Tax time is nearly upon us, and for once, taxpayers are actually looking forward to filing their 2018 returns. That's because tax reform laws took effect for the 2018 tax year, and so people are naturally curious how much they're going to save as a result of the changes.
There's no substitute for doing the math that applies to your own specific situation, and no one answer will be true for everyone. Of particular significance with your taxes is what filing status you qualify for and how many people are in your household. But by making some basic assumptions, you can at least get a sense of what the net overall impact of tax reform is likely to be. The U.S. Census Bureau recently said that the latest median household income figures came in at $61,372, and so we'll look at that number to look at a couple of common family situations and what taxpayers in those situations can expect from the new tax laws when they file their returns.
How tax reform will help typical single taxpayers with no children
First, let's look at a single person without children or any other dependents who makes the $61,372 figure listed above. We'll assume that all of that money comes from a job and that the taxpayer has never itemized deductions.
As you can see below, the tax savings will be pretty significant when you compare 2018 to what the same income would have produced in tax the previous year.
2017 Tax Year
2018 Tax Year
When you compare the two numbers, you get a difference of $1,681. That amounts to a roughly 20% reduction in the amount of tax. As you can see above, two big changes are responsible for the bulk of the lower tax bill. First, taxable income is slightly less, because the standard deduction almost doubled. That more than made up for the elimination of personal exemptions under tax reform.
The difference in tax owed adds up to just over $1,600. You can see above that the increase in the standard deduction more than offset the loss of the personal exemption under tax reform, resulting in a reduction in taxable income. Even more important was the tax rate cut for 2018. The marginal tax bracket for a typical single taxpayer dropped from 25% to 22%, and most of the taxpayer's income got taxed at 12% instead of 15% for 2017.
Tax reform's impact on married couples with two children
Families and taxes get a lot more complicated, because there are many different tax breaks that apply. In particular, the elimination of the personal exemption had a big impact on large families, but so too did the increase in the child tax credit.
For this second illustration, consider a married couple filing jointly with combined income of the $61,372 figure from above. Again, all the income comes from work, the taxpayers don't itemize deductions, and the couple has two children, both of whom qualify for the child tax credit. Here are the numbers:
2017 Tax Year
2018 Tax Year
Net tax owed
This family can expect a drop of $1,934 decline in tax liability. Because of the loss of personal exemptions, these taxpayers actually see their taxable income rise in 2018 compared to the prior year. Even the bigger standard deduction isn't enough to offset that. However, because the child tax credit doubled under tax reform, the family ends up paying less in tax.
Why you'll never be exactly average
It's important to understand why your own experience might differ dramatically from these two examples. First, if you used to itemize deductions, the higher standard deduction won't necessarily help you as much, and the new tax laws also eliminated or put limits on some popular itemized deductions. Also, there are many other tax deductions and credits available that might or might apply depending on your specific circumstances. And finally, the size of your family can have a dramatic impact on the size of your tax cut -- or whether you get a cut at all.
Nevertheless, most people who earn close to the median household figure of $61,372 a year will likely see a tax cut in 2018 compared to 2017. That puts the onus on you to make sure you get all the tax breaks that the new laws give you both this year and beyond.
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