If I Make $100,000, How Big Will My Tax Cut Be in 2018?

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Tax season is here, and taxpayers are finding out what they'll owe on their 2017 taxes. Yet with new tax laws having taken effect at the beginning of this year, many Americans hope to see considerable savings when they prepare their taxes this time next year.

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To see where you'll end up, there's no shortcut to just going through your situation and doing the math. For an upper-middle income household making $100,000, substantial tax savings will be available to some taxpayers, while others won't necessarily see a big benefit. Let's look at a couple of typical examples to see how the new tax laws will work.

What a typical family of four might save

Lawmakers often refer to the typical family of four, which for tax policy purposes usually refers to a couple filing jointly with two children. Tax reform offered specific tax provisions aimed at saving such families money, including a doubling of the child tax credit and a widening of the income range over which such credits were available.

To keep the example as simple as possible, let's consider a couple that earns $100,000 solely from work and that has traditionally taken the standard deduction. When you run the numbers, here's what you get as projected savings.

Item

2017 Tax Year

2018 Tax Year

Gross income

$100,000

$100,000

Standard deduction

($12,700)

($24,000)

Personal exemption

($16,200)

N/A

Taxable income

$71,100

$76,000

Tentative tax

$9,733

$8,739

Tax credits

$2,000

$4,000

Net tax owed

$7,733

$4,739

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This typical family of four could see savings of almost $3,000 in 2018 compared to 2017. This family benefits in two key ways: a lowering of its top tax rate from 15% to 12%, and the big boost in the child tax credit that they're allowed to take. Fully benefiting from the increase in the standard deduction also helps to maximize tax savings.

What about single taxpayers with no children?

The situation for single filers who have no children is different from the family of four in key ways. Single brackets are different, and not getting a child tax credit costs additional tax. Yet even so, these taxpayers will also typically see savings.

Item

2017 Tax Year

2018 Tax Year

Gross income

$100,000

$100,000

Standard Deduction

($6,350)

($12,000)

Personal Exemption

($4,050)

N/A

Taxable Income

$89,600

$88,000

Tax

$18,139

$15,410

Here, the different is more than $2,700. Taxable income actually goes down in this example, and the more favorable brackets of 12%, 22%, and 24% produce savings compared to the 15% and 25% brackets under old law.

When could tax reform cost you?

In the ordinary case where taxpayers take the standard deduction under both old and current law, the new tax rules generally produce savings. But other common situations can be less clear.

The most obvious situation involves someone who itemized deductions in 2017 but won't benefit from doing so under the larger deduction in 2018. For instance, in the family example, a taxpayer with $22,600 in itemized deductions in 2017 would see taxable income that was $10,000 less than in the example, saving them $1,500 from their 2017 tax bill. Yet since $22,600 is less than $24,000, they'd get no corresponding benefit in 2018. That would cut the tax savings in half.

Things get worse for those for whom extensive itemized deductions will simply disappear in 2018. For instance, limits of $10,000 on state and local income, sales, and property taxes taking effect in 2018 could limit a taxpayer's ability to itemize. Those in high-tax areas could end up having to take the standard deduction in 2018 even if they would have had more in itemized deductions under the old rules.

For most people making $100,000, tax reform will provide some savings. Nevertheless, until you go through your own particular situation, you'll need to take these illustrations with a grain of salt before you move forward with your tax planning for the coming year.

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