Sunday, December 17, 2017

Tax Bill New Tax Brackets

The new tax bill offers across the board tax rate reductions, as long as you take the standard deduction. If you pay state and local taxes, though, the benefit of the new bill is not so clear.

This graph compares the old and new tax brackets for filing single, and earning less than $1,000,000. See how much money you will save by finding your income along the horizontal axis, then looking at the blue and red lines directly above. The blue line is what you would pay under the old rules, while the red line is what you will pay if the new tax bill passes.

When reading these graphs, LOWER IS BETTER. When the red line is below the blue line, it means that income level gets a tax cut from the new bill.

The graphs assume you take the standard deduction, which increases substantially in the new tax bill.

New Tax Bill
Federal Taxes by Income
filing single


If you earn under $169,500, you will save roughly 4%, which is due to the lower rate as well as the increased standard deduction.

At around $200,000, you will save roughly 2.5%.

At around $430,000 income, the curves almost touch. You save only 0.2% compared to the old rates.

After that, the savings rate climbs rapidly to 2.6%.

If you earn more than $1,000,000, you pay 37% instead of 39.6% on everything above $1,000,000. For each additional million dollars: you will save $26,000.

Of course, these tax savings only work for you if you take the standard deduction. If you are used to deducting more than $10,000 in combined state taxes and property taxes, the loss of deductions on the federal return quickly eliminates any tax cut or even turns your tax savings into tax increases.deducting

This graph shows the same blue and red lines as before. It adds two additional lines that show your total taxes: federal + state, and account for the changes in treatment of state and local deductions. This graph is for filing single in California and assumes you do not pay mortgage interest nor property tax (i.e., you do not own a home).

California, filing single
No Home (no property tax nor mortgage)

Notice that the purple line is above the black line for incomes under $200,000. This new tax bill is a tax cut for people who make under $200,000. Above $200,000 the new bill is a substantial tax increase.

The next chart shows the total taxes for a California home owner filing single. It assumes a mortgage of $417,000 at 3%/year and $16,500/year property tax.

State tax is computed based on income and deductions for both property tax and mortgage interest.

Federal tax is computed based on income and deductions for state + property tax (capped at $10,000) and mortgage interest.

California, filing single
$16,500 property tax
$417,000 mortgage at 3%

The purple line shows what your taxes would be using 2017 rates. The black line shows what your taxes would be if the new bill passes. Note that, if you own a home in California, at best, you get no tax cut. If you earn more than $200,000, your total taxes will increase substantially.

The graph looks pretty much the same for Kansas, assuming filing single, paying property tax of $3,300/year and a $217,000 mortgage at 4%. In this case, you do get a tax cut if you earn less than $200,000. That's because you don't max out the $10,000 state tax deduction. As your income increases, though, the loss of state tax deduction turns this bill a into tax increase.

Kansas, filing single
$3,300 property tax
$217,000 mortgage at 4%

That's not the whole story though. If you make enough money, and you live in a low tax state, then the curves cross again, and the new bill becomes a tax cut. Here is the same Kansas graph, but showing up to $3,000,000 income. Notice that the black line is (finally) below the purple line.

Kansas, filing single, out to $3,000,000 income

Even in Kansas, you get a tax hike if you make roughly $200,000 to $600,000.

Here is why this so called tax cut bill is a tax increase for most people: You pay federal taxes on the state taxes you already paid. Suppose your income is over 500000, so your tax bracket is 37%. Then you pay 37% federal tax on the money you used to pay your state taxes above $10,000. If the state tax is 4.6% (as in Kansas), then roughly $250,000 income gives you a state tax bill of $10,000. Therefore, 100% of your income above $500,000 is taxed twice. That's 4.6% of your income that wasn't taxed under the old law is now taxed (again) at 37%. That's 37% * 4.6% = 1.7%. That 1.7% is less than the 2.6% tax cut for the highest tax bracket (from 39.6% to 37%), so if you make enough money, you'll keep 0.9% more of it.

Of course, in high tax states, it's a different story. In California, the top tax bracket is 12.3%. Paying federal tax on money you already paid to state tax means you are double paying 37% of 12.3%, or 4.55%. 4.55% is bigger than the 2.6% tax cut, so the tax bill effectively increases the top bracket by 1.95%.

Here's that graph.

California, filing single out to $3,000,000 income

The new tax bill raises taxes on almost everybody. There are two cases where your taxes are lowered, both only if you live in a low tax states.

If you live in a low tax state and make less than $200,000, then you get a very small tax cut. If  you live in a low tax state and make many millions, then you get a substantial tax cut.

Here are the highest taxed states. They will see tax increases of 2.8% to 4.9%.

  • California 13.3%
  • Oregon 9.9%
  • Minnesota 9.85%
  • Iowa 8.98%
  • New Jersey 8.97%
  • Vermont 8.95%
  • District of Columbia 8.95%
  • New York 8.82%
  • Hawaii 8.25%
  • Wisconsin 7.65%
It's no surprise that these high tax states, who receive the biggest tax increase, are blue states.

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