What happens when income is higher, and itemized deductions aren’t as big a factor as a percentage of total income? In this case, the taxpayer earns a good living, and has lower than national average itemized deductions. Income is $367,653 in W-2 earnings, $782 in qualifying dividends¹, and $192 in other income, for a total of $368,627.

Itemized deductions in 2017 were $28,638 in SALT, $11,350 in charity, and $7,334 in miscellaneous deductions (reduced to $361 allowable due to 2% of AGI limit), for a total of $40,349. Personal exemptions were $4,050 per person in 2017. However, the old tax law limited itemized deductions and personal exemptions for higher-income taxpayers. Those limitations are reflected in the comparison below.

For the new tax law, SALT is limited to $10,000, and miscellaneous itemized deductions are repealed, so the new standard deduction of $24,000 is higher than the allowable itemized deductions of $21,350.

Descript	2017	2018	Change
AGI	368,627	368,627
Itemized/Std.	38,704	24,000	-14,704
Pers. Exempt.	4,536	0	-4,536
Taxable	325,387	344,627	19,240
Income Tax	82,454	73,526	-8,928
AMT	3,812	0	-3,812
M/C surtax2	1,059	1,059
NIT3	35	37	2
Total Taxes	87,360	74,622	-12,738

The loss of itemized deductions and personal exemptions were not as big a factor in this case as were the tax rate reductions and the AMT changes. Even though taxable income is increased by 5.91%, the final tax bill is reduced by 14.58%. The average tax rate as a percentage of AGI dropped from 23.70% to 20.24%. Most of the taxpayer’s income taxed at a lower rate than the prior year due to the tax bracket changes. Click here for information on the bracket changes.

¹Qualifying dividends and capital gains are taxed at a lower rate for almost all taxpayers. ²Additional Medicare Tax is a 0.9% surtax on W-2 Medicare tax-eligible wages above $250,000 for married filers. ³Net investment tax, levied on high-income taxpayers.