Case 10–High income single

For our final example, we’ll assume the W-2 wages were $350,000, qualifying dividends and capital gains1 were $15,000, and other income was $10,000.

Itemized deductions in 2017 were $32,000 in SALT, $20,000 in deductible mortgage interest on the principal residence, and $20,000 in charity for a total of $72,000. Personal exemptions were $4,050 per person in 2017. However, the old tax law limited itemized deductions and personal exemptions for higher-income taxpayers. Those limitations are reflected in the comparison below.

Description Total 2017 2018
Taxes 32,000 32,000 10,000
Charity 20,000 20,000 20,000
Mort. Interest 20,000 20,000 20,000
2017 reduction   -3,045  
Allowed 72,000 68,595 50,000

Using this data, here is the comparison in old and new tax law:

Description 2017 2018 Change
AGI 375,000 375,000  
Pers. Exempt. 324 0 -324
Itemized/Std. 68,595 50,000 -18,595
Taxable 306,081 325,000 18,919
Income tax 81,706 86,440 4,734
AMT 6,185 0 -6,185
M/C surtax2 1,350 1,350  
NIT3 890 890  
Total tax 90,131 88,680 -1,451

The new tax law limits the state and local tax (SALT) deduction to $10,000 for all but Married Filing Separately filers (so the ‘marriage penalty’ lives on in this rule), but total itemized deductions are no longer reduced for high income taxpayers. These changes increase taxable income by 6.18% in this case. The taxpayer previously owed Alternative Minimum Tax (AMT), in this example due solely to his itemized deduction of SALT. With the elimination of AMT, the total tax bill actually fell by 1.61%. The average tax rate as a percentage of AGI fell from 24.04% to 23.65%.

1Qualifying dividends and capital gains are taxed at a lower rate for almost all taxpayers. In these examples, federal taxes were reduced by $1,950 in 2017 and $3,000 in 2018 due to this tax preference. 2Additional Medicare Tax is a 0.9% surtax on W-2 wages above $200,000 for single filers. 3Net investment tax, levied on high-income taxpayers.