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Understanding Changes to the US Marginal Tax Rates

Mon, Feb 5, 2018 - 2:54pm

Many are calling the GOP’s new tax bill one of the biggest tax reforms in our nation’s recent history. However, many questions remain about the 500-page bill and how it is expected to impact taxpayers in the coming years.

In a recent article "Dramatic Tax Changes Coming Your Way - Here's What You Need to Know" by Paul Horn, there have been numerous significant changes to the current tax law, including:

  • Standard deduction has been almost doubled for single and joint filers
  • SALT deductions capped at $10,000 per filer
  • Child tax credit increased from $1,000 to $2,000
  • Pass-through entities may receive a 20% deduction on their income
  • Corporations will now pay a 21% tax rate vs. 35%
  • Marginal tax rates for both single and joint filers have been lowered across the board

One of the biggest questions up for debate is which individuals are poised to benefit the most from the new tax changes? Much is still unknown to put together the whole picture but a recent study that we at Financial Sense® Wealth Management conducted provides some clarity on this question.

Methods

For this study, our data consists of the current and projected tax liabilities (or how much in taxes an individual pays) for taxpayers at various income levels. The tax liability for each income level was found using estimates for 3 main tax deductions (including mortgage interest, property taxes and State and Local taxes) provided by the Wall Street Journal’s 2018 GOP Tax Calculator. Using the 3 estimated tax deductions for 8 different income levels and 2 different filling statuses (single, and married filing-jointly) across 4 states, we then found the resulting effective tax rate (or the amount of taxes paid divided by total income earned) under the 2017 marginal rates and the newer legislation. The final step of our research was to then calculate the percentage change in tax liability between the two tax laws (see the chart below).

California Single Tax-Payers
  Current Tax Law 2017 New Tax Law 2018
Gross Income: $100,000 $100,000
Deductions:
 Mortgage Interest $5,900 $5,900
 Property Taxes $3,700 $3,700

SALT

$7,300 $7,300
Total Deductions: $17,100 $17,100
Calculated Tax Liability -$15,451 -$14,426
Effective Tax Rate 15.45% 14.43%
% Change in Tax Liability -6.63%

Given that our study included two different tax filers (single and married-jointly), the data consists of two different sets of results (illustrated in the graphs below).


Based on the resulting data for single-filers, these were our key statistical findings…

  • In the state of NY, single-filers with gross income ranging from $50k-$100k saw their tax liability decrease by 3.5% under the new tax law; 5% in CA respectively.
  • In the state of NY, single filers earning $250k+ per year saw their tax liability increase by at least 3.6%; 6% in CA respectively.
  • In states like OH and TX, all income earners saw decreases in tax liability; a single earner making $150k per year saw the greatest reduction (about 10%) in tax liability under the new law.
  • We found that single earners across all four states making $250k+ per year benefited the least from the new marginal tax rates.

For married couples filing jointly, these were our key statistical findings:

  • In the states of NY, CA, OH and TX, joint-filers earning $300k and $350k saw their tax liabilities decrease by more than 2.6% and 3.5% respectively.
  • Across all four of the states in our study, joint-filers earning $300k+ per year benefited the most from the new marginal tax rates.

Disclosures: All estimates (including mortgage interest, property taxes, and SALT deductions estimates) have been provided by the Wall Street Journal according to gross income and corresponding state (https://www.wsj.com/graphics/republican-tax-plan-calculator/). The resulting tax liability has been calculated using the MarketWatch ‘Trump Tax Calculator’ (https://www.marketwatch.com/story/the-new-trump-tax-calculator-what-do-you-owe-2017-10-26). This information is for general guidance only and not intended to be tax advice. For your particular tax needs and situation, please consult your tax advisor.

About the Author

Associate Wealth Manager
josh [dot] nunn [at] financialsense [dot] com ()