Many of the tax cuts signed into law by President Donald Trump in 2017 recently took a step closer to becoming a long-term reality. Individual and small-business tax cuts that were part of the Tax Cuts and Jobs Act were set to expire after 2025, but the House of Representatives on Sept. 28 voted to make the tax cuts permanent.
Yet when it comes to U.S. tax law, nothing is ever truly permanent. Dave Du Val, chief customer advocacy officer for TaxAudit said, “we’ve never been able to last the length of any tax law.” That’s because Congress has been making changes to the tax code since it was introduced. You be may one of many people surprised to learn how Trump’s tax plan made your taxes go up. That’s because there is no perfect tax system that benefits everyone, Du Val said — so the reforms will keep coming.
Click through for more about ways taxes changed America — including how the Trump tax plan affects your deductions.
The First Federal Income Tax
For almost 100 years after the U.S. was founded, there was no federal income tax. But in 1861, the U.S. needed money to pay for fighting the Civil War, so a 3 percent tax was imposed on incomes over $800. It was during this time that the Internal Revenue Service was created.
However, because incomes were so low, few Americans actually had to pay the federal income tax, Du Val said — and only 10 years later, the tax was repealed. Congress created a flat-rate income tax in 1894, but the Supreme Court ruled it to be unconstitutional because the tax wasn’t levied in proportion to each’s state population.
16th Amendment Gives Congress Legal Authority to Tax Income
In 1913, the 16th Amendment was ratified to remove the constitutional clause that required income tax to be levied proportionally to population. Congress then levied a 1 percent tax on personal income over $3,000 and a 6 percent surtax on incomes more than $500,000. This was also when the Form 1040 was introduced, according to the Internal Revenue Service.
World War I Revenue Acts
The first reform to the U.S. income tax system came with the Revenue Act of 1916. Congress raised the individual tax from 1 percent to 2 percent on incomes over $3,000, raised the corporate tax from 1 to 2 percent and introduced an estate tax to help fund World War I, according to the Tax History Project.
The next year, Congress raised income tax rates again. The 2 percent income tax was applied to income over $1,000 and a surtax with a top rate of 63 percent. That helped boost tax revenue into the billions.
Revenue Act of 1932
The Revenue Act of 1932 was the biggest tax increase the U.S. saw during peacetime, according to the Tax History Project. The top marginal rate – which had been lowered after World War I – was increased from 25 percent to 63 percent.
America’s wealthiest taxpayers were hit hardest by this change to the tax law — perhaps setting a precedent for the modern practice of finding tax loopholes to save thousands.
Roosevelt Tax Reform
If you think taxes are high now, you might be shocked by how high they were in the 1940s. President Franklin Roosevelt set out to tax the rich more heavily because he had been persuaded by Treasury Department attorneys that wealthy Americans had been avoiding taxes, according to the Tax History Project.
Revenue acts enacted during Roosevelt’s presidency attempted to close tax loopholes used by the wealthy and raise both individual and corporate tax rates. But the wealthy weren’t the only ones hit by high tax rates. Income taxes also increased on the middle class, and tax withholding from paychecks was introduced.
Tax rates increased again to help fund World War II. By 1944, the top income-tax rate for individuals was 94 percent. But that rate was lowered to 86.45 percent by the Revenue Act of 1945, which reduced tax revenue by $6 billion.
Tax Cut of 1948
The Revenue Act of 1945 offered little relief to taxpayers, so the Republican majorities in the Senate and House of Representatives fought for more tax cuts in 1948 – largely to win favor among voters. After three vetoes by President Harry Truman, Congress pushed through $6.5 billion in tax cuts in the Revenue Act of 1948; similarly, in modern times, major tax cuts like Donald Trump’s cost trillions of dollars.
But the tax cuts didn’t help Republicans hang onto their majority. Democrats took control of the House and Senate during the 1948 election.
Truman Tax Reform
To raise revenue for the Korean War, President Harry Truman pushed for higher taxes. The Revenue Act of 1950 boosted tax revenue by $4.5 billion by increasing individual tax rates up to 20 percent for the lowest bracket and 91 percent for the top bracket. The tax rate on large corporations also was increased, but the tax rate on smaller businesses was reduced.
Kennedy Tax Cuts
President John F. Kennedy had advocated for tax cuts during his 1963 State of the Union address but was assassinated before he could push legislation through Congress. President Lyndon Johnson followed through and advocated for cuts to spur job growth, according to the Tax Foundation.
The tax cuts in the Revenue Act of 1964 included a reduction in the top individual tax rate from 91 percent to 70 percent and the corporate tax rate from 52 percent to 48 percent. It also created the standard deduction, which was $300. It was the largest tax cut since World War II as a percentage of income and the federal budget, according to the Tax Foundation.
Reagan Tax Cuts
President Ronald Reagan’s 1981 tax cut was among the biggest in U.S. history. The aim of the Economic Recovery Tax Act of 1981 was to create incentives for economic development and reduce disincentives for savings and investment, according to the Tax Foundation. It included a 25 percent reduction in individual tax rates over three years and lowered the top rate from 70 percent to 50 percent. The law also reduced gift and estate taxes, indexed tax brackets for inflation and created a new cost recovery system for depreciating business assets.
Reagan pushed through another round of tax reforms in 1986 to simplify the tax code. “The Tax Reform Act of 1986 changed a great deal of things,” Du Val said. It lowered the top marginal tax rate to 28 percent and increased the standard deduction for married couples, the personal exemption and the earned income tax credit – which helped exempt low-income households from taxes – but removed several other deductions. It also reduced the corporate tax rate while removing loopholes for businesses and the wealthy.
George H.W. Bush Tax Reforms
President George H.W. Bush promised no new taxes but ended up raising them with the Omnibus Budget Reconciliation Act of 1990 to reduce the federal deficit. The top tax rate rose from 28 percent to 31 percent, the alternative minimum tax increased from 21 to 24 percent, the value of high income itemized deductions shrunk and the cap on taxable wages for Medicare rose.
However, Bush’s tax reform did expand the earned income tax credit and other low-income credits, according to the Tax Policy Center.
Keep Reading: 7 States With No Income Tax
Clinton Tax Reform
Tax rates rose again under President Bill Clinton. The Omnibus Budget Reconciliation Act of 1993 increased the top two tax rates to 36 percent and 39.6 percent. It also raised the corporate tax rate on income above $10 million to 35 percent. And it increased the taxable portion of Social Security benefits.
In 1997, though, Clinton signed the Taxpayer Relief Act, which included several tax breaks. It introduced a child tax credit of $500 and the HOPE and Lifetime Learning education credits. It also reduced the capital gains tax rates from 28 percent to 15 percent and 20 percent to 10 percent, repealed the alternative minimum tax for small businesses, increased the estate tax exclusion and created the Roth IRA.
George W. Bush Tax Reforms
President George W. Bush pushed through two big tax cuts in 2001 and 2003. The Economic Growth and Tax Relief Reconciliation Act of 2001 created a new 10 percent tax rate on the first $6,000 of income for a single person and $12,000 for a married couple and lowered the 28 percent rate to 25 percent, the 31 percent rate to 28 percent, the 36 percent rate to 33 percent and the 39.6 percent rate to 35 percent. It also increased the child tax credit, child and dependent care tax credit, expanded tax breaks for education expenses and increased the contribution limits for retirement savings accounts.
The Jobs and Growth Tax Reconciliation Act of 2003 expanded some of the 2001 tax cuts and lowered the capital gains tax rate. The Bush tax cuts benefited high-income taxpayers most. They also lead to increased deficits, according to the Center on Budget and Policy Priorities.
Obama Tax Reform
Bush’s tax cuts were set to expire in 2010, but President Barack Obama extended several of them for another two years with the American Taxpayer Relief Act of 2012. Obama’s Affordable Care Act of 2010 also included changes to the tax law, including tax credits to offset health insurance premiums, a tax penalty for not maintaining minimum health coverage, an additional hospital insurance tax on high-income earners and a Medicare tax on investment income over a certain level.
Trump Tax Reform
President Trump has claimed that his tax cuts are the biggest in history. However, Kennedy’s, Reagan’s, George W. Bush’s and Obama’s extension of Bush’s tax cuts all were bigger, CNN reported.
Regardless, “there are so many changes” with the Trump tax reform, Du Val said, that it will be hard for many taxpayers to know what impact it will have on them until they complete their 2018 tax return in 2019. “Some are going to get hurt, some are going to get helped,” he said.
Some of the biggest changes include a standard deduction that’s twice as big and lower tax rates – with the top rate dropping from 39.6 percent to 37 percent. The mortgage interest deduction is reduced, as are state and local tax deductions. Some itemized deductions are eliminated entirely. And the corporate tax rate is cut to 21 percent from 35 percent.
Du Val said the 2018 tax return will be about the size of a large postcard, but there are six new schedules, so there’s bound to be a lot of confusion. And taxpayers who dropped health coverage because they heard Trump’s tax reform eliminated the Obamacare tax penalty will be in for a surprise because the penalty for not having health coverage doesn’t disappear until 2019, he said.
Click through to get these last-minute tax deductions you don’t want to miss.
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About the Author
Cameron Huddleston is an award-winning journalist with more than 18 years of experience writing about personal finance. Her work has appeared in Kiplinger’s Personal Finance, Business Insider, Chicago Tribune, Fortune, MSN, USA Today and many more print and online publications. She also is the author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances.
U.S. News & World Report named her one of the top personal finance experts to follow on Twitter, and AOL Daily Finance named her one of the top 20 personal finance influencers to follow on Twitter. She has appeared on CNBC, CNN, MSNBC and “Fox & Friends” and has been a guest on ABC News Radio, Wall Street Journal Radio, NPR, WTOP in Washington, D.C., KGO in San Francisco and other personal finance radio shows nationwide. She also has been interviewed and quoted as an expert in The New York Times, Chicago Tribune, Forbes, MarketWatch and more.
She has an MA in economic journalism from American University and BA in journalism and Russian studies from Washington & Lee University.