Who will benefit from the 2018 tax law changes?

This is a question most have been asking since Trump announced massive changes to taxation as we knew it.  There's no doubt that high income earners will benefit from these changes but what about everyone else.  I keep reading/hearing/seeing that this tax reform was put in place to take money from the lower and middle class.  So let's run some numbers.  Let's look at the middle class and see how they'll fare in 2018.

Case Study #1, The Smith Family

I decided to pick a family who is typical to where we live.  Average family income in our area outside of Boston is $100,000.  This is not a real family, by the way.  The following are assumptions for purposes of this case study.

- Married Filing Joint
- 2 Dependents
- $100,000 Taxable W-2 Income
- $4,100 State Income Tax
- $7,000 Property Tax
- $10,000 Mortgage Interest
- $650 Charitable Contributions

Based on the above assumptions, here's a quick calculation of 2017 tax:

Taxable Income = $62,050 ($100,000 less itemized deductions of $21,750 less personal exemptions of $16,200)
Regular Tax = $8,371
Child Tax Credit = $2,000
Tax After Credits = $6,371

Using those same assumptions, here's how 2018 will look:

Taxable Income = $76,000 ($100,000 less standard deduction of $24,000)
Regular Tax = $8,739
Child Tax Credit = $4,000
Tax After Credits = $4,739

In 2018, the Smith Family will see tax savings of $1,632.

Case Study #2, The O'Leary Family

The O'Leary Family has the same assumptions as the Smith Family except they have 5 dependents instead of 2.  How will the loss of seven personal exemptions impact their tax situation?

2017:

Taxable Income = $49,900 ($100,000 less itemized deductions of $21,750 less personal exemptions of $28,350)
Regular Tax = $6,556
Child Tax Credit = $5,000
Tax After Credits = $1,556

Using those same assumptions, here's how 2018 will look:

Taxable Income = $76,000  ($100,000 less standard deduction of $24,000)
Regular Tax = $8,739
Child Tax Credit = $10,000
Tax After Credits = $0

It appears that the O'Leary Family will receive a refund for a portion of their Child Tax Credit that exceeds the amount of tax due.  The specifics of that calculation have not yet been released. In the above scenario, this family too will see a savings between 2017 and 2018.

Case Study #3, Mary Donahue

Okay, how about a single taxpayer with no dependents?

- Single
- 0 Dependents
- $40,000 Taxable W-2 Income
- Itemized Deductions total less than Standard Deduction

2017:

Taxable Income = $29,600 ($40,000 less itemized deductions of $6,350 less personal exemptions of $4,050)
Regular Tax = $3,978

Using those same assumptions, here's how 2018 will look:

Taxable Income = $28,000  ($40,000 less standard deduction of $12,000)
Regular Tax = $3,170

In 2018, Mary will have a tax savings of $808.

Case Study #4, The Sullivan Family  

Maybe the upper-middle class will suffer?

- Married Filing Joint
- 3 Dependents
- $300,000 Taxable W-2 Income
- $14,000 State Income Tax
- $8,500 Property Tax
- $10,000 Mortgage Interest
- $1,500 Charitable Contributions

2017:

Taxable Income = $245,750 ($300,000 less itemized deductions of $34,000 less personal exemptions of $20,250)
Regular Tax = $56,315
Child Tax Credit = $0

Using those same assumptions, here's how 2018 will look:

Taxable Income = $276,000  ($300,000 less standard deduction of $24,000)
Regular Tax = $54,315
Child Tax Credit = $4,000

This taxpayer will owe Alternative Minimum Tax (aka Alt Min) for 2017.  I have not yet seen the 2018 calculations for Alt Min (add it to the list of items the IRS needs to update) but that tax will be reduced for this taxpayer.

All in all, the Sullivan Family will see a tax savings for 2018.

Takeaways

Most taxpayers will receive a benefit next year.  There will be certain pockets of taxpayers who somehow lose but it's clear that tax cuts were meant to be spread across the board.  I have read that the Earned Income Credit going forward was not adjusted in a manner to reflect true inflation, which will result in a reduced credit.  I do not know if that statement is fact or speculation though.

Several additional taxes which mainly impact high income taxpayers will still be around in 2018.  I am not a fan of Alternative Minimum Tax as it hadn't been properly updated for inflation over the years and more and more middle class taxpayers fell victim to it.  I was a bit surprised to learn it had been on the chopping block.  (Well, I shouldn't have been surprised.)  It somehow survived and has supposedly been adjusted to take into account inflation.  We shall see.  Interestingly, the 3.8% Net Investment Income Tax, which originated with Obamacare, is still in place for 2018, as is the .9% Medicare Tax.

Where will the funds come from to make up for these tax cuts?  That's the big question floating around these days.  There is serious speculation that it will come from cuts to Medicare.  It's difficult to be happy with a bigger refund knowing there could be a negative impact to others.

There is concern of unintended negative consequences in the wake of these tax changes.  Charitable organizations fear they may see a decline in donations as more people succumb to the higher standard deduction and no longer itemized their deductions.  Some think those who live in high income states, such as California or New York will move.  That one seems a bit far-fetched to me but who knows.  Will home purchases decrease now that fewer taxpayers are itemizing deductions?  And what will happen to health insurance premiums when the health insurance penalty goes away and individuals drop their health insurance policies?

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Edited to add that in the above examples, it is assumed that all dependents are under the age of 17.


* This information should not be used as tax advice.  Please consult your tax advisor with questions specific to your tax situation.