Riddle: Who is single, has no kids, and getting a tax increase?
Tax Calculator Part 2
In my last blog, I ran some numbers on the Tax Foundation’s new tax calculator to show the average tax cut for California households by congressional district under the new Tax Cuts and Jobs Act. But I thought what would be even more interesting is to try to illustrate the tax cuts’ impact with some typical profiles of Californians. So, I ran some scenarios using the tax calculator beginning with a young, single person starting out in the job market, to go-getter entrepreneurs in Silicon Valley, to retired folks, say, in El Dorado Hills. Here are the results:
James, who just got his first job, has a starting salary of $34,240. That income is the average salary of a Californian under age 25 based on data from OnBoard Infomatics. Using the standard deduction, James is going to receive a tax cut of $584 under the new law – or a 1.7 percent reduction. He would have paid $3,062 in taxes but will now have a more reasonable tax bill of $2,478. $584 may not seem like much, but at that age, I saved for months to buy a 13-inch Sony Trinitron TV for $320 (I still remember!)
Now take Jane, who is also single, has two kids, and has a household income of $67,739 – the median household income in California. She also saves $3,600 in her company’s 401k plan. Under the previous law, she would have had a tax bill of $3,641 but under the new law using the standard deduction, she will now only pay $1,265. That’s a savings of $2,376 or a 3.51 percent reduction. Now that’s a tax cut.
Jan and Joe are married, have two kids, and have a family income of $77,359, which is the median family income in California. They also put away $4,800 in their 401k plan. Under the previous law, the couple would have paid $3,491 but using the standard deduction under the new law, they are only paying $1,446. That’s also a nice tax cut — $2,045 or a 2.64 percent reduction.
Sophie and Chad, who have an income of $165,000 – just a middle-class income in many parts of California – claim $26,000 in deductions and make $20,000 in contributions to a 401k plan. They have two kids. Under the old tax plan, they would have paid $16,723 in taxes, but under the new plan, their tax bill is $14,479. That’s a reduction of $2,243 or 1.36 percent.
Laura and Seth are married with two kids and have a business. Their income is $2 million. They have $220,000 in itemized deductions and contribute $18,500 to their 401k plan. Their taxes are a whopping $660,505 under the previous tax plan, but under the new plan, they still pay $636,976. Saving $23,529 sounds like a massive tax cut, but it’s only 1.18 percent less than their old tax bill. With their large income, they received the smallest percentage tax cut among all the profiles above. Moreover, people with businesses like Laura and Seth often plow their savings back to their business so that over time they would grow, and perhaps even create a job or two.
Then there’s Joanna and Ethan, who are now retired and have an income of $48,000 from a mix of their 401k plan and social security benefits. Under the old law, they would have paid $1,110 in taxes, but now pay $840 for a savings of $270 or .56 percent. That’s a few extra nice dinners out, or a few more dollars to spend on the grandchildren.
Finally, of course, I had to do me. Single and no kids. Whah, whah, I’m getting a tax increase — $148 or .06 percent more under the new tax plan. Nevertheless, I encourage everyone to check out the Tax Foundation’s tax calculator – it’s a great little tool.
Rowena Itchon is senior vice president at the Pacific Research Institute