As taxpayers prepare to file their 2017 tax returns between now and April, many will be looking forward to big changes in the coming year. The new tax reform laws are in the books, and proponents of the measure strongly argued that big breaks for ordinary Americans would come out of the final legislation.

The best way to see whether tax reform is likely to deliver on those promises is to run the numbers and compare what your tax bill will look like this year against what it'll be this time next year when you file your returns for the 2018 tax year. With the typical American household median income projected to be just under $60,000 in 2017, it's reasonable to use that income figure as the starting point for a couple of examples. As you'll see below, savings are available for many middle-income taxpayers, but the amounts can vary widely depending on the specifics of your particular situation. In particular, filing status and the size of your family both play a big role in determining benefits under tax reform.

Clockwork gears with words Tax Reform engraved on the side.

Image source: Getty Images.

Example: Single taxpayer with no children

In the first scenario, we'll take a simple situation in which a single person with no children makes $60,000 a year from work. This person takes the standard deduction and has no taxable income from other sources.

The table below goes through the calculations for the 2017 and 2018 tax years.

Item

2017 Tax Year

2018 Tax Year

Gross income

$60,000

$60,000

Standard deduction

($6,350)

($12,000)

Personal exemption

($4,050)

N/A

Taxable income

$49,600

$48,000

Tax

$8,139

$6,500

Calculations by author based on IRS rules.

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. Yet the primary source of the tax cut in this scenario is the reduction in tax rates from 2017 to 2018. This taxpayer's marginal tax bracket will fall from 25% to 22%, and the income that will get taxed at 15% in 2017 sees a lower 12% tax rate apply in 2018.

Example: Married taxpayers with two children

The situation for families can be a lot more complex with many more moving parts. That's because personal exemptions play a bigger role in driving tax liability for larger families, and special provisions like the child tax credit apply that taxpayers who don't have children can simply ignore.

In this example, we'll assume a married couple with two young children files jointly. The couple earns a total of $60,000 from work with no other sources of income. They take the standard deduction in both years.

Below, you can see the calculations for this family.

Item

2017 Tax Year

2018 Tax Year

Gross income

$60,000

$60,000

Standard deduction

($12,700)

($24,000)

Personal exemption

($16,200)

N/A

Taxable income

$31,100

$36,000

Tentative tax

$3,733

$3,909

Tax credits

$2,000

$4,000

Net tax owed

$1,733

($91)

Calculations by author based on IRS rules.

Here, the family can expect about an $1,800 decline in tax liability. Notice that taxable income actually rises in this scenario from 2017 to 2018, because the loss of personal exemptions outweighs the impact of a higher standard deduction. Yet the lower tax rates help to produce a smaller tax bill, and the big difference is the doubling of the child tax credit that ends up producing a net refund in 2018. That's possible because under tax reform, up to $1,400 of each child's $2,000 credit is refundable even if the taxpayer doesn't otherwise owe any income tax.

Why your savings will vary

These examples have the benefit of being fairly simple to understand, but they don't address all the issues that some families will deal with. Some of the additional complications that can change the calculations include:

  • Those who itemize deductions now can get a bigger tax break in 2017 than they'd get from the standard deduction, but they might not see any corresponding savings in 2018 because of the increased standard deduction amount. That's especially true for those whose itemized deductions hinge on items that will see limits under new tax law, such as the state and local tax deduction.
  • If you qualify for other deductions or credits, then they might have an impact on your taxes owed. Many tax breaks will continue despite tax reform, so you might not see any net increase or decrease in your tax bill because of them.
  • Different family sizes can have a big impact. Joint filers with no children will see smaller savings because they won't get the child tax credit. Singles who do have children could see even greater tax reduction because of the new laws.

Even with these caveats, most people earning $60,000 a year can expect to see their taxes fall under the new tax reform laws. It's up to you to make sure you do everything you can to take advantage of the opportunity to cut your tax bill.

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