There are a lot of articles about the new Tax Cuts and Jobs Act. Most of them are biased and state only the various components, or even draw conclusions from only a single component. What taxpayers need is an explanation of how the pieces work together and how the whole law affects the typical American.
The scope of this article is limited to individual taxpayers. Feel free to read our take on the small business components.
New Tax Brackets, Standard Deduction, Exemption Loss
At first glance, it seems that the individual tax brackets are almost the same, except for a 1-4% reduction of all but the ten percent bracket. The law makes a taxpayer into the higher brackets quicker once he or she makes more than $165,000. Also, the increase in the standard deduction will positively impact many people with medium levels of income.
Under current law, a single individual who makes $50,000 will pay $5,576 in tax, after subtracting the standard deduction and personal exemption.
Under the Tax Cuts and Jobs Act, that same person will pay $4,370. He or she has an increased standard deduction but does not have a personal exemption.
This is a savings of 21%.
Let’s look at a similar situation for a single parent with two children and a salary of $80,000 per year.
Under current law, this person has a standard deduction of $9,300 and personal exemptions of $12,450. This results in total tax of $8,058. After the tax, the tax credit for two children equals $2,000, which is then reduced by $250 because the person makes over $75,000. Our total tax in the current system is $6,308.
Under the Tax Cuts and Jobs Act, that same person will have tax of $8,188, or 2% more. However, because of the increased Child Credit amount and higher phaseout range, she or he receives a tax credit of $4,000, resulting in a total tax of $4,188, or 34% less than under current law.
While you’re going to read a lot about individual components of the new tax law, remember that taxes are very complicated. If only one piece of the law was changing, we might be able to rely on the conclusions broadcast by the media. So far, we’ve read that single parents or middle-class workers lose; maybe they do in some circumstances, and maybe they don’t. The impact of a change in tax law depends completely on an individual’s specific facts and circumstances.
If you’re wondering how any new tax rules might affect you, keep in mind that we’re tax people, not journalists. We support our claims. We can make only one all-inclusive statement about the tax law and how it affects people: it depends.
And we’re here to help you find out how.
Justin Sundberg is the Managing Member of Sundberg Tax & Consulting, a high-frequency accounting firm in the Twin Cities that specializes in unique, outside-the-box solutions for innovative companies and complex individuals.