A Closer Look at the New Tax Law's Effects
The Tax Cuts and Jobs Act (TCJA) promised an income tax cut for most Americans. Is that promise less likely to be fulfilled if you live in certain states?
The Tax Policy Center (TPC) released a recent report addressing the TCJA's effect on individual states and income levels. TPC concluded that, for tax year 2018, approximately 65% of all households will see a personal income tax cut while just over 6% will see an increase in individual taxes. The rest will see a negligible difference.
Nationally, the average change in after-tax income is expected to be 1.8%. However, the TCJA does not affect all states equally.
Pack Up, Honey – We're Moving to Fargo
Where do the most households benefit from the TCJA? North Dakota's 75.4% leads the way, with Iowa and New Hampshire behind at 71.9% and 71.0% respectively. On the other side of the coin, only 60.1% of Alaskans will benefit (the fewest in any state), followed by 61.0% of Georgians and 61.2% of Floridians.
New Jersey has the highest number of households expected to have higher tax bills because of the TCJA – just over 10%. Maryland and the District of Columbia are tied for second at 9.4%. West Virginia has the fewest number of households with higher tax bills at 2.8%, followed by Alaska at 3.1% and South Dakota at 3.6%.
The highest average percent change in after-tax income is generally found in the upper Midwest and the West. North Dakota again leads the way with a 2.7% average increase. Alaska, South Dakota, Wyoming, Washington, Texas, and Louisiana are also predicted to have average increases in post-tax income above 2.1%.
While no state projects an average decrease in after-tax income, the three states with the lowest expected average change are New York (1.4%), California (1.5%) and Oregon (1.5%). Why are these three states at the bottom?
For California and New York, the likely cause is the new limits on state and local tax deductions (aka SALT deductions). The new law now limits the collective itemized deduction on state and local taxes, including personal property, real estate, and income/sales taxes, to $10,000 effective in 2018.
According to Trulia, almost 10% of homeowners have property tax bills above $10,000 – pushing them over the SALT limit straightaway
A Little More SALT, Please
Some TCJA critics consider the SALT deduction limitation a partisan move punishing "blue states" that tend to have higher taxes and property values. Whether it's partisan or not, the SALT limitation does have a significant impact.
When the effect of the TCJA was recalculated with no SALT limitation, New York's average percent change in post-tax income rose to 2.6% – tied for fifth place with New Jersey, the state with the highest property taxes in the nation. Under these conditions, Connecticut – the state with the fourth highest property tax rate – comes in highest in after-tax income with a 2.9% increase. California rises to a middle-of-the-pack 2.4% increase.
For the 6% of taxpayers with TCJA-driven tax increases, the SALT limitation is a major factor – especially at upper income levels where itemizing is more prevalent.
To illustrate the difference, the Tax Policy Center analyzed the effect of SALT on three states at different levels of state taxes – New York for high, Virginia for moderate, and Texas for low tax. At lower and middle income levels, there is little difference in the average post-tax income, but at the 80th income percentile and above, the discrepancies stand out.
For those in the 80th-90th income percentile, the average post-tax income increase is 1.3% in New York, 1.6% in Virginia, and 2.1% in Texas – a distinctive spread around the 1.7% national average increase at that percentile. Remove the SALT restriction, and the gap closes. New York's average increase jumps to 1.8%, while Virginia and Texas only jump to 1.7% and 2.2% respectively.
In that same percentile with SALT limitations, 8% of Texans will see a tax increase, as for 11% of Virginians and 16% of New Yorkers. Without SALT, the gap closes to 6%-8% for all three states.
Essentially, the SALT deduction limitation is the greatest factor in state differences from the TCJA – and that's generally within a narrow band of taxpayers that still itemize and live in states with high taxes and high property values.
It's interesting to see how your state generally compares to others with respect to the new tax law – but your individual situation is more important than your state's ranking.
Take the new tax laws into account for the current tax year, when most of the provisions take effect. Will state and local tax deduction limitations hit you particularly hard? Will you still choose to itemize based on the new standard deductions? How did your status change for certain deductions and credits? Did you adjust your withholding to account for the likely changes in your tax bill next April, along with changes in your take home pay?
Since taxes are still fresh in your mind, take some time to review how the new tax law affects you in 2018. By making adjustments now, you could make next April less painful – and possibly even profitable.
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