2018 Tax Changes Explained (Tax Rates & AMT)

Under the Senate’s proposed new tax law, which is expected to go into effect for all taxable income (line 43 of current tax returns), that you earn Jan 1, 2018 and after, most married taxpayers with a combined TAXABLE income between $45,000 and $250,000 would receive an approximate 13% – 15% reduction in income tax vs. tax that would have been due under the old laws (see Table 1 below).

For households with taxable income less than approximately $75,000, the savings will be readily apparent, especially for those without mortgages or state income tax, and all others who typically do not itemize tax deductions. However, households with taxable income over approximately $75,000 will continue to be subject to an additional tax: AMT (alternative minimum tax), which will significantly reduce income tax savings outlined in Table 1 below. Note that income tax and AMT are separate taxes, calculated differently and separately, on earned and unearned income.

Due to its complexity and uncertainty of how AMT will be calculated under the new tax laws, AMT, although expected to significantly increase taxes on taxable income over $75,000, is not figured into the amounts listed in Table 1.

AMT is an additional tax which is added to income tax when income exceeds a threshold level. As well, when calculating AMT, itemized deductions are often disregarded or significantly reduced. The proposed new tax laws have not raised the AMT threshold very much, therefore AMT will likely continue to over-tax upper middle class households; although taxable income at or above $75,000 is subject to AMT, the proposed AMT threshold is expected to remain heavily skewed against household incomes between approximately $190,000 – $480,000.

Although the dirty details of the new AMT have not been revealed, based on what information has been released to-date (recently leaked), the new AMT will continue to disproportionately over-tax high-level professionals with earnings in this range. Professionals such as engineers and scientists, computer programmers and accountants (with the exception of Wall Street, insurance company and banking slugs), who earn salaries between $190,000 and $480,000 are the unrecognized backbone of the US economy; however, the tax system (both new and old) treats these well-educated, hard working men and women, who are integral to wealth-generation for all of us, as nothing more than tax-load-bearing pack mules.

The proposed new tax laws will increase the child tax credit from $1,000 to $2,000, but will eliminate the $4,000+ dependent deduction. A deduction of $4,000, for most taxpayers, is the same as a credit of $1,000; therefore, for households with approximately $75,000 of taxable income or less who in the past were eligible to claim the credit, nothing changes – it is a “wash” so to speak. However, if under the new laws income thresholds for child tax credits remain relatively unchanged, households with taxable income above approximately $75K will lose out big time.

Why? Because you will lose the tax credit AND the dependency deduction. In the past, due to your income being too high, you may not have received a child tax credit or your credit may have been insignificant; however, under the old law higher income did not not limit your ability to claim a child or relative dependency deduction. Under the new law, there are only credits (no dependent deduction) and if credits remain income dependent, bang, gotcha! You will pay approximately $1,000 more in tax for each child or other dependent that you claimed in prior years. Now there is not only a marriage penalty, but a child penalty (if your income is high enough, which includes most educated technical workers and professionals).

So, what about married households with children and taxable income under $75,000? Unless there is something in the final tax bill for which we are currently unaware (which I would not doubt), married households with $45,000 to $75,000 of taxable income will hit the tax savings trifecta! You will get the full $2,000/child tax credit (or a high % of the full credit) and you will benefit from the new, very high, $24,000 standard deduction. When a couple’s combined mortgage interest, property taxes, PMI and state income tax have not been high enough in prior years to itemize (i.e. you typically claim a standard deduction), that couple would have taken the much lower standard deduction. Under the new law renting is not a tax negative, so rent on!

Many households with income between $45,000 and $100,000 who typically DO itemize are expected to enjoy a tax decrease; however, the decrease will not be as significant as those with similar incomes who did not itemize in the past. Bottom line: owning a middle to upper-middle class home will very likely have $0 positive impact on your income tax for income earned 1/1/18 and after. This is actually a fair deal for non-homeowners; in the past many renters paid more tax than non-renters, which, in my humble opinion, was unfair. Why should a renter, who is losing equity by not owning, pay more income tax because he or she cannot itemize mortgage interest, PMI and property taxes? There is no reasonable “why” logic here, silly, this is tax law!

If you earn income from investments and do not have to work to live, you will continue to pay significantly less tax than those of us who work to create all of the good and services that you gobble up every day! Congratulations, you are sucking us dry and paying less tax for doing so. If you earned the money that you have invested, from which you are reaping such rewards, congratulations, you deserve it! If you inherited all of your income and you don’t work, don’t want to contribute, etc., well, you are a worthless loser regardless of what your friends tell you. But, hey, the system still loves you, so what does it matter what the masses think of you, right!

(Table 1) Married Taxpayers Filing Joint Tax Returns for tax year 2017 (old tax laws) vs 2018 (new tax laws). Due to additional tax (Alternative Minimum Tax) which will be added to income tax for couples with TAXABLE income of $75,000 or more, the tax savings listed below will likely be far less, and significantly less for households with taxable income over $175,000.

 

Note also that single persons with income under approximately $480,000 will enjoy significantly greater tax savings than their married counterparts (i.e. the new tax laws do not eliminate the archaic marriage penalty). Yes, you will save 10’s of thousands of dollars in your lifetime, possibly hundreds of thousands, simply by living with your significant other vs getting married. Yes, this is fact for almost everyone (but for the very wealthy).

Although under the new tax laws, some high income ranges are slated to enjoy an 18% – 20% income tax reduction (i.e. around $320,000 in taxable income seems to be the sweet spot), the additional AMT tax due will significantly or completely erode these higher earner’s tax savings. Remember, income tax and AMT are two separate taxes, calculate separately and differently, and no clear data has been released to-date regarding the AMT calculation details, but that AMT will remain and that the income thresholds to pay the additional tax are ridiculously low and unfair.

 

Table 1: Married Filing Jointly (2018)
Taxable
Income
Current
Rates
 Current
Tax Due
(Pre-AMT)
New
Rates
 New
Tax Due
(Pre-AMT)
Difference
() = Less Tax Due Under New Rates
% Tax
Reduction
         19,050 10.0%        1,905.00 10.0%        1,905.00                           – 0.0%
         25,000 15.0%        2,797.50 12.0%        2,619.00                    (179) -6.4%
         35,000 15.0%        4,297.50 12.0%        3,819.00                    (479) -11.1%
         45,000 15.0%        5,797.50 12.0%        5,019.00                    (779) -13.4%
         55,000 15.0%        7,297.50 12.0%        6,219.00                (1,079) -14.8%
         65,000 15.0%        8,797.50 12.0%        7,419.00                (1,379) -15.7%
         77,400 15.0%      10,657.50 12.0%        8,907.00                (1,751) -16.4%
         80,000 25.0%      11,307.50 22.0%        9,479.00                (1,829) -16.2%
         90,000 25.0%      13,807.50 22.0%      11,679.00                (2,129) -15.4%
      100,000 25.0%      16,307.50 22.0%      13,879.00                (2,429) -14.9%
      110,000 25.0%      18,807.50 22.0%      16,079.00                (2,729) -14.5%
      120,000 25.0%      21,307.50 22.0%      18,279.00                (3,029) -14.2%
      130,000 25.0%      23,807.50 22.0%      20,479.00                (3,329) -14.0%
      140,000 25.0%      26,307.50 22.0%      22,679.00                (3,629) -13.8%
      153,000 28.0%      29,947.50 24.0%      25,799.00                (4,149) -13.9%
      170,000 28.0%      34,707.50 24.0%      29,879.00                (4,829) -13.9%
      180,000 28.0%      37,507.50 24.0%      32,279.00                (5,229) -13.9%
      190,000 28.0%      40,307.50 24.0%      34,679.00                (5,629) -14.0%
      200,000 28.0%      43,107.50 24.0%      37,079.00                (6,029) -14.0%
      210,000 28.0%      45,907.50 24.0%      39,479.00                (6,429) -14.0%
      220,000 28.0%      48,707.50 24.0%      41,879.00                (6,829) -14.0%
      230,000 28.0%      51,507.50 24.0%      44,279.00                (7,229) -14.0%
      233,000 28.0%      52,347.50 24.0%      44,999.00                (7,349) -14.0%
      240,000 35.0%      54,797.50 24.0%      46,679.00                (8,119) -14.8%
      250,000 35.0%      58,297.50 24.0%      49,079.00                (9,219) -15.8%
      260,000 35.0%      61,797.50 24.0%      51,479.00              (10,319) -16.7%
      270,000 35.0%      65,297.50 24.0%      53,879.00              (11,419) -17.5%
      280,000 35.0%      68,797.50 24.0%      56,279.00              (12,519) -18.2%
      290,000 35.0%      72,297.50 24.0%      58,679.00              (13,619) -18.8%
      300,000 35.0%      75,797.50 24.0%      61,079.00              (14,719) -19.4%
      310,000 35.0%      79,297.50 24.0%      63,479.00              (15,819) -19.9%
      320,000 35.0%      82,797.50 24.0%      65,879.00              (16,919) -20.4%
      330,000 35.0%      86,297.50 32.0%      69,079.00              (17,219) -20.0%
      340,000 35.0%      89,797.50 32.0%      72,279.00              (17,519) -19.5%
      350,000 35.0%      93,297.50 32.0%      75,479.00              (17,819) -19.1%
      360,000 35.0%      96,797.50 32.0%      78,679.00              (18,119) -18.7%
      370,000 35.0%    100,297.50 32.0%      81,879.00              (18,419) -18.4%
      380,000 35.0%    103,797.50 32.0%      85,079.00              (18,719) -18.0%
      390,000 35.0%    107,297.50 32.0%      88,279.00              (19,019) -17.7%
      400,000 35.0%    110,797.50 32.0%      91,479.00              (19,319) -17.4%
      415,000 35.0%    116,047.50 35.0%      96,729.00              (19,319) -16.6%
      417,000 35.0%    116,747.50 35.0%      97,429.00              (19,319) -16.5%
      430,000 35.0%    121,297.50 35.0%    101,979.00              (19,319) -15.9%
      440,000 35.0%    124,797.50 35.0%    105,479.00              (19,319) -15.5%
      450,000 35.0%    128,297.50 35.0%    108,979.00              (19,319) -15.1%
      460,000 35.0%    131,797.50 35.0%    112,479.00              (19,319) -14.7%
      468,000 35.0%    134,597.50 35.0%    115,279.00              (19,319) -14.4%
      480,000 39.6%    139,349.50 35.0%    119,479.00              (19,871) -14.3%
      490,000 39.6%    143,309.50 35.0%    122,979.00              (20,331) -14.2%
      500,000 39.6%    147,269.50 35.0%    126,479.00              (20,791) -14.1%
      510,000 39.6%    151,229.50 35.0%    129,979.00              (21,251) -14.1%
      520,000 39.6%    155,189.50 35.0%    133,479.00              (21,711) -14.0%
      530,000 39.6%    159,149.50 35.0%    136,979.00              (22,171) -13.9%
      540,000 39.6%    163,109.50 35.0%    140,479.00              (22,631) -13.9%
      550,000 39.6%    167,069.50 35.0%    143,979.00              (23,091) -13.8%
      560,000 39.6%    171,029.50 35.0%    147,479.00              (23,551) -13.8%
      570,000 39.6%    174,989.50 35.0%    150,979.00              (24,011) -13.7%
      580,000 39.6%    178,949.50 35.0%    154,479.00              (24,471) -13.7%
      590,000 39.6%    182,909.50 35.0%    157,979.00              (24,931) -13.6%
      600,000 39.6%    186,869.50 35.0%    161,479.00              (25,391) -13.6%
      610,000 39.6%    190,829.50 35.0%    164,979.00              (25,851) -13.5%
      620,000 39.6%    194,789.50 35.0%    168,479.00              (26,311) -13.5%
      630,000 39.6%    198,749.50 35.0%    171,979.00              (26,771) -13.5%
      640,000 39.6%    202,709.50 35.0%    175,479.00              (27,231) -13.4%
      650,000 39.6%    206,669.50 35.0%    178,979.00              (27,691) -13.4%
      660,000 39.6%    210,629.50 35.0%    182,479.00              (28,151) -13.4%
      670,000 39.6%    214,589.50 35.0%    185,979.00              (28,611) -13.3%
      680,000 39.6%    218,549.50 35.0%    189,479.00              (29,071) -13.3%
      690,000 39.6%    222,509.50 35.0%    192,979.00              (29,531) -13.3%
      700,000 39.6%    226,469.50 35.0%    196,479.00              (29,991) -13.2%
      710,000 39.6%    230,429.50 35.0%    199,979.00              (30,451) -13.2%
      720,000 39.6%    234,389.50 35.0%    203,479.00              (30,911) -13.2%
      730,000 39.6%    238,349.50 35.0%    206,979.00              (31,371) -13.2%
      740,000 39.6%    242,309.50 35.0%    210,479.00              (31,831) -13.1%
      750,000 39.6%    246,269.50 35.0%    213,979.00              (32,291) -13.1%
      760,000 39.6%    250,229.50 35.0%    217,479.00              (32,751) -13.1%
      770,000 39.6%    254,189.50 35.0%    220,979.00              (33,211) -13.1%
      780,000 39.6%    258,149.50 35.0%    224,479.00              (33,671) -13.0%
      790,000 39.6%    262,109.50 35.0%    227,979.00              (34,131) -13.0%
      800,000 39.6%    266,069.50 35.0%    231,479.00              (34,591) -13.0%
      810,000 39.6%    270,029.50 35.0%    234,979.00              (35,051) -13.0%
      820,000 39.6%    273,989.50 35.0%    238,479.00              (35,511) -13.0%
      830,000 39.6%    277,949.50 35.0%    241,979.00              (35,971) -12.9%
      840,000 39.6%    281,909.50 35.0%    245,479.00              (36,431) -12.9%
      850,000 39.6%    285,869.50 35.0%    248,979.00              (36,891) -12.9%
      860,000 39.6%    289,829.50 35.0%    252,479.00              (37,351) -12.9%
      870,000 39.6%    293,789.50 35.0%    255,979.00              (37,811) -12.9%
      880,000 39.6%    297,749.50 35.0%    259,479.00              (38,271) -12.9%
      890,000 39.6%    301,709.50 35.0%    262,979.00              (38,731) -12.8%
      900,000 39.6%    305,669.50 35.0%    266,479.00              (39,191) -12.8%
      910,000 39.6%    309,629.50 35.0%    269,979.00              (39,651) -12.8%
      920,000 39.6%    313,589.50 35.0%    273,479.00              (40,111) -12.8%
      930,000 39.6%    317,549.50 35.0%    276,979.00              (40,571) -12.8%
      940,000 39.6%    321,509.50 35.0%    280,479.00              (41,031) -12.8%
      950,000 39.6%    325,469.50 35.0%    283,979.00              (41,491) -12.7%
      960,000 39.6%    329,429.50 35.0%    287,479.00              (41,951) -12.7%
      970,000 39.6%    333,389.50 35.0%    290,979.00              (42,411) -12.7%
      980,000 39.6%    337,349.50 35.0%    294,479.00              (42,871) -12.7%
      990,000 39.6%    341,309.50 35.0%    297,979.00              (43,331) -12.7%
   1,000,000 39.6%    345,269.50 35.0%    301,479.00              (43,791) -12.7%
   1,050,000 39.6%    365,069.50 38.5%    320,729.00              (44,341) -12.1%
   1,100,000 39.6%    384,869.50 38.5%    339,979.00              (44,891) -11.7%
   1,150,000 39.6%    404,669.50 38.5%    359,229.00              (45,441) -11.2%
   1,200,000 39.6%    424,469.50 38.5%    378,479.00              (45,991) -10.8%
   1,250,000 39.6%    444,269.50 38.5%    397,729.00              (46,541) -10.5%
   1,300,000 39.6%    464,069.50 38.5%    416,979.00              (47,091) -10.1%
   1,350,000 39.6%    483,869.50 38.5%    436,229.00              (47,641) -9.8%
   1,400,000 39.6%    503,669.50 38.5%    455,479.00              (48,191) -9.6%
   1,450,000 39.6%    523,469.50 38.5%    474,729.00              (48,741) -9.3%
   1,500,000 39.6%    543,269.50 38.5%    493,979.00              (49,291) -9.1%
   1,600,000 39.6%    582,869.50 38.5%    532,479.00              (50,391) -8.6%
   1,700,000 39.6%    622,469.50 38.5%    570,979.00              (51,491) -8.3%
   1,800,000 39.6%    662,069.50 38.5%    609,479.00              (52,591) -7.9%
   1,900,000 39.6%    701,669.50 38.5%    647,979.00              (53,691) -7.7%
   2,000,000 39.6%    741,269.50 38.5%    686,479.00              (54,791) -7.4%