit from $1000 to $2000 for every qualifying child, expansion of the refundable portion to include dependents while the old law only recognized children and an almost quadrupling of the credit phaseouts.
The changes in the law will certainly create a substantial impact on the individual tax return of households in the United States. The Tax Policy Center estimated that 90% of households with children would benefit from an average of $2380 in the year 2020. Also expected is that households with children falling in all income categories continue to benefit maximally from these changes. However, lowest income quintile households will least benefit from the credit due to their insufficient earnings.
The Kiddie Tax
As it is now apparent, the Tax Cuts and Jobs Act (TCJA) caused numerous changes to the individual income tax in the United States for the tax year 2018 and years to follow. One of the areas affected was the Kiddie Tax, described as the tax imposed on children with income that is unearned. The previous law provided for taxation of a child’s unearned net income was carried out from a top marginal rate of parents. However, after the enactment of new provisions that cover the period 2018 all the way to 2025, the unearned income of a child is taxed at the applicable rates to estates and trusts (Congressional Research Services, 2018).
There are a couple of positive impacts attributed to the Kiddie Tax is the significant changes it created on the final tax bill on the taxpayers.
One Tax Law Concept included in the TCJA.
The TCJA comprises several provisions that detail new changes to the countrys tax regime meant to elapse in 2025. In the new rules, there are quite a number of concepts that practitioners had to acquaint themselves with for purposes of providing excellent consultancy services to their clients. On the same note, there are a few concepts that have never been clear or are still creating troubles for even the academic world. For purposes of this discussion, we highlight corporate compensation, worker compensation as well as pension contributions as knitted out in the TCJA.
It is common knowledge that the TCJA has had implications on the compensation and benefits for executives and workers in various companies. The changes in the new provisions have forced researchers to consider learning more about the relationship that exists between compensation and corporate taxes. Specific to the corporate executives, the new provisions repealed sections that previously allowed publicly trading companies to effect deductions on qualified performance-based annual compensation exceeding $1 million of the executives. Given that majority of top CEOs earn annual fixed wages of about $1 million, it was expected that the new changes would increase the cost of after-tax performance-based compensation, which includes stock compensation and cash bonuses. However, a study carried out by De Simone, McClure & Stomberg (2019) failed to pinpoint to establish a correlation between the changes that firms effected thereafter as a result of the new taxation laws. On the same note, the study did not find evidence suggesting that the affected firms reviewed the compensation and benefits for their top executives, changed their compensation mix, or reviewed the sensitivity of pay-performance based on the result of the new provisions.
Although the above study failed to narrow to evidence that would demonstrate that CEO pay changed as a result of new legislation, there is evidence suggesting that many workers saw positive impacts, even though the benefits were mostly short-term based. In summary, this is a concept that has proved troubling since the underlying intricacies have never been explained to me.
References
Congressional Research Services. (2018, February 6). The 2017 Tax Revision (P.L. 115-97): Comparison to 2017 Tax Law (CRS Report for Congress, R45092). Retrieved from https://crsreports.congress.gov/product/pdf/R/R45092
De Simone, L., McClure, C., & Stomberg, B. (2020). Examining the Immediate Effects of Recent Tax Law Changes on the Structure of Executive Compensation. Kelley School of Business Research Paper (19-28).
Gale, W.G., Gelfond, H., Krupkin, A., Mazur, M.J., & Toder, E. (2018, June 13). Effects of the Tax Cuts and Jobs Act: A Preliminary Analysis. Retrieved from the Tax Policy Center: https://www.brookings.edu/wpcontent/uploads/2018/06/ES_20180608_tcja_summary_paper_final.pdf
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