Case 2–Lower rate, higher taxable income

This is an example of a taxpayer with moderate income and lots of itemized deductions. This is a two-earner family with a variety of sources of income. They have 2 dependent children over age 16, both in college. The interesting part of this case is how the tax law changes affected their somewhat unusual situation.

Our taxpayers in this portrayal are very generous, and one is an over-the-road truck driver with unreimbursed employee business expenses. These miscellaneous itemized deductions were repealed in the new tax law. Even with the tax law changes, they will itemize deductions in both 2017 and 2018. Here are their itemized deductions:

Description 2017 2018 Law change Change
Taxes 6,337 6,337    
Charity 10,186 10,186    
Mort Int 7,712 7,712    
Misc deduct 4,861 0 Repealed -4,861
Totals 29,096 24,235   -4,861
Standard Deduction 12,700 24,000 for comparison

Total household income is $134,875, made up of W-2 earnings $118,622, rental and other income of $9,379, and self-employment net profit of $6,874. “Above the line” (ABL) deductions include 1/2 of self-employment tax, $250 teacher expenses, and student loan interest of $1,036.

Description 2017 2018 Change
Income $134,875 $134,875  
1/2 S/E tax -486 -486  
Other ABL -1,286 -1,286  
AGI $133,103 $133,103  
Itemized 29,096 24,235 -4,861
Pers. Exempt. 16,200 0 -16,200
QBI deduct 0 -1,375 1,375
Taxable Inc 87,807 107,493 19,686
S/E tax 971 971  
Income tax 13,434 15,527 2,093
Dep. Credit 0 1,000 1,000
Educ. Credit 4,548 4,548  
Net Income Tax 9,857 10,950 1,093

The new tax law resulted in taxable income almost 20% higher than the prior year. The repeal of miscellaneous itemized deductions cost them $1,030 in tax at 2018 rates, or $1,215 at 2017 tax rates. The new child credit cut their tax bill by $1,000, but at their marginal tax rate of 22%, it didn’t make up for the loss of $8,100 in personal exemptions for the two kids. As a percentage of taxable income, their net tax rate dropped from 10.90% to 10.19%. The tax rate cuts weren’t enough to offset the increase in taxable income for these folks. As a percentage of AGI, their net tax rate increased from 7.41% to 8.23%

If this tax law change had occurred when their children were both under 17, they’d not be paying college expenses (which results in the Education Credits shown above), and their child credits would be $2,000 per child instead of $500 per child in 2018. Their income was over the $110,000 limit for the under age 17 child credit in 2017.