How the Tax Cuts and Jobs Act Will Impact the Average American

Congress recently passed the Tax Cuts and Jobs Act, which is the most dramatic change to the U.S. tax code in over 30 years. GOP leaders in Congress claimed that the bill would cut taxes for middle-income Americans and working families, as well as spur economic growth.

With that in mind, here's a look at what the Tax Cuts and Jobs Act could mean for the average American in 2018. While it certainly appears to be a tax cut for middle-income Americans, there are also two big caveats Americans need to know about.

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Who is the average American?

Using IRS data from the 2015 tax year (the most recent for which finalized data is available), the average household's adjusted gross income was $67,846, and after deductions, exemptions, and credits, the average taxable income was $47,840. However, because the affect of the new tax plan on the average American largely depends upon factors such as filing status and number of children, let's consider three "average American" scenarios.

• The average single filer reported AGI of $31,630. More than three-quarters of single taxpayers claim the standard deduction, including 81% of those with income in the $30,000-$40,000 range, so we can say that the average single filer uses the standard deduction.
• The average American married couple filing jointly reported AGI of $122,073. They had a household size of just under three people. So, for calculation purposes, we'll say that the average married couple filing jointly has one child. And, since the average taxable income for this group was $91,758, this implies that the average married couple had $30,315 in deductions.
• The average American filing as head of household reported AGI of $37,197. (Note: If you're unfamiliar, head of household generally means that you're not married, but have dependents.) They had a household size of just over 2.5 people, so we'll round this to one adult and two children. Eighty-three percent of head of household filers took the standard deduction, so it's fair to say that the average head of household filer did.

How would the average American's 2018 tax bill be affected?

1. Single

First, the single filer. Under the current 2018 tax structure, the average single filer would be entitled to a standard deduction of $6,500, and would also get a $4,150 personal exemption, reducing their taxable income to $20,980. Plugging this into the previously announced 2018 tax brackets results in a tax of $2,671.

Under the new tax bill, a single filer would receive a $12,000 standard deduction but no personal exemption, resulting in an average taxable income of $19,630. In the new tax brackets, this would produce a tax of $2,165 for 2018, a savings of $506.

2. Married filing jointly

Next, the married couple with one child. Under previous tax law, this couple would have deductions of $30,315, and personal exemptions totaling $12,450, reducing the average taxable income to $79,308. Based on the previous tax brackets, this would result in a $11,135 tax, which would be reduced by roughly $400 by the child tax credit. (Note: Since the Child Tax Credit phases out above AGI of $110,000, the average couple's $1,000 credit would be reduced.) This result in a final tax bill of $10,735.

Under the new bill, this couple will get their deductions (we'll assume it's mortgage interest and other deductions that are kept in place), but no more personal exemptions. This produces an average taxable income of $91,758, which corresponds to a $12,066 tax under the new brackets. However, this couple would get the full, expanded $2,000 child tax credit, bringing their tax bill down to $10,066.

3. Head of household

Finally, the head of household would get a $9,550 standard deduction and three personal exemptions totaling $10,450. This would reduce the average head of household's taxable income to $17,197, which would result in a tax of $1,900 under the old law. They would also get two $1,000 child tax credits, which would result in negative $100 in tax liability since the child tax credit is refundable.

Under the new tax law, they would lose their personal exemptions, but would get a higher $18,000 standard deduction, bringing taxable income to $19,197. This would result in a tax of $2,032 under the new brackets, but two $2,000 child tax credits would result in a tax of negative $1,968, since up to $1,400 of each child tax credit is refundable.

To recap, here's how the new tax plan affects the average American households that use each of the three most common filing statuses.

Data sources: IRS, Tax Cuts and Jobs Act, and author's own calculations. Figures in parentheses indicate negative tax liability.

Beyond 2018, the outlook gets a little less rosy

So, it looks like the average American taxpayer will generally get a tax cut in 2018 under the new bill. However, there are a couple of major caveats worth pointing out.

First, these tax cuts aren't permanent. The Tax Cuts and Jobs Act gives a permanent tax cut to corporations, while the individual tax cuts are set to expire after the 2025 tax year. After this point, recent analysis shows that middle-class families could actually see a tax increase from today's levels. For example, the Tax Policy Center found that while the average household would get a big initial cut, by 2027 households in the $50,000-$75,000 income range would see an average increase of $30 compared with today. The main reason for the increase over time would be the switch to the chained CPI as the method of calculating tax bracket inflation -- one of the few permanent provisions that affect individuals.

Second, the bill is expected to add $1.4 trillion to the deficit, and this will need to be paid for somehow, sooner or later. One way this could happen is with cuts to entitlement programs, such as Social Security, Medicare, and Medicaid. In fact, Speaker of the House Paul Ryan recently mentioned healthcare entitlement programs as the best way to deal with the expanding deficit.

The point is that the tax bill isn't necessarily good news for the average American when you look beyond 2018.

Just three of many possible situations

As a final point, keep in mind that the three situations looked at here are examples of how the tax law changes could affect the average taxpayer. There are literally thousands of potential tax situations, and it's impossible to fully analyze the effects of the Tax Cuts and Jobs Act on all of them. However, by learning the major changes the bill makes, you could get a better idea of how it could affect you.