The much anticipated GOP tax bill is hitting the news (link):
Summary of changes to individual taxes:
- Massive standard deduction ($24.4k) makes itemizing irrelevant for most the US
- New 10k limit on property tax deduction (this is a big deal if you’re in a state with exceedingly high property taxes (bay area, CA))
- No deduction for state income tax payments (this one is huge)
- Therefore, it would only now make sense to itemize when: min(property tax, 10,000) + mortgage interest + charitable contributions > $24.4k.
- Only 30% of American’s itemize today, but with the above changes this number would plummet to < 5%?
- Goodbye alternative minimum tax (AMT)
Summary of changes to corporate income taxes:
- Slashing of top corporate marginal rate from 35% to 20% to make the US more competitive globally
- Reduce top marginal rate of pass-through businesses from 39.6% to 25%
- Ceasing to tax income on multinationals earned abroad (leading to hoarding of cash abroad)
Overall, I’m elated with the proposed changes. If I ruled the world, I would further:
- Eliminate interest deduction for individuals and corporations
- Eliminate property tax deduction entirely
- Lower rates to reflect increase in revenue from the two above bullets
What does this mean for normal people?
- I just ran some numbers to match the WSJ article. My updated spreadsheet matches the numbers in the article perfectly for a married filing jointly with 2 kids making $60k/year.
- Proposed bill: $472 taxes owed
- Current Law: $1,608 taxes owed
- You can play around with my spreadsheet to see how you fare. We still don’t have any details on how the EITC will look, so the new plan looks harsh on low income families but this is simply a function of not knowing more details on the new plan. The new plan will likely have some sort of EITC feature.
- Overall, here’s what my sheet says. Assumes currently takes standard deduction & will do so in future. Assumes all kids <= 16:
- Married w/ 0 kids => new plan results in lower taxes above $0k in income
- Married w/ 1 kid => new plan results in lower taxes above $40k in income
- Married w/ 2 kids => new plan results in lower taxes above $46k in income
- Married w/ 3 kids => new plan results in lower taxes above $49k in income
- Married w/ 4 kids => new plan results in lower taxes above $48k in income
- Married w/ 5 kids => new plan results in lower taxes above $47k in income
- I have seen a lot of angry commentators indicating that the plan will raise their taxes. This is simply not the case if they were to do the math. Higher income individuals will benefit more as the sheet shows.
It is difficult to be objective when considering tax reform. After all, people tend to support legislation that benefits them personally and oppose legislation that hurts them personally. My take on the proposal is that it will directly help most people and will stimulate the economy.
Cliff notes version on how to calculate taxes under the new proposal:
Deductions = max(standard deduction, itemized deduction)
Standard deduction = $24.4k if MFJ; half if single
Itemized deduction = min($10k, property tax + state income tax) + mortgage interest + charitable contributions.
Gross income – Deductions = Taxable Income.
Tax table is as follows
12%; 0-45k if single; 0-90k if married
25%; 45-200k if single; 90k-260k if married
35%; 200k-500k if single; 260k-1M if married
39.6%; >500k if single; >1M if married
Compute taxes owed using above table using taxable income. Tax credits = $300 per adult and $1.6k per child.
With $200k gross income, MFJ, and 5 kids, here’s how it would look.
Deductions = Standard of $24.4k.
Taxable income = $200k-$24.4k = $175.6k.
Taxes owed (before credits) = $90k*0.12+($175.6k-$90k)*0.25=$32.2k
Taxes owed (after credits) = Taxes owed (before credits) + # adults*$300 + # kids*$1.6k = $32.2k – 2*$0.3k – 5*$1.6k = $23.6k.
This is exactly what my spreadsheet computes as the new tax liability. As shown above, it’s really easy to compute. No AMT nonsense. Just dumb simple math.
In contrast, the current law (once updated for 2018 values), gives a tax liability of $32,832, so the new plan is $9,232 less in taxes for this particular scenario.