Drilling Down on Tax Reform

Now that the grandstanding and scare tactics are over, let’s talk about how the new tax bill will actually impact taxpayers.  I’ve spent some time over the past few days reading the text of the actual bill, with my focus being on the individual income tax changes.

Then, last night I selected a cross-section of my tax clients and re-calculated their 2016 tax returns as if the new bill had been in effect at that time. The tax returns were a mix of married, single, and head of household. Some had dependents, some did not.  All had income under $400,000, and 75% were California residents.

What did I find?

Generally, those who itemize in high-tax, high cost-of-living states benefit the least. It’s not uncommon for a California resident to pay $10,000 in property taxes plus $10,000 in state income tax, with total SALT well above $20,000. The new bill caps that deduction at $10,000, so these taxpayers are losing the additional $10,000+ in deductions.

Did you notice I said “benefit the least” up there?

Within that group, married couples with children made up for the lost SALT deduction with the lower tax rates and additional child tax credits. Married couples without children fell into two main categories:

• Those with SALT between $10 – $20k. These taxpayers benefited more by taking the flat $24,000 standard deduction. That, combined with lower tax rates, resulted in a lower tax liability.
• Those with SALT above $20k.  These are the taxpayers who saw a slight tax increase using the new rules.  The lower tax rates do not offset the loss of a good portion of their SALT deduction when no child tax credit is in play.

Who benefits most in my little experiment?

Taxpayers who do not itemize tend to see a significant reduction in tax liability, especially if they have children. The most dramatic decrease I saw was in this group, a 44% decrease in tax liability.

Taxpayers who itemize in low tax states tend to benefit by taking the higher standard deduction.

Today I came across this tax calculator: http://taxplancalculator.com/  (I wish I had found it last night, before doing all my calculations in Excel!)

If you’d like to get an estimate of what this may mean for you, pull out your 2016 tax return and plug your numbers in! The results from the calculator were very close to my spreadsheet numbers, the difference most likely being that I had more detail to work with for each taxpayer.  I have a feeling there will be some surprises out there!