The Tax Cuts and Jobs Act was released by GOP leaders on Thursday, and Americans finally got some long-awaited details on what a tax reform package might look like. The bill is likely to change significantly before it's signed into law, but let's take a look at how it could potentially affect certain American households.
1. A single filer who rents their home and has $45,000 in annual income
Single taxpayers who don't itemize deductions are winners under the Tax Cuts and Jobs Act. Under current law, this taxpayer would be entitled to a $6,500 standard deduction and a $4,150 personal exemption, for a total of $10,650 deducted from their taxable income. The Tax Cuts and Jobs Act eliminates personal exemptions but offers single taxpayers a $12,200 standard deduction, which is an additional $1,550 of income that's excluded from taxation. For a single filer earning $45,000 a year, this would reduce their taxable income to $32,800, rather than $34,350 under current tax law.
According to the 2018 tax brackets as they stand now, a taxable income of $34,350 would put this taxpayer in the 15% marginal tax bracket, resulting in a 2018 tax bill of $4,676.25. Under the proposed changes, a single taxpayer with $32,800 in taxable income would be in the 12% tax bracket, which would apply to all of their income, making for a tax bill of $3,936.
The bottom line is that a single taxpayer who rents their home and earns $45,000 per year would save about $740 on their 2018 taxes.
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2. A married couple who have no children, own a home, have $90,000 in annual income, and itemize deductions. Both spouses contribute to 401(k)s.
With slightly more complex tax situations like this, it gets difficult to say exactly how much these families will benefit without knowing specific details like what itemized deductions they claim. If this couple qualifies for a $15,000 mortgage interest deduction and a $15,000 charitable contribution deduction, then itemizing deductions would still make sense, as the standard deduction under the Tax Cuts and Jobs Act would be $24,400 for married couples -- less than the $30,000 they could shave off their taxable income by itemizing.
On the other hand, if this couple can deduct $10,000 in mortgage interest and $5,000 in charitable contributions, it would no longer make sense to itemize, as the new standard deduction of $24,400 would save them far more money. Either way, the couple would lose out on two personal exemptions totaling $8,300.
Under current law, this couple would fall into the 15% marginal tax bracket, while under the new tax plan, they'd fall into the 12% tax bracket (the lowest one). Both spouses would still be able to exclude their 401(k) contributions from their income.
In most cases, married couples in this income range with no children would benefit from the new tax bill, though some would not.
3. A married couple with three kids, a home, and $120,000 in income. One has a 401(k), one has an IRA, and they itemize their deductions: student loan debt, charity, mortgage interest, and property taxes.
Here's one situation in which a middle-class family could end up losing under the new tax plan. The student loan interest deduction would be eliminated, but the other three are staying. And as long as they add up to more than $24,400, it would still be worth it for this family to itemize.
Here's the problem. Two parents plus three children equals five personal exemptions -- worth an additional $20,750 deduction under the current system. Under the Tax Cuts and Jobs Act, that hefty tax break would be eliminated. The family would receive an additional $1,800 from the Child Tax Credit, as the new bill raises the credit from $1,000 per child to $1,600 per child. However, even if the family falls in the 12% marginal tax bracket, the increased Child Tax Credit wouldn't make up for the loss of the personal exemptions.
4. A single filer who has $500,000 in annual income and claims lots of deductions, but who gets hit with the Alternative Minimum Tax (AMT) under the current system.
This is another situation in which it's difficult to say whether the current or proposed tax system would be better. On the surface, it sounds like this individual would be a big winner, because the Tax Cuts and Jobs Act would immediately repeal the Alternative Minimum Tax.
However, the bill also calls for the elimination of most itemized deductions, excepting mortgage interest, charitable contributions, and property taxes up to $10,000. So it's possible that this taxpayer would no longer be able to claim most of the deductions that made them subject to the AMT in the first place. Because this taxpayer would likely fall in the new 35% tax bracket, their tax bill could be higher under the new plan.
To be fair, it's important to point out that most taxpayers who currently get hit with the AMT -- especially those with more moderate incomes -- will come out ahead under the new plan.
5. An elderly married couple with $20 million in total assets.
Under the current tax law, the lifetime exemption from estate taxes is $5.6 million per person or $11.2 million per couple in 2018. Above this amount, assets passed to heirs are taxable at a 40% rate. So if this couple were to pass away in 2018, their estate could get hit with a $3.52 million tax bill.
However, the Tax Cuts and Jobs Act calls for doubling the estate tax exemption immediately to $22.4 million per couple. So, under the proposed law, this couple's entire estate would be exempt from estate taxes and could pass to their heirs tax-free.
The reform plan also calls for the estate tax to be eliminated in 2024, so wealthy Americans who live past that point will be able to pass their entire estates, no matter how large, to their heirs.
