For perspective, based on the data published by the Tax Foundation, in 2016, there were 140.9 million individual income tax returns filed. Fifty percent of returns filed were by taxpayers reporting adjusted gross income (AGI) of $40,078 or less; 75 percent of returns filed reported AGI of less than $80,921; and 95 percent of returns filed reported AGI of $197,651 or less. (AGI would include sources of income less “above the line” deductions. Some examples of above-the-line deductions are educators’ expenses, self-employment taxes, self-employed retirement plans, alimony payments (pre-TCJA), and student loan interest.) The statistics for 2018 and similar statistics for 2017 and 2016 are presented in figure 1 (and the Tax Foundation source documents are linked to the appropriate years).
About 3 percent of taxes paid were from 50 percent of returns filed each year. On the other end of the spectrum, the 5 percent of taxpayers reporting income greater than $189K–$198K paid 37–39 percent of taxes paid. These statistics are interesting; however, certified public accounts (CPAs) and attorneys want to look at things from the standpoint of their clients. In the next few sections of this article, we consider taxes from the taxpayers’ standpoint.
Single and Head-of-Household Taxpayers Who Are Not Self-Employed
Taxpayers filing as single with income of $45,000 to $352,000 saw a decrease in taxes—along with single taxpayers reporting greater than $705,000 in income. However, those with income of less than $45,000 or between $352,000 and $705,000 saw an increase in income taxes (figure 2 and figure 3). Effective federal income tax rates varied from an increase in the effective tax rate of 0.8 percent to a decrease of 1.1 percent (figure 4; note that differences in rounding may exist).
Taxpayers filing as head of household (with two children) saw greater federal income taxes when gross income was below $375,000 or greater than $988,000 (figure 3). The change in effective tax rates ranged from an increase of 1.2 percent to a decrease of 1.4 percent. (figure 4).
What does this tell us? For single and head-of-household filers who are not self-employed, the change in effective tax rates was between a 1.4 percent decrease and a 1.2 percent increase. In the author’s opinion, this is not a substantial change.
Single and Head-of-Household Taxpayers Who Are Self-Employed
The qualified business income deduction, introduced in the TCJA, allows eligible taxpayers to deduct up to 20 percent of their qualified business income (QBI). QBI is income from a proprietorship, partnership, S corporation, trust, or estate, and is subject to limitations that are beyond the scope of this article. For purposes of this article, we are treating self-employment income as QBI.
Self-employed single taxpayers with income between $366,000 and $764,000 saw an increase in income taxes (figure 5). This is comparable to the increase for taxpayers who are not self-employed discussed in the previous section. Self-employed single taxpayers outside this range saw decreases in income taxes. Effective income tax rates ranged from a 4.9 percent decrease to a 0.7 percent increase (figure 6).
Head-of-household filers with income greater than $390,000 saw an increase in income taxes (figure 5). Not until self-employment income exceeded $1,075,000 did taxpayers see a decrease. Effective income tax rates ranged from 5.2 percent decreases to 1.4 percent increases (figure 6).
This shows us that self-employed taxpayers saw a larger decrease in taxes but similar increases compared with their not self-employed equivalents.
Married Filing Jointly
For married taxpayers filing jointly, three scenarios were considered under both not self-employed (figure 7) and self-employed (figure 8):
- Two children age 16 or younger
- No children
- Over 65 years old, no children, and no mortgage interest
In all of these situations, the taxpayers paid less income taxes in 2018 than in 2017. Decreases in effective tax rates ranged from 0.3 percent to 4.2 percent for taxpayers who were not self-employed and from 1.1 percent to 7.0 percent for self-employed taxpayers. Due to the QBI deduction, self-employed taxpayers saw a larger decrease in their effective tax rate. Married taxpayers filing jointly saw a larger decrease than single and head-of-household filers.
Another point of comparison is the effective federal income tax rates across all filing statuses considered—single, head of household (with two children), and married filing jointly (MJF) (with two children or no children)—(figure 9 and figure 10) and the changes in those rates between 2017 and 2018 (figure 11 and figure 12).
On a positive note, the increases in taxes were less than the decreases in taxes; however, you can be the judge as to whether all of the hoopla about the TCJA was worth it.
The change to the taxability and deductibility of alimony was one of the most publicized components of the TCJA. Assume the goal was for both parties to have 50 percent of the cash flow after taxes. The change in the alimony provisions left the higher wage earner (HWE) with 41 to 42 percent of the income and the lower wage earner (LWE) with 58 to 59 percent of the income because the HWE is disallowed the alimony deduction and pays taxes at a greater rate. In order for both parties to have 50 percent of the income, alimony would need to be adjusted by 30 to 32 percent (figure 13).