2018 tax law changes: myth versus reality | TheUnion.com

2018 tax law changes: myth versus reality

Seth Leishman, a certified financial planner and certified public accountant, has been with Ostrofe Financial Consultants since 2016.
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Late last year, Rick Fisher wrote an article summarizing some of the proposed tax changes for 2018.

The new tax bill has been polarizing, with conservatives stating that it saves the average American money on their taxes and many liberals stating that it was only a tax break for the rich. As people began to file their returns early this year, many claimed that even as their income remained basically the same, their refunds were smaller than last year, implying that their taxes went up. This was reported widely on mainstream media and furthered the debate. Since I prepare tax returns for many of our clients, I began to analyze whose taxes went up and whose taxes went down. Though not a scientific study, my findings do cover a wide array of income and filing status.

So far, I have completed approximately 170 tax returns. For those married filing jointly and having income less than $350k, their taxes went down 90 percent of the time. For those whose incomes were less than $100k the savings ranged from 10 to 25 percent from the prior year.

To illustrate an actual example with fictitious names, I present the case of Mr. and Mrs. Jones. They are retirees living on a fixed income. For 2018, their adjusted gross income rose from $62k to $67k, or 7 percent, however their tax liability declined by over $500 or 11 percent.

Something important to note is that as a result of the tax change, the Internal Revenue Service adjusted the withholding schedules for W2 wage earners, however they made an error and adjusted the withholding amounts lower than necessary. This resulted in wage earners receiving higher paychecks during the year, but often resulting in a lower than expected refund when filing for 2018. The error made it appear as though middle class taxpayers did not benefit from the tax bill. However, had the withholding tables been adjusted correctly, the savings would have been more visible.

Even with married filing joint households where taxable income went up their effective tax rate mostly went down. An actual example involves another fictional couple, the Rogers.

In 2017 the Rogers’ had taxable income of $113k. They paid a marginal rate of 25 percent and an effective rate of 17.5 percent last year. For 2018 their taxable income rose to $138k. They did pay $2k more in taxes, but their marginal rate fell to 22 percent and their effective rate fell to 15.8.

The best way to judge the 2018 tax reform act is to see how it affected your own marginal and effective tax rates. Don’t judge the tax bill changes by the amount of refund or tax owed. If still unclear, ask your tax preparer to give their take on the new law as it pertains to your unique situation. As with all things tax related, our legislature can make positive or negative impacts on certain individuals or groups of taxpayers.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This is a hypothetical situation based on real life examples. Names and circumstances have been changed. To determine which investments or strategies may be appropriate for you, consult your financial advisor prior to investing.

For questions or suggestions, contact Seth Leishman at 530-273-4425, or seth.leishman@lpl.com, or visit ostrofefinancial.com.  

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