Case 4–Higher income

What happens when income is higher, and itemized deductions aren’t as big a factor as a percentage of total income? In this case, the taxpayer earns a good living, and has lower than national average itemized deductions. Income is $367,653 in W-2 earnings, $782 in qualifying dividends1, and $192 in other income, for a total of $368,627.

Itemized deductions in 2017 were $28,638 in SALT, $11,350 in charity, and $7,334 in miscellaneous deductions (reduced to $361 allowable due to 2% of AGI limit), for a total of $40,349. 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.

For the new tax law, SALT is limited to $10,000, and miscellaneous itemized deductions are repealed, so the new standard deduction of $24,000 is higher than the allowable itemized deductions of $21,350.

Descript 2017 2018 Change
AGI 368,627 368,627  
Itemized/Std. 38,704 24,000 -14,704
Pers. Exempt. 4,536 0 -4,536
Taxable 325,387 344,627 19,240
Income Tax 82,454 73,526 -8,928
AMT 3,812 0 -3,812
M/C surtax2 1,059 1,059  
NIT3 35 37 2
Total Taxes 87,360 74,622 -12,738

The loss of itemized deductions and personal exemptions were not as big a factor in this case as were the tax rate reductions and the AMT changes. Even though taxable income is increased by 5.91%, the final tax bill is reduced by 14.58%. The average tax rate as a percentage of AGI dropped from 23.70% to 20.24%. Most of the taxpayer’s income taxed at a lower rate than the prior year due to the tax bracket changes. Click here for information on the bracket changes.

1Qualifying dividends and capital gains are taxed at a lower rate for almost all taxpayers. 2Additional Medicare Tax is a 0.9% surtax on W-2 Medicare tax-eligible wages above $250,000 for married filers. 3Net investment tax, levied on high-income taxpayers.