A Preliminary Look at 2018 Tax Data

Federal Tax

At the end of June, the Internal Revenue Service released the first set of tax return data from 2018. These are the first numbers on the effects of the Tax Cuts and Jobs Act (TCJA), which was passed in December of 2017. The preliminary data provides aggregate information by income group on a range of topics, including sources of income as well as deductions and credits taken by taxpayers.

It is important to note that this new information does not contain data from those who requested a filing extension. For this reason, it includes only about 80 percent of total income tax liability for the year 2018.

Overall, the data seems to match expectations about changes. Let’s look at the highlights.

Tax Liability

Critics of the TCJA have claimed that the law’s tax cuts only benefit high-income individuals and businesses. However, the visual below shows that total tax liability fell for all income groups except those earning over $1 million in 2018.

Importantly, these numbers show total tax liability. While taxpayers in every income group (except for those earning more than $1 million) saw a tax cut on average, individual circumstances vary.

2018 tax data, effects of the Tax Cuts and Jobs Act, 2018 tax return data, federal tax reform impact

Filing Methods

One of the most significant changes introduced by the TCJA was the expansion of the standard deduction. The standard deduction increased from $6,500 to $12,000 for single filers, and from $13,000 to $24,000 for those married filing jointly, in 2018.

This change had a significant impact on the ease of filing for many taxpayers, as taking the standard deduction simplifies the tax filing process. As shown below, the percent of taxpayers who itemized went down at all income levels. Overall, the percentage of the population that itemizes decreased from 30 percent to 10 percent.

2018 tax data, effects of the Tax Cuts and Jobs Act, 2018 tax return data, federal tax reform impact

Tax Returns & Withholding

There was some friction during the 2019 filing season as changes to income tax withholding tables resulted in lower-than-expected tax refunds. Decreased tax returns, however, do not necessarily translate to increased tax liabilities.

Since individual level data was not released on this topic, the graph below compares the total dollar amount returned to taxpayers in each income category before and after the TCJA. While refunds went down for some, recall that total tax liability dropped across all income levels but the highest.

2018 tax data, effects of the Tax Cuts and Jobs Act, 2018 tax return data, federal tax reform impact

Child Tax Credit

The TCJA increased the amount parents receive from the Child Tax Credit (CTC).

The maximum credit amount increased from $1,000 to $2,000 per child in 2018. Additionally, the income level where the CTC begins to phase out increased from $110,000 to $400,000 for married taxpayers ($75,000 to $200,000 for single taxpayers). Overall, these changes broadened the scope and increased the cost of the program.

As seen in the graph below, the expansion benefited taxpayers across the income spectrum, except for the highest levels. Not only did the number of people who received the credit double, but the number who claimed the credit increased even within brackets that were previously able to claim the credit. Due to the higher phaseout threshold, parents in higher income levels were able to claim the credit for the first time.

2018 tax data, effects of the Tax Cuts and Jobs Act, 2018 tax return data, federal tax reform impact

2018 tax data, effects of the Tax Cuts and Jobs Act, 2018 tax return data, federal tax reform impact

Qualified Business Income

In 2018, certain taxpayers were able to claim the qualified business income (QBI) deduction, frequently referred to as “Section 199A” or the “pass-through deduction,” for the first time. Under this provision, taxpayers could deduct up to 20 percent of pass-through business income from their taxable income. The QBI deduction has been criticized for its onerous qualifications and nonneutrality.

This data is the first look at the real cost of the pass-through deduction but remains incomplete; taxpayers who qualify for this deduction tend to be wealthy business owners with complex finances and are therefore more likely to request a filing extension.

Thus far, the benefits of the deduction are skewed towards those earning high income. This is especially true when you compare the number of people claiming QBI to the amount they receive across income levels, as visualized in the graph below.

2018 tax data, effects of the Tax Cuts and Jobs Act, 2018 tax return data, federal tax reform impact

Conclusions

The TCJA was historic, but not perfect. The initial data shows that the TCJA expanded the use of several credits and deductions, made the standard deduction more favorable than itemizing, reduced tax refunds, and lowered taxes for most Americans. As data on the changes continues to roll in, it will remind us that federal tax reform is far from complete.

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