While much remains to be hammered out and confusion abounds relative to some of the 2018 tax law changes, especially with regard to small businesses, the changes for the Average Joe are fairly clear. Let’s agree on who is an Average Joe. If you receive an average W2, you have some average kids and you live in an average house with your average spouse (I see myself getting into a lot of trouble here.), you’re probably an Average Joe. Here’s a look at some of the significant tax law changes for you.
State and local tax (SALT) limitation – Under the new tax law, there is a $10,000 limit to the amount state and local tax that can be deducted if you are itemizing, and as we noted above, this is the largest category of itemized deductions. This includes state income taxes, real estate taxes and auto excise tax. If you live in a state with a state income tax or an area with high property taxes, it’s very easy for the Average Joe to exceed $10,000. There’s no question that this aspect of the new tax law disproportionately affects our friends in states like CA, NY and NJ versus our friends in states like NH, where there is no personal income tax (yes, yes, my fellow NH citizens, we have real estate taxes and we think they are high, but truly, they are nothing like parts of CA, NY and NJ. Live free or die.). It is worth noting that some states are up in arms about this provision and working on some crafty tricks to get around it, and the IRS is hopping mad and making threats. Good stuff, stay tuned! However, at this point, the impact of the $10k SALT limitation is that even more Average Joes will be taking the standard deduction and not getting a federal tax break for paying high state income taxes and property taxes, and that’s making them feel….well, salty.
No more personal exemptions - The new tax law eliminates personal exemptions entirely. Under 2017 tax law, the personal exemption amount was $4,050 per taxpayer and dependent on the return. For the average family of four, that was a $16,200 reduction of taxable income. There are certainly other provisions of the new tax law that more than make up for the elimination of personal exemptions, but it depends who you are. Larger families obviously lose more here, but depending on the ages of the dependent children, they could do fabulously better overall due to some other tax law changes related to children.
The kiddos – The Child Tax Credit is doubled from $1,000 per child to $2,000 per child under the new tax law, but even more astounding is that the modified adjusted gross income level at which the Child Tax Credit begins phasing out increased from $110,000 (married filing joint taxpayers) to $400,000! This makes a whole lot of Above-Average Joes eligible to claim the Child Tax Credit, which is now Huge! So as long as your child is under age 17 at the end of the year, you are far better off with a $2,000 tax credit, which is a direct reduction of your tax bill, versus the $4,050 exemption, which was merely a reduction of your taxable income.
If your children are aged 17 or older at the end of the year, you are really mad because a lot of Average Joes, who made nowhere near the new income limitation for the Child Tax Credit, could not previously claim the credit due to income limitations, and now their kids are too old to claim it. But wait, it’s not a total loss.
Non-child Dependent Credit – The new tax law provides for a $500 tax credit which can be claimed for children aged 17-24 who still qualify as dependents, including most college students. It also can be claimed for other dependent family members, including elderly parents. In the case of a lot of Average Joes, this credit does not fully make up for the loss of personal exemptions, but it softens the blow. Your dependent college student’s personal exemption in the 25% tax bracket was worth $1,012.50 tax dollars to you ($4,050 exemption x 25%) versus the new $500 credit.
In addition to these specific provisions affecting the Average Joe, almost all Joes will enjoy a lower tax rate. How much your overall tax burden will change precisely will depend on your particular mix of income, location, local taxes, family members and choice of accountant! I encourage you to check your withholding and do an income tax projection midway through the year. With all the variables we’ve discussed, don’t count on the standard withholding tables to get it absolutely right. The IRS even has a 2018 withholding calculator tool online to make it easy on you. After that, stay in touch, hang on, it’s going to be a wild tax year, and have a better than average summer!