The Tax Cuts and Jobs Act (TCJA) and Me

My 2018 personal returns are in and I wanted to share how my numbers turned out courtesy of the new tax cut.

First, let’s take a look at the pre-TCJA situation for my 2017 return. Once the details came out in late 2017, I figured it was my final opportunity to itemize my deductions so I did all of the following before 12/31/17:

• Paid all assessed property taxes due in 2018
• Doubled up all planned charitable contributions
• Paid an extra mortgage payment
• Increased final 2017 estimated state tax payment

When all was said and done, we were MFJ topping out in the 25% tax bracket and our effective tax rate (total tax/taxable income) ended up at 18.4%. At our MAGI I was able to max out my employer SEP IRA contribution and Roth IRA contributions for Mrs. Frugalson and myself.

Once we hit 2018, I tried to switch gears to a more TCJA-friendly approach where possible:

• Greater emphasis on business profit over salary due to the Section 199A 20% qualified business income deduction (QBIC)
• Change my work retirement plan to a solo 401k to help maintain or exceed employee/employer plan contributions allowed with my old SEP IRA
• Reduced charitable contributions due to extra giving in 2017

As it turned out, our 2018 AGI actually decreased ~1.5% due to increased retirement plan contributions, but our taxable income increased by about 2.4% with the switch to the standard deduction (minus the QBIC) and the loss of personal exemptions. We topped out in the 22% tax bracket and were able to qualify for child tax and education credits in 2018, giving us a 13.4% effective tax rate (a 5% reduction). At our MAGI we were still able to max out Roth IRA contributions for Mrs. Frugalson and myself and I was able to make a healthy contribution to my solo 401k.

Obviously, a 5% tax cut is nothing to sneeze at, but we will lose $1500 of the child tax credit in 2019 as the youngest Frugalson will age out of it. I’m hoping to qualify for a bigger bite of the American Opportunity Credit this year with increased retirement plan contributions, but that can be hard to gauge with unpredictable business income. Finally, I’ve also started to rethink our charitable contributions in terms of gifting appreciated shares of stock directly to charities instead of cash gifts since we can no longer itemize our deductions.

That being said, I have to admit that I am not a fan of this tax cut despite the immediate financial benefit it provided me for 2018. The previous tax rates were already at historic lows, and our debt and deficit problems were already getting worse before this tax cut. I could certainly get behind something like this if we were in a recession and needed short term financial stimulus, but unemployment was already very low and corporate profits were already very high when the TCJA was passed. I expect tax receipts to fall and figure it’s only a matter of time before our friends in Washington will be looking to “reform” (i.e. cut) my future Social Security and Medicare benefits to pay for it. Thanks guys! ;)