Taking the ball farther down the field from Case 4, let’s look at a scenario with a very high-earning taxpayer. Here we’ll assume the W-2 wages were $985,000, qualifying dividends and capital gains1 were $20,000, and other income was $10,000.
Itemized deductions in 2017 were $68,638 in SALT and $11,350 in charity for a total of $79,988. 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 comparisons below. Also, since the new law limits SALT to $10,000, the standard deduction of $24,000 is more advantageous in 2018 in this example.
While the TCJA rules made the new standard deduction more attractive and increased taxable income by 3.66%, the total tax bill actually fell by 5.27%. The average tax rate as a percentage of AGI fell from 32.28% to 30.58%.
Now let’s see what happens when the itemized deductions are higher by adding another $20,000 in property taxes, an additional $120,000 in charitable contributions, and $20,000 in deductible home mortgage interest (in 2018, limited to debt on $750,000 on primary residence). Itemized deductions now look like this:
Now, lets see a comparison with itemized deductions significantly higher:
So, high income folks with significant itemized deductions don’t fare as well under the new law as those whose deductions are less, particularly when it comes to state and local taxes. Even with the elimination of high-income itemized deduction limitations, the $10,000 limit on state and local taxes more than offsets that benefit in the example above. Taxable income increased by 7.24%, but tax owed decreased by 1.78%. The average tax rate as a percentage of AGI fell from 26.03% to 25.57%.
1Qualifying dividends and capital gains are taxed at a lower rate for almost all taxpayers. In these examples, federal taxes were reduced by $3,920 in 2017 and $3,400 in 2018 due to this tax preference. 2Additional Medicare Tax is a 0.9% surtax on W-2 wages above $250,000 for married filers. 3Net investment tax, levied on high-income taxpayers.