EYE ON THE MARKET

Tax Cuts and Jobs Act: Implications for individual taxpayers

The Tax Cuts and Jobs Act (TCJA) is projected to reduce individual tax payments by close to $1 trillion over the next 10 years. However, the impact on individual taxpayers will differ, and depends on their income and deduction characteristics. The bill entails changes to marginal tax rates, tax bracket levels, itemized deductions, the child tax credit and the Alternative Minimum Tax, and creates a new approach to pass through entity taxation. We developed this interactive website to give you some sense for how the changes might impact your combined Federal and state effective income tax rate.

Simply choose from among the taxpayer types and whether your itemized deductions are high or low. If you are a pass through entity owner or investor, you will need to choose whether the pass through entity has high or low wage intensity. The chart will then display effective tax rates under the current system and under the TCJA across a range of total income. Click on the ‘View’ links for more information on the menu selections.

Assessing the incentive to move under the TCJA

Select a taxpayer type from the drop-down menu, and the chart will plot the incentive to move from a high tax state to a state with no income taxes and low property taxes. To be clear, for many taxpayers who currently pay the Alternative Minimum Tax, the incentive to move under the TCJA is no different than it is under current tax law, since the AMT already disallows all state and local tax deductions. However, many wealthy taxpayers with more than $1mm in income skewed towards wages, salaries and ordinary unearned income do not fall into the AMT under current law and can deduct some state and local taxes. The cap on state and local tax deductions under TCJA therefore increases the incentive to move for this type of taxpayer. The charitable contribution, home value and mortgage assumptions are the same as in the high deduction case outlined above.

The charts above incorporate our interpretation of both the current tax code and the reconciled version of the TCJA. Please see below for more details on assumptions and methodology. For more customized and precise estimates of the impact of the TCJA on your income, please consult your tax advisors.

Assumptions

  • Effective tax rates are computed as total Federal, state and local income taxes paid as a percentage of gross income (including ACA taxes), where gross income includes all forms of earned and unearned income, including from tax exempt municipal bonds.
  • The effective tax rates shown in the chart reflect changes to taxation of earned and unearned income. They do not reflect changes in estate/gift tax rules or the repeal of the ACA mandate. They do not reflect the impact of tax credits, except for the child tax credit (we assume all taxpayers, except retirees, have two children: a boy named Cecil and a girl named Brunhilda). They also do not incorporate the impact of changing corporate tax rates, except as it relates to pass-through entity taxation.
  • Income levels reflect the joint incomes from a married couple filing jointly.
  • We assumed home ownership, rather than rental status. Home values were estimated as a multiple of income from data disclosed pursuant to the Home Mortgage Disclosure Act.
  • We assumed a loan to value ratio of 80% and a mortgage interest rate of 5%. While the TCJA grandfathers existing mortgages for purposes of interest deductibility, we apply the new $750k cap on interest deductibility in all scenarios shown above.
  • All retirees are assumed to receive social security benefits of $25,000, based on the average monthly benefits payable to a retired couple both receiving benefits in 2016 as per the Social Security Fact Sheet.
  • In conference, Congress added an alternative means of obtaining the full pass through deduction in situations where wage intensity is low. The alternative calculation allows pass through entities with sufficient depreciable assets to also qualify for the full deduction. For this latter circumstance, the effective tax rate outcome would be the same as in our high wage intensity case.

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