Like it or not, there’s a new administration with big plans in Washington, D.C. The Trump administration finally released their tax-plan proposal, and if the experts are correct, it has a good chance of passing. After finishing my Free Money! 2018 post, I shifted gears and began researching how the Trump plan would impact our 2018 federal income taxes. My buddy Justin at Root of Good pointed me to Michael Kitces’ comprehensive post on the potential Trump tax plan. (Read it here.) Within five minutes I was able to revise our 2018 numbers reflecting the Trump tax-plan changes.
This post will focus on how the Trump plan will affect our 2018 Free Money! numbers. Before I dig into our numbers, I need to mention a few proposed changes that would greatly impact our federal income taxes in 2018. First, our standard deduction (MFJ) would be raised to $24,000 a year (as opposed to the $13,000 in the current tax plan). Second, personal exemptions would be eliminated. (What? Goodbye to $4,150 per person. Ouch, that hurts, but don’t despair because there’s lots of good news in this post.) Third, the Trump plan would eliminate the 10% tax bracket and replace it with a 12% tax bracket. Finally, our tax credits would also change in 2018. I’ll address those changes later in the post.
As you read this post, compare the Trump tax-plan numbers with those based on the current tax law. Here our 2018 non-Trump Free Money! numbers to keep in mind:
- Free Money — $35,450, this is our standard deduction, three personal exemptions, and one child tax credit
- Free Money + 10% Money — $44,500, this is our Free Money amount and the remainder of the 10% tax bracket ($9,050)
Our 2018 Trump Free Money
As I mentioned above our standard deduction would be $24,000 in 2018, but we’d lose our personal exemptions. Under the current tax law, we are scheduled to have $25,450 of “free money” from our standard deduction and personal exemptions ($13k + ($4,150 * 3)). Right off the bat, the Trump plan is already costing us $1,450, but we still have to determine the impact of our tax credits.
Oh happy day! Under the Trump plan, the child tax credit would increase to $1,600 per child. In 2018 we’d also be eligible for two “Flexible Family” credits of $300 each. In total, it looks like we’d have $2,200 in tax credits. How much Free Money would those tax credits yield in the 12% tax bracket? (Remember, the 10% tax bracket would be history.) Let’s see, $2,200 / .12 = $18,333. Here’s my best estimate of our 2018 Trump Free Money total:
In other words, the Trump plan would result in almost $7k MORE of Free Money! To be exact, the number is $6,883. (Remember, our expected free-money amount under the current law is $35,450.)
$42,333 – $35,450 = $6,883
I have to say $42k a year at a 0% tax rate sounds pretty good to me. However, let’s see how much tax we’d owe after our free-money amount.
Beyond the Trump Free Money
Since there would no longer be a 10% tax bracket under the Trump plan, any money after our free money amount would be taxed at 12%. Under the current law we plan to take our income to the end of the 10% tax bracket which means we can earn another $9,050 with a tax bill of $905. That means our Free Money + 10% Money will be $44,500 under the current tax law.
Next, I’d like to know how much tax we’d pay on $44.5k under the Trump tax plan. Since we’d only need $2,167 ($44,500 – $42,333) at the 12% tax rate, we would only owe $260 of federal income tax ($2,167 * .12). The last time I checked $260 was still less than $905. Here are the numbers:
The Trump tax plan is looking pretty good, isn’t it? Under current tax law, I’ll have an effective tax rate of 2.03% ($905 / $44.5k) while under the Trump plan my effective tax rate would be .58% ($260 / $44.5k). Okay, I can see you’re still not impressed, so let’s see how much income we’d be able to with a tax bill of $905 (the end of the 10% tax bracket under current tax law).
Money with Tax Bill of $905
Figuring out how much income yields a tax bill of $905 is pretty easy: $905 / .12 = $7,542. When we add this amount to our Trump Free Money amount, this is what we get:
If my numbers are correct, we’d net $48,970 ($49,875 -$905) under the Trump plan after paying our $905 tax bill. Under current tax law we’ll net only $43,595 ($44,500 – $905) after paying our $905 tax bill. It looks like we’re going to keep more of our income under the Trump tax plan:
$48,970 – $43,595 = $5,375
Wow, that extra $5,375 a year results in almost $450 a month…that’s rent in south Georgia!
Our 2018 Trump Income Options
Since the Trump tax plan would result in less tax (or a lower effective tax rate) in the three scenarios reviewed, our income options would increase in 2018. Here are our 2018 income options under the proposed Trump tax plan:
Any income taken beyond the $49,875 would still be in the 12% tax bracket. (Nota bene: all the way up to $90k for MFJ! Roth IRA conversion ladder anyone?) Under current tax law any income beyond the 10% tax bracket is taxed at 15%. Before we get too giddy with these increased income options, we need to remember that this tax law is still not official.
As you know, a lot of things can change in the world of politics. No matter what happens, we’ll be ready to adjust our tax plan as the situation requires. Remember, no crying on April 15th, 2019 about how high your taxes are…plan YOUR tax bill now!
Yeah Ed, But…
- …the Family Flexibility tax credit will expire in 5 years * Yes, that’s possible, but our $600 in Family Flexibility tax credits only allow for an extra $5,000 of income ($600 / .12). In other words, our Free Money would be reduced by $5,000, but it would still be $1,833 higher than our current free-money amount. ($6,833 – $5,000…see above in post)
- …your Coverdell ESA college account will be terminated * Oh well, our ESA account is already pretty fat, so we’ll start adding that $2k a year to our son’s other 2nd Generation FIRE accounts.
- …I hate Donald J. Trump * Take a number and get in line because you certainly don’t have a monopoly on that. That said, he is the president, and he and his administration are making new tax law. That’s the reality and wishing otherwise will do nothing for your tax planning.
There are many other possible tax changes coming under the Trump plan. I’ll tackle those issues later when we know more.
The Big Takeaway
Tax laws come and go, so it’s imperative that you be ready to alter your tax plan as needed. I’m sure there will be things in the new tax law that I won’t like, but I’ll be ready to “work the problem” as best as I can. If you haven’t taken a look at the proposed Trump tax plan, at a minimum make sure you know what your standard deduction and tax credits would be.
Right now I don’t have a 2018 Trump Free Money! Tax Table ready because there are still too many unknowns. Don’t worry, as soon as I have more details I’ll crank out another tax table for my loyal readers.
Soon to Be Yours in the 12% Tax Bracket?,
|Health Savings Account: We use Elements Financial to access commission-free, low-cost Vanguard ETFs at TD Ameritrade.