How Tax Reform Affects Different Taxpayers, Including You
Photo Credit: Architect of the Capital
Early Saturday morning, the Senate passed the “Tax Cuts and Jobs Act”. This, paired with the recent passing of the bill by the House of Representatives, means that significant changes to the tax law are a virtual certainty. The House and Senate bills have many similarities and a handful of differences. The government will now work on reconciling those differences in the two bills and submit a finalized bill for the President to sign into law. It is likely that the new laws will come into effect for your 2018 taxes.
There have been many anecdotal analyses of how the changes will affect taxpayers, with a lot of misinformation being shared and many taxpayers fearing the worst. Now that the Senate and House have both passed versions of tax reform bills, I’ve been able to do a comprehensive analysis of how the new laws will affect taxpayers with many different situations and income levels. Keep in mind, the proposed laws are still subject to revisions.
Here are a few takeaways that seem most likely to make it through the final revisions:
-The Standard Deduction(which reduces taxable income by $6,350 in 2017) and the Personal Exemption (reduces taxable income by $4,050) will be increased and rolled into one for a total Standard Deduction of $12,000($24,000 for Married Couples).
-Exemptions for dependents(reduce taxable income by $4,050 per dependent) will be eliminated and replaced with an expanded Child Tax Credit and non-child dependent credit. The expanded Child Tax Credit gives parents an extra $1,000 per child and increases the cutoff age from 17 to 18 so parents can claim the credit for an additional year. Parents with dependents who are 18 or older can claim a $500 non-child dependent credit.
-Many deductions will be eliminated or capped. Most notable are the elimination of state income tax deductions(tough for us Californians) and unreimbursed employee business expenses(expenses you can deduct related to your job).
-The reductions and elimination of many deductions will mean that more income will be taxable, however, the rate at which that income is taxed will be lower.
-Many additional smaller changes will be included as well, but individually they affect a relative few taxpayers so I’ll cover those in detail once there is a final word on which changes are officially being made.
How will the new law affect most taxpayers?
I’ve put together a number of tables below which incorporate the new rules to help you understand how these new changes might affect your tax bill for better or worse.
The results of my analysis showed that just about every tax filer who had previously claimed a standard deduction will see savings under the new plan. That’s pretty good news because around 70% of tax returns claim the standard deduction.
Additionally, all categories in my analysis who claim children will see a reduction in taxes.
Unfortunately, there will be some losers. Most taxpayers who do not have children and itemize deductions will see a moderate increase in their tax bill.
Your personal situation will vary, but feel free to find the table which most closely reflects your personal situation and get a better idea of how the new law might affect you.
Single-Standard Deduction
Comparison of current tax law and new Senate bill for a single filer claiming the standard deduction.| Annual Income | Tax Under Current Law | Tax Under Proposed Law | Difference | Percentage Change |
|---|---|---|---|---|
| $25,000 | $1,728 | $1,369 | -$359 | -21% |
| $45,000 | $4,720 | $3,767 | -$953 | -20% |
| $75,000 | $11,896 | $9,800 | -$2,096 | -18% |
| $100,000 | $17,963 | $15,659 | -$2,304 | -13% |
| $150,000 | $32,070 | $27,659 | -$4,411 | -14% |
Single-Itemized Deductions
Comparison of current tax law and new Senate bill for a single filer claiming itemized deductions.| Annual Income | Current Itemized Deductions | Tax Under Current Law | Tax Under Proposed Law | Difference | Percentage Change |
|---|---|---|---|---|---|
| $45,000 | $18,000 | $2,973 | $3,110 | +$137 | +5% |
| $75,000 | $25,000 | $7,233 | $7,380 | +$147 | +2% |
| $100,000 | $30,000 | $12,220 | $12,300 | +$80 | +0.6% |
| $150,000 | $35,000 | $24,048 | $24,400 | +$352 | +1% |
Head of Household-Standard Deduction, One Child*
Comparison of current tax law and new Senate bill for a Head of Household(single parent) with one Child filer claiming the standard deduction.| Annual Income | Tax Under Current Law | Tax Under Proposed Law | Difference | Percentage Change |
|---|---|---|---|---|
| $25,000 | $-247 | $-1,000 | -$753 | -- |
| $45,000 | $2,461 | $954 | -$1,507 | -61% |
| $75,000 | $7,634 | $4,554 | -$3,080 | -40% |
| $100,000 | $14,896 | $9,949 | -$4,947 | -33% |
| $150,000 | $27,430 | $21,488 | -$5,942 | -22% |
Married-Standard Deduction, No Children
Comparison of current tax law and new Senate bill for a married couple claiming the standard deduction.| Annual Income | Tax Under Current Law | Tax Under Proposed Law | Difference | Percentage Change |
|---|---|---|---|---|
| $45,000 | $2,701 | $2,139 | -$562 | -21% |
| $75,000 | $7,201 | $5,739 | -$1,462 | -20% |
| $100,000 | $11,284 | $8,739 | -$2,545 | -23% |
| $150,000 | $23,777 | $19,599 | -$4,178 | -18% |
| $200,000 | $37,061 | $31,319 | -$5,742 | -18% |
Married-Standard Deduction, With Two Children
Comparison of current tax law and new Senate bill for a married couple claiming the standard deduction and two children.| Annual Income | Tax Under Current Law | Tax Under Proposed Law | Difference | Percentage Change |
|---|---|---|---|---|
| $45,000 | -$392 | -$1,861 | -$1,469 | -- |
| $75,000 | $3,986 | $1,739 | -$2,247 | -56% |
| $100,000 | $7,736 | $4,739 | -$2,997 | -39% |
| $150,000 | $21,752 | $15,599 | -$6,153 | -28% |
| $200,000 | $34,792 | $27,319 | -$7,473 | -23% |
Married-Itemized Deductions, No Children
Comparison of current tax law and new Senate bill for a married couple claiming itemized deductions with no children.| Annual Income | Itemized Deductions | Tax Under Current Law | Tax Under Proposed Law | Difference | Percentage Change |
|---|---|---|---|---|---|
| $45,000 | $18,000 | $1,906 | $2,859 | +$953 | +50% |
| $75,000 | $25,000 | $5,356 | $5,727 | +$371 | +7% |
| $100,000 | $30,000 | $8,356 | $8,259 | -$97 | -1% |
| $150,000 | $35,000 | $18,203 | $18,499 | +$296 | +2% |
| $200,000 | $40,000 | $29,453 | $29,879 | +$426 | +1% |
Married-Itemized Deductions, Two Children
Comparison of current tax law and new Senate bill for a married couple claiming itemized deductions with two children.| Annual Income | Itemized Deductions | Tax Under Current Law | Tax Under Proposed Law | Difference | Percentage Change |
|---|---|---|---|---|---|
| $45,000 | $18,000 | -$917 | -$1141 | -$224 | -- |
| $75,000 | $25,000 | $2,141 | $1,727 | -$414 | -19% |
| $100,000 | $30,000 | $5,141 | $4,259 | -$882 | -17% |
| $150,000 | $35,000 | $16,184 | $14,499 | -$1,685 | -10% |
| $200,000 | $40,000 | $27,428 | $25,879 | -1,549 | -6% |
Note: Itemized deduction amounts for each income level were estimated by using national averages from the Congressional Research Center and adjusted to reflect California’s taxes and higher housing costs. Taxes under the new plan were calculated by reducing itemized deductions by the amount of California state income tax each individual/couple would have normally deducted and applying the new tax rates. No adjustments were made for the loss of deductions for Unreimbursed Employee Business Expenses which affect 17% of filers who itemize deductions and earn $50k-$100k per year. No adjustments were made for the property tax cap of $10,000 which is primarily claimed by filers who earn $500k or more per year. No analysis of higher income tax payers were performed due to uncertainties regarding the status of the Alternative Minimum Tax.
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