The Tax Policy Center estimates that about 65% of filers will get an income-tax cut for 2018, while about 6% will get an increase. The difficult part in knowing if you get a tax cut or a tax increase is that you really have to run the same income through the 2017 tax law and 2018 tax law to compare apples to apples. We ran this calculation for a high income earner (someone not in this 65% tax decrease group, W2 income earner) and the taxpayer will be paying $111 less under 2018 tax law vs. 2017 tax law. Now here’s the tricky part, it appears the taxpayer is paying a substantial amount less in tax based on the effective tax rate (total tax divided by taxable income), but that is because Congress has changed both the numerator calculation (total Federal tax) and denominator calculation (taxable income).
Using same income in 2017 vs. 2018 for this scenario, the effective tax rate goes from 32.01% in 2017 to 28.47%. The effective tax rate shows a significant (11%) tax decrease, but that decrease in rate is not the reality for the taxpayer. Tax only decreased by $111 in 2018 compared to 2017. The real percent measurement would be to divide total tax by AGI for the same income for the 2017 tax law vs. 2018 tax law and that percent goes from 26.4740% for 2017 to 26.4584% in 2018, which is that slight $111 decrease the taxpayer received under the new tax law.
The only way to know for sure if you are getting a tax cut vs. tax increase is to run the same income under both the 2017 and 2018 tax law. The next best measurement would be to divide total tax by AGI (if not a business owner) in both years with the different income per the tax returns, but that will be slightly skewed with income being different in each year. However, it’s a more honest measurement than the usual tax effective rate calculation that uses taxable income.
Michael R. Noon, CPA, MSA
Prudhomme Associates CPAs
43460 Ridge Park Dr. Ste 220
Temecula, CA 92590