On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA). Most of the provisions of the new law were accurately predicted but some last minute juggling inserted and dropped several provisions that were not expected. But with the final numbers now out, I thought it might be fun to run some fairly ‘typical’ household numbers through the Excel Spread Sheet I’ve created for this, just to see how these household’s tax bills might change for 2018. To be sure, the TCJA deals with tax issues other than those affecting individuals, to include corporations and pass through tax entities, executive compensation, tax exempt organizations, international tax and estate and gift tax. But with this article, I’ll consider only the individual household.
Let me take a moment and explain that this is only a comparison of the difference in tax due under TCJA and under ‘current’ tax rules, meaning those that would be in effect in 2018 were the TCJA not passed. Although for most households, these calculations will be accurate or close to it, I am not attempting to be a substitute for TurboTax or any other accurate tax calculator. I consider only the common sources of income and deduction. For example, I don’t account for separate taxation of Section 1250 unrecaptured dividends, households subject to AMT, energy or education credits or the added standard deduction for the blind, to name a few. Certainly these (and other) income/deductions could be added to the below spread sheet for those interested. Below is the sheet data screen, showing the sources of income and deductions that are considered:
This worksheet shows the income of a couple Married Filing Jointly (MFJ) with two qualifying children and with both ordinary income and (Qualified Dividends + Long Term Capital Gains) (QD + LTCG) income. Above-the-Line (ATL) and itemized deductions have been included as they apply. Note that two ATL deductions can be taken in 2017 but not 2018, as they have been blacked out. Similarly, itemized deductions such as Miscellaneous Deductions subject to 2% of AGI threshold and interest on a home equity loan (begun after Dec.15, 2017) have been blacked out while state/sales tax and property tax have been combined and are limited to a max of $10,000 for TCJA for 2018.
One of the surprises was the continuation of the additional standard deduction for those age 65 and older. With the TCJA, personal exemptions are repealed but the Standard Deduction has been increased to $12,000 Single (S) and $24,000 MFJ. This means a married retired couple will give up (2 X $4,150) + $13,000 + (2 X $1,300) = $23,900 under the current method in exchange for $24,000 + (2 X $1,300) = $26,600, or an additional $2,600 standard deduction. For those MFJ not yet 65, the added standard deduction is increased by $24,000 – (2 X $4,150) - $13,000 = $2,700. This means virtually all who use the standard deduction will see a decrease in their household tax bill.
Itemized deductions are a bit more complicated. Generally, the higher the % of total deductions made up of State Tax + Property Tax + Miscellaneous Itemized Deductions subject to the 2% of AGI threshold, the greater the likelihood the new TCJA tax will be higher than the tax calculated using the current method.
When all deductions have been totaled, the sheet will chose between the greater of the itemized or standard deduction, subtracting this from gross ordinary income (tax on QD+LTCG occurs at the bottom of the sheet) to give taxable ordinary income which is then run through the tax tables, applying the various tax table rates:
Note with the TCJA tax tables, there are 2 changes that work to reduce the tax on taxable income:
- Lower corresponding tax rates for most brackets.
- All but one tax bracket has a higher ceiling under TCJA, meaning a higher percent of taxable income is taxed at the lower rate before jumping to the next higher rate.
These benefits are most notable at the higher tax rates.
A third benefit to high income households not shown in these tables is the TCJA repeal of the Pease limitation (surtax) on itemized deduction, which is shown in the work sheet. This reduction of itemized deduction begins at a high AGI ($320,000 for MFJ) and usually doesn’t result in much of a percent change in itemized deductions, but it does reduce tax on higher income households under TCJA.
Once the tax in all affected tax brackets are added for a total ordinary income tax, the tax on any QD+LTCG are added at the rate of 0% (for QD+LTCG in the 10% and 15%/12% brackets), 15% (25%/22% to maximum 39.5%/37%) and 20% for any QD+LTCG in the maximum tax bracket. This becomes the total tax for both current and TCJA for comparison.
Finally, tax credits, in this case the child credit (note: I did not include the dependent care credit as it and the educational and energy credits remain mostly unchanged), which affects many working households, has been doubled by TCJA and perhaps more important, the phase out for taking it has nearly quadrupled from $110,000 for a couple MFJ to $400,000. This means dual income households with multiple children under age 17 will generally see a sizable reduction in their tax bill as the loss of the $4,150 personal exemption which represents a $1,038 tax savings (at the 25% tax rate) is more than offset by the $2,000 credit. And the low income households will little or no tax will also benefit as up to $1,400 of the $2,000 credit is refundable, meaning it will be paid as a refund to the household even if they owe no tax. Remember, credits are not deductions, but reduce the calculated tax dollar for dollar.Examples
Let’s work through some fairly typical households to see how the annual tax bill will change based on forms and amounts of income and various levels of deductions (note: by convention, a positive 'change' means this is the amount the household will benefit from TCJA, while a negative value represents the additional tax that will be due over what it would have been under the 'current' system).
This is perhaps the simplest comparison as such a household will use only the standard deduction. The gradual tax decline with TCJA is modest and increases as taxable income climbs into the higher brackets.
This shows the effect of the qualifying child credit when combined with the standard deduction. The % tax savings here is the highest of the group for moderate incomes. The negative values in total tax shown at the lowest income is due to the child credit being refundable for up to $1,400/child under TCJA and partially refundable for current child credit. A refundable credit means there is a tax refund even though there is no tax due.
Here the family has larger itemizable deductions that are all deductible under current and TCJA except the State and property tax are capped at $10,000 and so the tax reduction is gradually reduced as these deductions are assumed to increase with higher incomes. The loss of the increasing state and property tax deduction is offset by the 4 child credits not phasing out in these income ranges. Were it not for the $8,000 child credit, such a household would see significant tax increases with these kinds of itemized deductions.
This couple lives in a high tax state with one non-qualified child. It can be seen what the effect of such a large tax deduction under current conditions has when most of it is not allowed under the TCJA and the household has no qualifying children. As the AGI grows, the % of the increase in the tax bill gradually declines as the lower bracket rates and higher bracket ceilings come into play at higher AGIs.
This is a retired couple not yet 65 whose income is from retirement plans, Social Security, rental properties and other investments, who pay little in deductible expenses except for high pre-Medicare medical costs which allows them to itemize for each of the above levels of income under current tax rules, but uses the standard deduction for each income group for the TCJA. Adding to this the $8,300 in personal exemptions and deductions are large enough that the TCJA will result in higher tax until the income level gets high enough to take advantage of the lower bracket rates.
This retired couple live in a relatively high State and property tax state and have enough in Medicare premiums + copays + deductibles to itemize under current tax law but not to itemize under TCJA until income and proportional expenses grow large enough. Also noteworthy is the small tax in the first 3 income groups, due to the 0% tax on QD and LTCG.
With high income, high deduction, things change quickly. Here, the standard deduction is never used, so it is the percentage of deductions that will carry over to the TCJA and the effect of lower marginal high income rates and higher bracket ceilings that determine total tax difference with the new tax law. The changes here are high deductions that will not transfer to TCJA, but tax differences in the highest brackets are considerably less due to the lower rates. Interestingly, although the dollar amounts look large, the percent change for the various AGI’s do not change very much between the current and TCJA tax law, at least under these conditions.Summary
From this it would seem most households will see a reduction in their 2018 tax bill. But as can be seen, how the TCJA will affect your household will depend on multiple factors. For the “average” household these factors will likely be, in order of decreasing priority
- Number of qualified dependents
- Whether the household currently uses the standard deduction or itemizes deductions
- For current itemizers, the gross amount and percent of current itemized deductions that can be carried to the TCJA
- The household AGI and the effect of generally lower rates and higher incomes within each tax bracket as incomes grow into these brackets.
As always, I’m happy to make the Excel SS I built available to anyone who wishes to have a copy. Just PM me with your e-mail address and I’ll attach the sheet in an e-mail I send you. But remember, this sheet is built to grossly see the difference between the current household tax (for 2018) and the TCJA tax, not to accurately calculate it, although this sheet should be able to do that if the household return does not have income or deductions not included on the sheet. And finally in regards to this Excel SS, I have tried to find and correct every bug I can, but it is entirely possible I have missed one or two. To check I've randomly manually calculated what the sheet does automatically.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.