Let’s take a look at a real-life example of a couple who went from a refund of $2,248 in 2017 to owing $1,326 in 2018.
This married couple has income of $150,000 and one college-age child as a dependent.
| Married couple with one college-age child | 2018 | 2017 | Diff |
| Income | 151,038 | 150,117 | 921 |
| Standard Deduction | (24,000) | (12,700) | (11,300) |
| Larger Itemized Deductions | (24,738) | (26,551) | 1,813 |
| Exemption Deduction | 0 | (12,150) | 12,150 |
| Taxable Income | 126,047 | 111,166 | 14,881 |
| Tax before Credits | 19,550 | 19,188 | 362 |
| Child Tax Credit | (500) | 0 | (500) |
| Education Credits | (1,241) | (1,474) | 233 |
| Tax after Credits | 17,809 | 17,714 | 95 |
| Income Tax Withheld | (15,656) | (18,979) | (3,323) |
| American Opp. Credit | (827) | (983) | 156 |
| Refund Amount | 0 | 2,248 | (2,248) |
| Amount Owed | 1,326 | 0 | 1,326 |
| Marginal Tax Rate | 22% | 25% | (3%) |
| Effective Tax Rate | 14.1% | 15.9% | (1.8%) |
So what went wrong for this couple?
2017
They paid in $18,979 and received a $2,248 refund. The federal government took $16,731 of their money for taxes.
2018
They paid in $15,656 and owed an additional $1,326 at filing time. The federal government took $16,982 of their money for taxes.
Their income went up by $921 and they paid $251 more in taxes. So the new tax laws didn’t really help them. It is because they did not gain any benefit from the increased Standard Deduction, yet they lost the benefit of the Personal Exemptions.
I will publish more on this topic once we get through the busy filing season.
Gregory J. Cook, EA, CPA
Accredted Tax Advisor
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