Many of we early retirees and aspiring early retirees are on the never ending quest to Never Pay Taxes Again.
With the Tax Cut and Jobs Act of 2017 about to be signed into law (aka the Largest Tax Cut in HistoryTM, perhaps a better name than The Mother of All Tax Cuts) it is worth assessing what impact this round of tax reform may have on the common tax minimization strategies.
Overall, I prefer a little more reform in my tax reform, but most individuals should see…
…at least a minimal reduction in their tax bill in the short term.
Let’s review the changes.
Early tax reform proposals suggested that the tax code would be simplified by reducing the number of unique tax brackets. The old tax code had 7. The new tax code has… you guessed it, 7. See, reform.
The tax rates on those brackets have been lowered, as per the chart below.
The new tax brackets (purple) are noticeably lower than the old brackets (blue.) This results in lower tax paid and effective tax rates.
As reference, a Married couple Filing Jointly (MFJ) with no children will save about $600 on $50k income, $2.2k on $100k income, and $5.8k on $200k income.
Standard Deduction / Personal Exemptions / Child Tax Credit
One of the big talking points of the TCJA is that the standard deduction was doubled. Sounds nice, right?
However… while the standard deduction was (approximately) doubled, personal exemptions were eliminated. Repeat: there are no personal exemptions. This will induce fewer people to itemize, which will simply tax time for many.
As shown in the table below, this can impact people couples with children. To offset this, the Child Tax Credit was increased from $1,000 to $2,000 per child. (I share MFJ only