The Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act of 2017 reduced federal income tax liability for some, but not all Americans. Wealthy residents of California, New York and other high-tax states could face a higher tax bill, when they file their 2018 return.1

Effects on 2018 Tax Filings:

  • Cuts tax rates on ordinary income
  • Increases the standard deduction
  • Doubles federal estate and gift tax exemptions
  • Caps deductions for state and local taxes (SALT)
    • While once open-ended, the SALT deduction is now limited to $10,000 ($5,000 if married, filing separately).2

How Does TCJA 2017 Affect Tax Deductions?

State and local taxes are higher in some locations and, in the past, this has represented a significant deduction for high-income filers. For example, in California the tax for the highest income bracket is 13.3%. In Hawaii, it is 11%, and residents of Oregon & Minnesota pay nearly 10%. To help offset their tax liability going forward, these filers could engage strategies ranging from relocating to another state to transferring wealth to heirs or trusts.3

Itemized Deductions May Carry Additional Taxation in 2018

The Government Accountability Office (GAO) recently reported that those who itemize deductions may owe additional taxes for 2018. Specifically, filers who are:4

  • Married
  • Itemize deductions
  • Have two dependents under age 17
  • Earn annual income in excess of $180,000
  • Have non-wage income (dividends, interest or capital gains) of $20,000 or more

More than 4.5 million taxpayers may owe additional taxes in April, depending on adjustments to their withholding amounts.5  Tax filers with many dependents or multiple itemized deductions are likely to face higher taxes, depending on the benefit of family tax credits.However, it’s not all bad news. Some taxpayers could find increased standard deductions outweigh the elimination of exemptions and may even provide tax savings.

How to Calculate Tax Withholdings

The IRS recommends taxpayers use the Withholding Calculator at the IRS website for a “paycheck checkup.” Simply enter the estimated value of your 2018 income, number of dependents, your itemized deductions and the amount of federal tax withheld from your paychecks to assess whether your current withholdings will miss, meet or exceed your anticipated tax bill. The results can help you adjust your income tax withholding. As with any financial calculator, the results received are only as accurate as the information entered.6

A Snapshot on National Debt

The national debt topped out at $779 billion in fiscal year 2018, representing a 17 percent increase over 2017. In a recent interview, former Federal Reserve Chair Janet Yellen stated that she expects this situation to worsen in the future. Her forecast is based on the number of baby boomers retiring; she believes that a larger number of retirees will strain government retirement and health care programs . She also noted that the current tariff war could impact economic growth.7

Since lawmakers cut the corporate tax rate to 21%, 2018’s corporate tax collections fell 31% in the fiscal year ending Sept. 30. Overall, tax receipts shrank to 16.5% of GDP, from 17.2% the prior year.8 For tax payers, the effects of the new act will vary based on how they file their taxes.

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Works Cited:

1. Mitchell A. Drossman. U.S. Trust. Sept. 6, 2018. “The State of Taxes in America” https://www.ustrust.com/articles/the-state-of-taxes-in-america.html. Accessed Oct. 31, 2018.
2, 3, 5. Ibid.
4. Ray Martin. CBS News. Sept. 10, 2018. “Millions of taxpayers could wind up owing for 2018.” https://www.cbsnews.com/news/millions-of-taxpayers-could-wind-up-owing-for-2018/. Accessed Oct. 31, 2018.
6. IRS. Oct. 2, 2018. “IRS Withholding Calculator.” https://www.irs.gov/individuals/irs-withholding-calculator. Accessed Oct. 31, 2018.
7. Fred Imbert. CNBC. Oct. 30, 2018. “Yellen says rising deficit is unsustainable: ‘If I had a magic wand, I would raise taxes’.” https://www.cnbc.com/2018/10/30/yellen-says-rising-us-deficit-unsustainable-if-i-had-a-magic-wand-i-would-raise-taxes.html. Accessed Oct. 31, 2018.
8. Scott Horsley. NPR. Oct. 16, 2018. “Federal Deficit Jumps 17 Percent As Tax Cuts Eat Into Government Revenue.” https://www.npr.org/2018/10/16/657790901/federal-deficit-jumps-17-percent-as-tax-cuts-eat-into-government-revenue. Accessed Oct. 31, 2018.
9. Smith & Howard. Mar. 2018. “Federal Deficit Jumps 17 Percent As Tax Cuts Eat Into Government Revenue.” https://www.smith-howard.com/2018-tax-cuts-jobs-act-overview/. Access Nov. 30, 2018.