Tax reform measures got passed more than a year ago, and many advocates of the legislation pointed to the big tax cuts that many Americans would receive. Now, taxpayers will get their first crack at seeing just how much of an impact the new tax laws will have as they complete their tax returns for 2018.

Everybody's situation is different, so you really need to roll up your sleeves and use your own numbers to be exactly sure whether you'll get a tax cut, and if so, how big it'll be. But in general, upper-middle-income households making $125,000 -- roughly twice the median household income -- will see a wide variety of results, with the biggest question being whether you itemize your deductions or take the standard deduction. Below, we'll look at a couple of examples that can shed some light on the impact of tax reform.

1040 tax forms and a pencil sitting on a spread-out pile of cash.

Image source: Getty Images.

Tax cuts for upper-middle-income families

Tax reform offered several incentives to families. The most important was the doubling of the child tax credit, which helped to make up for the fact that personal exemptions disappeared under the legislation in favor of a larger standard deduction. Moreover, it used to be that the child tax credit phased out for those making incomes above certain levels, but much-higher thresholds now apply.

For instance, let's look at a married couple with two children who file jointly and together make $125,000 from their jobs. We'll assume they've never itemized. Looking at the math, here's how big a tax cut they'll get:

Item

2017 Tax Year

2018 Tax Year

Gross income

$125,000

$125,000

Standard deduction

($12,700)

($24,000)

Personal exemption

($16,200)

N/A

Taxable income

$96,100

$101,000

Tentative tax

$15,503

$14,099

Tax credits

$1,250

$4,000

Net tax owed

$14,253

$10,099

Calculations by author based on IRS rules.

The savings for this typical family of four amounts to $4,154 in 2018 compared to the previous year. Interestingly, taxable income actually goes up for this family, but lower tax rates result in a smaller tentative tax bill. In addition, the increase in the child tax credit contributes a full $4,000 to their refunds, compared to the much-smaller former credit -- which was subject to a $750 reduction due to income phase-outs.

How tax reform affects upper-middle-income earners who are single

When you look at single filers without children, the brackets aren't the same, but the results are comparable. The boost in the standard deduction helps more when there are fewer dependents, but not getting a child tax credit costs some savings.

Item

2017 Tax Year

2018 Tax Year

Gross income

$125,000

$125,000

Standard deduction

($6,350)

($12,000)

Personal exemption

($4,050)

N/A

Taxable income

$114,600

$113,000

Tax

$25,070

$21,410

Calculations by author based on IRS rules.

The savings here add up to $3,660. The lower 12%, 22%, and 24% brackets for 2018 are a lot less expensive for taxpayers than the 15%, 25%, and 28% brackets that applied for 2017.

Why you might not win

The biggest challenge in evaluating whether you're better off under tax reform is that many upper-middle-income taxpayers itemized their deductions. Tax law changes make it less likely that they'll continue to do so in 2018, but for them, the fact that they got to take a larger itemized deduction than in the examples above offsets any other tax savings they might get.

As a simple case, look at the first example above. If the family had $24,000 in itemized deductions in 2017, then the rise in the standard deduction will do them no good whatsoever. Their taxable income in 2017 would've been $11,300 lower than in the example above, and their taxes would've been $2,825 less. That doesn't wipe out all of the gains, but it takes a big bite out of the savings from the new tax law.

Moreover, some itemized deductions actually went away in 2018, while others were restricted. The tax break change that generated the most controversy was the limitation on itemized deductions for state and local taxes to $10,000 per year. That's why in some high-tax states, upper-middle-income taxpayers could end up paying more in tax in 2018.

Save what you can

Upper-middle-income taxpayers making $125,000 should generally see savings from tax reform. But a lot will depend on the particulars, and so it's important to use your own numbers in order to avoid what could otherwise be a nasty surprise if you don't see the tax cut on your 2018 return that you'd hoped to get.

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