This tax calculator is the most useful tool I’ve found online to estimate how the new tax law passed by the Republican Congress and awaiting the president’s signature will affect U.S. taxpayers.
The calculator isn’t perfect: It slightly underestimated the amount of income taxes I paid to the state of Virginia last year. It’s designed for typical employees who receive a W-2 each year (and not the self-employed who will benefit from a new 20-percent business income deduction).
But the calculator is very useful because it shows the math behind the major changes that typical taxpayers will experience, and you can correct for any obvious errors.
If you want to figure out if you’re among the five percent of Americans who will pay more or the 80 percent who will pay less under the new law next year, it’s a quick and easy way to do it.
For most people paying more, that means the amount of tax savings lost by the elimination of the personal exemption and the limitation on state and local tax deductions is greater than the amount of money saved by the new law’s lower tax rates, increased child credit, and increased standard deduction.
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If you want to double check that estimate and figure out the tax law’s impact the old-fashioned way with a pen and a calculator, here’s how to do it in five minutes or less. Consider yourself warned: There will be basic math.
Step 1: Go get last year’s Form 1040 and (if you itemized your deductions) Schedule A. (What’s that, you say? It took you more than five minutes to find your tax forms? I’m sorry, but I’m not responsible for your sloppy bookkeeping. Let’s just move on.)
Step 2: Look at the top of the second page of your Form 1040 (it’s Line 38). This lists your Adjusted Gross Income, and the tax plan won’t change that number for most employees who do not have business income. Start here.
Step 3: Figure out your deductions. The standard deduction nearly doubles to $24,000 for a married couple filing jointly and $12,000 for an individual.
If you took the standard deduction last year or if your itemized deductions were less than these amounts, then you’ll use the new standard deduction under the new law.
As for those couples who had more than $24,000 in itemized deductions, here’s how the law affects you:
– The new law keeps all deductions for charity and existing mortgage interest payments.
– It limits mortgage interest deductions on new homes to the first $750,000 of a loan (down from $1 million).
– The one big change that will affect a significant number of people is the limitation on deductions for state and local taxes. That deduction used to be unlimited; it’s now capped at $10,000 for combined property and income taxes paid to state and local governments. So for most who would still itemize under the new law, calculate how much you paid in state and local taxes. If the amount exceeded $10,000, subtract the excess from your total deductions.
Once you’ve figured if it makes more sense to still itemize or take the standard deduction, subtract the deductions from your Adjusted Gross Income. This is your taxable income.
You can access a fuller list of how the new law changes or keeps smaller tax deductions here.
Step 4: After accounting for deductions, calculate how much tax you owe using the new tax brackets listed here.
Step 5: Calculate tax credits for children and other dependents: $2,000 for each child 17 years old or younger, and $500 for other dependents (including children older than 17).
The child tax credit used to be $1,000 per child and phased out beginning at $110,000 of income for married couples; the new phaseout is $400,000.
Subtract those credits from the number you got in Step 4, and (for most of you) the answer is how much you’d owe under the new tax law.
