Earlier today, the GOP released its proposed tax reform plan, dubbed the Tax Cuts and Jobs Act. There has already been a massive amount of news generated around the proposed changes, and specifically how it will impact individual taxpayers. Without debating the political ramifications of the bill, below are a few of my preliminary thoughts.
I’ve also built a simple comparison model that allows you to input specific assumptions to see how the bill as proposed might impact your tax bill. I’m not a tax expert, and the details are guaranteed to change through negotiations, so no representations as to accuracy are being made or implied.
Highlights of the Proposal
There is a lot to process in the bill and one’s specific circumstances will have a major impact on whether this bill will benefit or harm them economically. Here are the highlights of the proposal:
- The current seven tax brackets are being reduced to three, with corresponding changes in income levels and tax rates.
- The top 39.6% rate is preserved, but the threshold at which it applies has been increased. In the case of married filing jointly, the threshold nearly doubles.
- The standard deduction nearly doubles, but personal exemptions will be eliminated.
- Itemized deductions for mortgage interest will be reduced and state/local tax deductions will be eliminated. Property taxes may be deducted up to $10,000.
- Tax deductibility of 401k contributions will remain unchanged.
- AMT and estate taxes will be eliminated.
- Business tax rate will drop from 35% to 20%.
My Initial Observations
Income Tax Brackets
Changing income tax bracket levels and rates means one’s savings are highly dependent on income levels. While my simple analysis shows that all income levels will have some tax savings (assumes just the standard deduction for comparability), it varies widely.
Note: Assumes standard deduction only for comparability.
One other interesting observation: high income married couples are much better off than their single pals. While both are paying the same rate, it doesn’t kick in for the married couples until $1m of income vs. $500k for individuals. The most an individual would save on income taxes is about $5,000 (top bracket moving from $418k to $500k), while a married couple could save up to $30,000 (top bracket moving from $470k to $1 million)
State and Local Taxes
The elimination/reduction of state and local taxes will disproportionately impact high income earners in high tax states. This will partially be offset by the increased standard deduction, but some individuals will still see higher taxes under the proposal. For married couples, the much higher top threshold appears to shield enough income to largely offset the loss of this deduction.
Tax Savings Scenarios – Single Filer
Tax Savings Scenarios – Married Filing Jointly
Increase in the Standard Deduction
Increasing the standard deduction will substantially raise the threshold to justify itemizing deductions. This will disproportionately benefit people in low tax and low cost of living parts of the country. They will be receiving additional tax savings they otherwise wouldn’t have.
This bill is going to change many, many more times before reaching it’s final form. You should still be informed as to how it could impact your finances.
Download my calculation model to get a sense of what it may mean for you. My estimated savings was about $4,000, resulting mainly because we’ll switch from itemizing currently to a (higher) standard deduction. The additional tax savings would increase my pre-tax savings rate by 2.4% as well..
How does your financial situation change as a result of the currently proposed plan? What other interesting observations do you have about the bill? Note for comments: this isn’t a political blog, so any comments outside of the financial implications of the proposed tax reform won’t be accepted.
John started Present Value Finance in 2017 to share his experiences and insights on personal finance to help people make better decisions and take control of their financial lives.
He achieved financial independence in 2016 by walking away from the high stress world of corporate finance to focus on his family. He’s a husband, father, family CFO, and all around finance geek.