Case 3–Lack of SALT

We found it interesting that fewer taxpayers were adversely affected by the limit in SALT deductions in the new tax law. Perhaps our area has lower property and state income taxes than other areas of the country. The limitation would certainly be more painful for taxpayers with higher state and local taxes than this case. In our example here, 2017 itemized deductions included almost $27,000 in state and local taxes. With the new limit of $10,000 on SALT, it is more advantageous for the taxpayers to claim the new higher standard deduction.

Total household income is $239,755, comprised mostly of W-2 earnings from work. This amount includes tax-exempt municipal interest of $709, and other interest and investment income. The taxpayers contributed $1,750 to their HSA as an “Above the line” (ABL) deduction. An investment that produced taxable income also passed through a Qualified Business Income deduction of $695.

Description 2017 2018 Change
Income $239,046 $239,046  
HSA -1,750 -1,750  
AGI $237,296 $237,296  
Itemized/Std 35,850 24,000 -11,850
Pers. Exempt. 8,100 0 -8,100
QBI deduct 0 695 695
Taxable Income 193,346 212,601 19,255
Income tax 41,021 39,602 -1,419

While the new tax law resulted in taxable income almost 10% higher than the prior year, the tax bracket changes reduced their tax bill by 3.46%. Their average tax rate as a percentage of AGI dropped from 17.29% to 16.69%.

The new law would have greatly advantaged these folks if they had dependent children under age 17. Two dependents in 2017 would have resulted in $8,100 more in personal exemptions, and a tax cut of $2,268. In 2018, they’d lose those personal exemptions, but would qualify for the more generous $2,000 per child tax credit, for a net tax cut of $1,732.