Talking Tax Rates With TCJA Tax Reform

The Tax Cuts and Jobs Act of 2017 had one main purpose, and that was to get it passed by Congress and signed into law. Any actual effects of the law were secondary.

As for the secondary purposes, the main one of that group was to get our corporate tax rates more in line with the rest of the world. This is something that both parties, at least in theory, agreed upon. Business taxes, though, isn’t politically sexy, so Congressional Republicans fought like cartoon dust clouds to make enough minor tweaks to the individual code to allow each Senator and Representative claim they did something good for their voters.

Pictured: Mitch McConnell and Susan Collins discussing tax credits

Basically it made Tax Reform like the facades at Disneyland, where they spent so much on the outside window treatment it was as if the line were the purpose for waiting, not the ride at the end.

But, since the tax reform starts with Individual Tax Reform, and this is what most people are going to care about, let’s start there.

Specifically, we’re going to start with the Individual Tax Rates.

Let’s break it down, compared to what would have been without TJCA:

ORDINARY RATES

Married Filing Jointly

Income 2018 With Tax Reform Without Reform (Approx.)
Up to $19,050 10% 10%
$19,051 to $77,400 12% 15%
$77,401 to $165,000 22% 25% (plus a little in 28%)
$165,001 to $315,000 24% 28% to 33%
$315,001 to $400,000 32% 33%
$400,001 to $600,000 35% 33%, 35% and 39.6%
Over $600,000 37% 39.6%

 

Single

Income 2018 With Tax Reform Without Reform (Approx.)
Up to $9,525 10% 10%
$9,526 to $38,700 12% 15%
$38,701 to $82,500 22% 25%
$82,501 to $157,500 24% 25% to 28%
$157,501 to $200,000 32% 28% (plus a little in 33%)
$200,001 to $500,000 35% 33%, 35% and 39.6%
Over $500,000 37% 39.6%

There’s also another rate table for Head of Household and Married Filing Separately, but I’m feeling too lazy to put those up here. And, just like the old tables, these will adjusted with inflation year after year (more on that in another post).

General thoughts on these rates: well, they’re mostly lower. Not all. I was actually a bit surprised that there’s a couple of windows where you’ll potentially be better off with the old rates. If you’re married making between $400,001 and $416,700, you’ll be paying 35% now, compared to 33% before. That’s a very narrow band, sure, so CEOs and CFOs, be sure to use that information to help you next time you’re asking for a raise from the Board (since this unlikely to affect many typical wage earners).

The slightly larger band of losers are unmarried people between $157,501 and $191,650, who would have been taxes at 28%, but have now been bumped up to 32%. That’s both a bigger range and a bigger increase, and probably a much harder bump to get over to make it back into the Tax Decrease Safe Zone.

Now, we’re not exactly talking about people on the borderline of poverty. If you’re single and making $157,501, or Married making $400k, you should be doing alright. And if not, you likely have financial issues that tax reform isn’t about to fix.

CAPITAL GAINS

Capital gains are a little trickier to play out now. Capital gains are taxed at preferential rates that make good economic sense as well as a fun populist punching bag. That’s all I’ll say on that for now.

Under the old system, things were fairly simple. If you were in the old 10% or 15% bracket, you paid 0% on your capital gains (and qualified dividends). If you were in any other tax bracket except 39.6%, you paid 15%. If you were in that top 39.6% bracket, you paid 20%.

Now, they are taxed as such:

Rate Everyone not listed to the right (except Trusts) Married Filed Jointly Income Head of Household
0% $0 to $38,600 $0 to $77,200 $0 to $51,700
15% 38,601 to 425,800 77,200 to 470,000 51,700 to 452,400
20% 425,800 and up 470,000 and up 452,400 and up

*NOTE: These do not include the 3.8% Obamacare Medicare Tax, which is added to the top of these rates for many people. See your accountant to find out if the Obamacare Medicare Tax is right for you!

Notice how, unlike before, these don’t QUITE line up with the ordinary income tax rates? Especially with that first MFJ 15% cut off of $77,200, that’s oddly $200 less than 12% ordinary rate.

My guess is that they originally lined up in some Senate Committee, but as their wonks ran the numbers, they realized they wouldn’t quite reach the amounts they wanted, so they prodded and tortured the numbers until that 21 year old Senate intern in the corner declared that it was good.

CONCLUSION

The easiest part of the tax return has changed. So, yay on that. The good stuff comes up next. Stay tuned.