Over the past year on “Money Matters” (9-11 a.m. Sundays on News 95.5 and AM 750 WSB) we have spent a great deal of time discussing the prospect of tax reform. Would it pass? What would it mean for individuals and families in America? Since the recent passing of the Tax Cuts and Jobs Act, we have answered hundreds of calls and emails, all essentially asking the same thing: Will my taxes go up, down or stay flat?
The short answer is that it depends. But from my research and using a new streamlined GOP tax bill calculator, I’ve helped many families try to answer this question. The calculator isn’t perfect nor a substitute to the robust tax software that will be ready in 2018, but from my guise, more than 90 percent of Americans are likely to see their taxes go DOWN for the 2018 tax year.
Here are what I believe will be the 10 most significant changes to our tax code and most likely to affect you in the coming year:
1. The federal tax brackets are expanding from six to seven. — This is a big part of the change. The new brackets are slightly more precise than before, with the lowest rate remaining at 10 percent and the highest rate capped at 37 percent, down from 39.6 percent. Note that these brackets are set to revert to the pre-2018 levels after the year 2025.
2. The standard deduction DOUBLES to $12,000 and $24,000. — This part of the new code carries significant weight in helping middle-class families reduce their overall federal taxes. If you spent time and money on tax prep in the past, itemizing a total of $14,000, that may no longer be necessary, as the standard deduction for a married couple is a whopping $24,000.
3. Mortgage deduction changes. — Pretty simple. The maximum mortgage level you can use for mortgage interest deductions will come down from $1 million to $750,000. This is a big deal that this provision was retained … as the vast majority of Americans have mortgage balances below $750,000. The $1 million level is grandfathered in for loans prior to Dec. 15, 2017.
4. SALT, the state and local tax deduction, is now capped at $10,000. — This is arguably the biggest single change in the new tax plan. It takes away dramatic deductions for high wage earners, particularly in high-income tax states such as California, New Jersey and New York. However, from most of our calculations, high earners will still receive a small tax cut (in percentage terms) as the top income bracket has now been reduced from 39.6 percent to 37 percent. This bracket reduction (for some taxpayers) will make up for the loss of the SALT deduction.
5. Child tax credit massively increased. — This is being raised from $1,000 to $2,000 per child, and the number of people who will be able to use this will go up dramatically, up to $200,000 if you are single and $400,000 for married folks. Amazingly, $1,400 of this is refundable — meaning that if you don’t owe taxes, you can get a check back from the government for this refundable credit.
6. Obamacare individual mandate penalty removed (but not Obama-era increase in Medicare taxes). — No longer are you required to buy health insurance, and no longer will you have to pay a penalty if you DON’T buy coverage. This is a 2019 provision. The average penalty for not carrying insurance had been $470 a year.
7. The AMT is retained, but with higher exemption amounts. — This essentially means that fewer Americans will get hit with the hated alternative minimum tax. For example, under the old law a married couple filing jointly had an $86,200 exemption to protect against the AMT. Now that income level exemption jumps to $109,400.
8. Charitable deduction limit upped from 50 percent of adjusted gross income to 60 percent. – This is pretty straightforward. If you make $500,000 per year, you’re now able to deduct $300,000 in charitable contributions in a given year (60 percent) vs. $250,000 (50 percent) from last year. And if you give MORE than 60 percent, the additional amount can be carried forward for up to five years.
9. There’s a new inflation measure. — The code moves from CPI-U, or the consumer price index-urban, to chained CPI-U, or chain-linked CPI-U. Chain-linked CPI-U grows at a slower rate than standard CPI-U. Moving to chain-linked CPI will slow the rate at which the tax bracket starting points will rise, resulting in more people jumping to higher tax brackets in the future, that would have been the case under the old way (plain CPI-U). It’s essentially another way for the government to increase tax revenue over time.
10. The capital gains tax remains largely the same: 0 percent, 15 percent, 20 percent. The act generally retains present-law maximum rates on net capital gains and qualified dividends. It retains the breakpoints that exist under pre-act law but indexes them for inflation using C-CPI-U (chained CPI) in tax years after Dec. 31, 2017.
So now let’s apply all that to some relatable examples. For this exercise, let’s assume the following for the individuals/families profiled in each example:
1. Home value — Equal to 1.5X to 3X of their annual income, and mortgage balance was 80 percent of that value. Due to the new tax bill, mortgage interest deductions are capped at a loan balance of $750,000.
2. Property taxes were 1.8 percent of the home’s value — this helps the calculator determine whether you would/would not lose some of your property tax deduction.
3. SALT — The tax calculator we are using automatically calculates your state income tax deduction. You add in your property taxes, and the calculator automatically caps your total SALT at $10,000. We did not assume any other itemized deductions on top of this.
Under the new tax bill (living in the state of Georgia):
— Jim, single, no kids, makes $50,000. Taxes go down by about $200 (a 5 percent reduction in federal taxes).
— Beth, a single mother making $50,000 with two kids. Her taxes go down by 73 percent. From $1,366 to $370.
— Chris and Jennifer, married with two kids making a combined income of $150,000. Their taxes will go down by about 8 percent, or $1,200.
— Homeowners Robert and Lindsay, married with no kids making an income of $150,000. Their taxes actually go up about $800.
— Renters Robert and Lindsay (the same couple from above, but renting instead of paying a mortgage), their taxes would actually go down relative to what they paid last year by about $3,800. This is primarily due to their standard deduction going up and they were not previously itemizing. But renters Robert and Lindsay still actually pay more than homeowners Robert and Lindsay.
— Bryan, a single guy with no kids making $500,000, gets hit hard. His taxes increase by about $13,000.
— Bryan gets hitched and has two kids, and his taxes actually go down. The tax changes seem to reward those filing jointly and who have children under the age of 17.
— Don and Susan are big earners, making $2 million a year. It depends on how much they deduct, but generally this group should see their taxes stay flat or go down slightly.
For a better assessment of how your taxes might change under the new law, check out TaxPlanCalculator.com.
Bottom Line: About 90 percent of you will get a tax cut in 2018. Most of the remaining group will see little change, and for a small and enraged portion of the population — the lower end of the upper 1 percent of income earners in America — taxes may actually go up, particularly if you live in a high tax state such as California or New York.
Contrary to what you may be hearing from the media, this tax bill could be very positive for economic growth. For you. For companies. For small business owners. When it comes to the economy — all of us will benefit as the overall tax bill will add more than $200 billion in economic stimulus to U.S. gross domestic product in 2018 alone. This should be a good thing for job creation, better for wages, more small business optimism, and entrepreneurship. The jury is still out on this, but this tax bill should give the economy a significant tailwind for the next several years.
Wes Moss has been the host of “Money Matters” on News 95.5 and AM 750 WSB in Atlanta for more than seven years now, and he does a live show from 9-11 a.m. Sundays. He is the chief investment strategist for Atlanta-based Capital Investment Advisors. For more information, go to wesmoss.com.
Disclosure: This information is provided to you as a resource for informational purposes only. This information is not intended to, and should not, form a primary basis for any investment or tax planning decision that you may make. Always consult your own legal, tax or investment adviser before making any investment/tax/estate/financial planning considerations or decisions.