The tax reform bill, as passed, does three key things for individual taxpayers:
- Temporarily changes the way we calculate “taxable income”. No longer do we calculate personal exemptions. Most deductions are eliminated. The standard deduction is increased. To estimate the impact on your taxes subtract the total amount of your current deductions and personal exemptions from the new standard deduction. It it’s a net positive number then you gain from the tax law. If it’s a net negative number then you lose.
- Temporarily lowers our tax rates although some people will see an increase in their marginal tax rate. It is useful to understand the difference between overall and marginal tax rate. To estimate your new tax use the published tax tables available from many sources including Forbes.
- Temporarily changes the way we calculate alternate minimum tax to compare to the regular tax. Each of these three changes operates independently from the others. To calculate the overall net effect of the change we must consider and estimate the impact of all three items on our projected 2018 income. I am pleased to help with the calculation and brainstorm with you on the best ways to make the most of the new law when it becomes effective. There is no easy way to estimate this without software. The important thing is to know whether you are likely to be affected by the alternate minimum tax.
A more detailed look at my “First five strategies to deal with the new tax law” is available with more detail.