Will you benefit from the 2018 tax law changes?

October 30, 2018

2018 brings about one of the most significant United States Federal income tax changes in decades. The Tax Cuts and Jobs Act has a ton of features that are beyond the scope of this article, but I wanted to see what the impact would be on the average family, using same basic calculations. The major changes to the law revolved around 4 areas, tax brackets, exemptions, deductions, and credits.

Changes to the tax brackets

In 2017, Federal tax brackets included 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% – 7 brackets in all. In 2018, we still have 7 brackets, but they are a little lower at 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Here is a chart showing the brackets and the income threshold to enter each bracket.

You can see that while the income thresholds to enter each higher bracket is similar, the percentage is lower is most cases. For example, at a taxable income level of $20,000, you drop from the previous 15% bracket down to 12%. At net taxable income of $80,000, you would have been at 25% in 2017, but now you are at 22% for 2018. Only the 10% and 35% brackets are the same, but the income range that encompasses the 35% bracket is now $200,000 ($400,000 through $600,000), instead of the previously small $54,000 range.

Changes to personal exemptions

A personal exemption of $4,050 was available to each taxpayer on your tax return in 2017. For a married couple with 2 children, that equals $4,050 times 4 or a deduction of $16,200! For 2018, exemptions are removed. To compensate, child tax credits and standard deductions have been increased.

Changes to the standard deduction

The standard deduction for a married couple in 2017 was $12,700. For 2018, this has almost doubled to $24,000. This is a big deal for couples without children since their deduction is now the same as couples with children. Let’s say you are a young couple who don’t have children yet (or you can make the same argument for an older couple who’s children are already grown). Take a look at the chart below.

Comparing two families with the same income, the 2017 law favored families with children by giving them a much larger total deduction. In 2018, two families making the same income have the same deduction, regardless of how many children they have. Of course, the comparison assumes you are taking the standard deduction. The calculation would be very different for those using itemized deductions.

It’s not so say the new law does not favor families with children though; tax credits make up the difference.

Changes to the child tax credit

If you have children under 17, in 2017 you qualified for a $1,000 per child tax credit as long as your family income was under $110,000. For 2018, the credit has been doubled to $2,000 for families with income under $400,000.

Let’s put it all together.

Lower tax brackets, changes to the way exemptions and deductions work, and changes to child tax credit all spell confusion as to whether or not the average family will be hurt by or benefit from the 2018 tax law changes. We can easily remove political opinions by running the math and here is what we get.

In order to simplify the chart, I assumed only a filing status of married filing jointly. A couple making combined income of $100,000  with 2 children will see a significant reduction in tax liability from 2017 to 2018 – $7,733 for 2017 and $4,739 for 2018. That is a 39% reduction in Federal tax. You can see on the bottom half of the graphic that for every income level that I ran, there is a significant tax savings under the new law, with larger tax breaks on families making less than $100,000, especially with children, as compared to high income families.