tax reform

How Much Less We’ll Pay After Tax Reform

I just filed our 2017 tax return and thought it might be interesting to see how tax reform will change our liability.

The “Tax Cuts and Jobs Act” was signed into law December 22, 2017 and first applies to the 2018 tax year. You can read PWC’s summary of the changes to personal income taxes here.

2017 Taxes

We both work, have no children and file a joint return. We own a small home, but don’t spend enough to itemize our deductions.

Tax reform doesn’t take effect until the 2018 tax year, so for 2017 we’re under the old rule.

Our adjusted gross income (“AGI”) was $161,134.

Our relatively high-earning corporate jobs make up the bulk of our AGI. For 2017, we maxed out our 401k’s at work, which reduced our taxable wages. We also had about $3,000 in investment earnings for the year.

After taking the standard deduction and two personal exemptions, our taxable income was $140,334.

Our federal income tax for the year was $26,461.

2017 Taxes under the New Law

Just for kicks, let’s see what our tax would have been if tax reform took effect in 2017.

Our AGI would remain the same, $161,134.

The standard deduction is going up to $24,000 for married filing jointly and personal exemptions are going away. The higher standard deductions mean less people will itemize going forward.

Our taxable income after tax reform would be $137,134

Our federal income tax for the year would be $21,978.

We’ll pay $4,483 less in income taxes thanks to Tax Reform. $800 of that is driven by the higher standard deduction with the rest coming via reduced tax rates. Our marginal tax rate will be 22% going forward compared to 25% now.

I’m all for paying less, but…

Are we really the appropriate target for tax cuts? Our gross compensation (including employer paid health insurance, etc.) was over $200,000 in 2017. As kid-less, healthy, educated adults this should be plenty to live a comfortable life on, even with a $26,000 income tax bill.

Our taxes will be 17% less. That’s a lot. $4,483 is a lot of money for us to save. The pro Tax Reform economists assume we’ll plug that savings right back into the economy via spending. We won’t. We’re going to save it. I know that’s anecdotal, but I’m a little wary of government revenue cuts that promise to fund themselves by stimulating economic growth.

The U.S. National debt is over $21 Trillion

That’s trillion with a T.

The debt per taxpayer is nearly $175,000.

The government operates at a deficit every year, meaning the national debt will continue growing. If we already aren’t paying enough taxes to cover government expenses, is it wise to reduce them? If you personally were spending more than you made, would you actively make less money and spend more? That’s what the government is doing…

I appreciate that the national debt is more nuanced and not so easily comparable to personal debt, but also, is that true?

What am I Going to do about It?

You can make gifts to the federal government to reduce the public debt. This link will show you how if you’re so inclined.

We’re not going to do that though. I realize that complaining about Tax Reform while refusing to take an easy step to remedy the affects makes me a hypocrite.  I can live with that. I’m selfish. So is all of America. It’s a classic example of the tragedy of commons: our tiny $4,500/year doesn’t make a dent in the $21 trillion debt, so we won’t do anything. And if everyone individually decides they don’t make a difference, then it ends up actually making one.

Takeaway

I’m not really sure if there is one?

Reducing taxes or increasing benefits will always be a popular political move. The current individual tax climate is very adversarial: no one wants to pay more than their neighbor. A few, maybe, will say they want to pay their fair share, but really they just mean they won’t cheat on their tax return.

Government finances deal in big data. A tax bill never considers people individually, it just makes broad statements about the “average” taxpayer, or the “rich” vs the “lower-income”. For that reason I think it’s interesting to look at the changes on a personal level.

$4,483. That’s how much less we would have paid in taxes this year. All the while the national debt clock ticks onward and upward…

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