Doylestown Wealth Management - LPL

165 West Ashland Street Doylestown, PA 18901
P: (267) 864 - 2000 | F: (267) 864 - 2010

May 2018 Budget Commentary

As promised, this month we will take a first look at the effects of the recent federal tax changes.  For the salaries listed below, the reduction in withholding taxes ranges between 10 and 15%.  (Note that this amount includes the employee portion of the payroll tax—7.65% of income.)  This dovetails nicely with the data from the Treasury, which showed that daily withholding receipts moved from up 6% to down 5% when the new tables were implemented.

Let’s look at that married couple making a combined $60,000 (roughly the median household income.)  Prior to the tax changes, they had been withholding $4947 in federal taxes, in 2018, this will be $3939.  Their FICA taxes will remain the same–$4590 each year.  Let’s assume for a minute that the withholding changes accurately reflect their final tax bill (more on that in a moment).  The tax changes, then, amount to about 1.5% of this family’s income, and, all other things being equal, they will get about $20 per week extra in their paycheck.  This seems a bit underwhelming after all the speeches and news coverage.  I suspect that many people who have their pay directly deposited won’t even notice.

And remember that our family making $60,000 is the median household income—by definition, half of American households make less.  When it comes to the lower end of the wage scale, FICA taxes become more significant than federal income taxes in withholding calculations, so the majority of working taxpayers will see even less change.  To me, this goes a long way to explaining why surveys have shown 60-70% of Americans don’t think the tax changes have meant much to them. 

But what about higher wage earners?  Here, we should note that the reduction in withholding is larger—about $100 in a biweekly paycheck for the married couple making $100K.  However, this couple was likely to have itemized their deductions in the past–about 80% of filers with an adjusted gross income (AGI) over $100,000 did so in 2015—with the average deduction for AGI’s of $100,000-500,000 being about $30,000.  Under the new rules, most of these families will to lose ability to itemize their deductions since the standard deduction for couples is now $24,000 and state and local income taxes are not eligible for deduction. Since the new standard deduction also eliminates personal exemptions for taxpayers and their children, many families with AGI’s of $100,000-500,000 will find that their taxable income is much higher under the new regime, and that this will largely if not completely offset the reduction in marginal rates.   People who used to itemize may find that the extra money in their paychecks this year will be demanded next April with the 2018 tax filing.  Combined with the otherwise salubrious rise in interest rates, next year is likely to show a big jump in taxpayer checks written to the IRS—which may make the whole exercise seem not like a tax cut at all.

The bottom line is that the withholding changes for most taxpayers amount to a minimal increase in pay—something resembling a cost-of-living raise– and those who used to itemize their deductions may face an unexpected bill in April 2019.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  

Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Doylestown Wealth Management, Inc. are separate entities from LPL Financial.