It depends. Most taxpayers will not see a significant net tax change. Tax rates are decreasing. The standard deduction is nearly doubling. Deductions are being capped and eliminated. The Alternative Minimum Tax exemption is increasing. The people most affected will be high-income earners, who itemize, and depended greatly on the deductions, which are being either eliminated or capped, to offset their tax liability. Although, there are some specific taxable income ranges that will see a rate increase, as discussed below. To determine if the new federal tax law will mean Ohioans pay higher income taxes, please see below for additional information on some of the biggest changes under the New Tax Reform.
There are still seven tax brackets. However, for 2018, the tax rates have been slightly lowered, and the income ranges have been adjusted. For most people, this will mean their tax rate will decrease slightly, which will help offset the effect eliminating or capping of certain itemized deductions. However, there is a group of high-income earners (single filers $200,001 - $416,700 / married filing jointly $400,001 - $416,700), who will see a 2% tax rate increase.
Married Filing Jointly
|10%||$0 - $9,525||$0 - $19,050|
|12%||$9,526 - $38,700||$19,051 - $77,400|
|22%||$38,701 - $82,500||$77,401 - $165,000|
||$82,501 - $157,500||$165,001 - $315,000|
||$157,501 - $200,000||$315,001 - $400,000|
||$200,001 - $500,000||$400,001 - $600,000|
||$500,001 +||$600,001 +|
Head of Household
Married Filing Separately
||$0 - $13,600||$0 - $9,525|
|12%||$13,601 - $51,800||$9,526 - $38,700|
|22%||$51,801 - $82,500||$38,701 - $82,500|
|24%||$82,501 - $157,500||$82,501 - $157,500|
|32%||$157,501 - $200,000||$157,501 - $200,000|
|35%||$200,001 - $500,000||$200,001 - $300,000|
|37%||$500,001 +||$300,001 +|
If you do not remember your tax bracket for 2017 and want to compare, you can find the 2017 tax brackets here. For most taxpayers, except those with taxable income in the ranges mentioned above, who will see an 2% increase, and those with taxable incomes of $9,325 or below, whose tax bracket will not change, the tax rate will decrease 2% - 3%.
The standard deduction is nearly doubling for taxpayers in 2018. For most taxpayers, this will not equal a huge net tax difference because the personal exemption is being eliminated as well. For example, in 2017, a single filer would qualify for a standard deduction of $6,350 and a personal exemption of $4,050 for a total deduction of $10,400. In 2018, a single filer would qualify for a standard deduction of $12,000 (or an additional deduction of $1,600). A married couple filing jointly in 2017 would qualify for a $12,700 standard deduction and a personal exemption of $8,100 ($4,050 x 2) for a total deduction of $20,800. In 2018, a married filing jointly couple will qualify for a standard deduction of $24,000 (or an additional deduction of $3,200). This will help slightly decrease taxes for lower wage earners. For middle class earners, who itemize deductions, the increased standard deduction will help offset the effect the elimination and cap on some of the itemized deductions will have on taxpayers.
There will be some taxpayers these changes affect negatively, who will see an increase in taxes. However, this is expected to be a small percentage. For example, if a married couple filing jointly took an itemized deduction for $23,000 in 2017, they would have qualified for a total deduction of $31,100 ($23,000 + $8,100 personal exemption). The couple under the same circumstances for tax year 2018 would qualify for a $24,000 standard deduction, because it would give them a $1,000 greater deduction than itemizing deductions. Since the personal exemption has been eliminated for 2018, this would mean they would have a $7,100 less tax deduction. However, even if this tax situation applies to you, the likelihood of you seeing a significant net tax increase is low due to the tax rate decrease discussed above unless you are a high-income earner within the specific ranges discussed above.
2017 Standard Deduction
2018 Standard Deduction
|Married Filing Separately||$6,350||$12,000|
|Married Filing Jointly
|Head of Household
For high-income earners that rely heavily on itemized deductions, several of the itemized deductions are being either eliminated or capped in 2018. Depending on how much you depend on these deductions to offset your tax liability will depend on how much they affect the amount of taxes you will owe. These changes to itemized deductions will not affect taxpayers that take the standard deduction. Also, taxpayers, who itemize deductions, but only get a slightly larger deduction by doing so, will not be drastically affected. For example, a single filer, who took an itemized deduction of $8,000 in 2017 would have received a total deduction of $12,050 ($10,050 + $4,050 personal exemption). The same taxpayer with the same deductions in 2018 would qualify for a standard deduction of $12,000. Although, it does result in a $50 less deduction, the effect on tax liability will be minimal.
|Mortgage Interest||Capped||Limited to mortgage interest on home acquisition loans up to $750,000.|
|Home Equity Loans||Capped and/or Eliminated||Deduction no longer allowed for loans that are used for other reasons other than purchasing or making improvements to the home the loan was taken out on. Also, the cap up to $750,000 applies to the combined mortgage debt limit of all loans, including primary mortgage, second mortgage, and home equity. The grandfather rule may apply to older loans.|
|State and Local Income Taxes||Capped||State and local income taxes, which includes property taxes, are subject to a $10,000 cap, $5,000 cap for married taxpayers filing separately.|
|Moving Expenses||Eliminated||Taxpayers can no longer claim a deduction for moving expenses related to a move for work.|
|Job Expenses (W-2 work expenses)
||Eliminated||Expenses for W-2 income, including mileage, home office, work clothes, etc. is eliminated.|
|Uncompensated Personal Casualty Losses
||Eliminated||Losses for personal casualty and theft losses, including fire, wind, storm, flood, or theft, are eliminated, except for personal casualty losses occurring in a Federally-declared disaster area.|
||Increased||Medical and dental expenses above 7.5% of adjusted gross income (AGI) (down from 10%) for 2017 and 2018. Beginning with tax year 2019, the floor for eligible medical expenses returns to 10% of AGI.|
||Increased and Eliminated||Charitable donations are now allowed up to 60% of adjusted gross income (increased from 50%). Charitable miles rate stays at $0.14. Taxpayers are no longer able to deduct, as a charitable donation, payments made to colleges in exchange for tickets to events or rights to seats at stadiums.|
|Deductions Subject to 2% of Adjusted Gross Income
The miscellaneous itemized deductions subject to the 2% floor of adjust gross income have been eliminated. Examples include: tax preparation fees; W-2 business expenses including: unreimbursed business mileage, travel, meals, union dues, work clothes, work-related education, and home office deduction taken as an employee working from home; educator expenses; and many others.
Will the New Federal Tax Law Mean Ohioans Pay Higher Income Taxes? Yes and no. However, it is important to look at the overall tax implications, not just one or two changes under the New Tax Reform. Depending on how the changes affect individual taxpayers, some will see their taxes increase under one change only for the increase to be offset by a different change of the new reform. However, high-income earners, especially those whose tax rate is increasing and/or who relied heavily on the itemized deductions to offset their tax liability that are either eliminated or capped under the new law, could see a significant increase, depending on how the increased exemption for the Alternative Minimum Tax affects their tax situation. The majority of Ohioans, low to middle class income earners, will not see a huge net tax change. Most Ohioans will see a slight decrease.
To get a better understanding of how these and the other changes under the New Tax Reform will affect your individual tax situation, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.