There have been many rumblings in the financial planning community regarding the Trump tax cuts for 2018. A couple of the big changes are the removal of the personal exemption and the doubling of the standard deduction. Much of the concern among planners’ centers around people who will lose their personal exemption and potentially lose on their overall deductions. My wife and I fit into this category, so I decided to re-run my 2015 taxes using the new tax code. I use 2015, because it was the last full year of “normal” income before we moved to Lubbock for the PhD program at Texas Tech.
We are married filing jointly with no children, large charitable contributions, property taxes, and home interest. In 2015, our deductions and exemption added up to $27,814 ($19,814 in deductions and $8,000 in exemptions). Under the new tax code, we lose the $8,000 exemption, but the standard deduction doubles to $24,000. So, a little math ($27,814 – $24,000) shows we lose $3,718 in deductions with the new tax code. Ugh! Our taxable income jumps from $48,679 under the old law to $52,493 under the new law. This had me nervous as I thought for sure my tax bill would go up.
The final step is where the new tax code really wins out. With the new tax plan, my marginal rate drops from 15% to 12% and the break point threshold moves up from $18,650 to $19,050. This means the 12% rate does not kick in until $19,050 in income where the 15% rate kicked in at $18,650 in 2015.
The result shows my total tax dropping from $6,379 to $5,918 under the 2018 tax cut, a savings of $461 or 7.2%. I was surprised at the results, particularly considering losing almost $4,000 in deduction and exemption. Your results will vary, but I think you will be surprised as well.
If you are a small business owner, the new tax plan has even more potential savings in it. You can use these tax savings to finally set up benefits like 401(k) and insurance for you and your employees. Protect your retirement by setting up ERISA protected retirement accounts. If you’d like to take advantage of this once in a lifetime potential tax windfall, give us a call at 512-327-4747 and set up a free, no-hassle benefits analysis for your business.
Your surprised financial planning guru,
Mark Evers, MBA, CFP®, CRPC®
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