There has been a lot of discussion about tax reform lately with the House having passed their tax reform bill in mid-November and now the Senate is set to vote this week on a similar bill. Republicans say this will spur corporate growth which will create jobs and Democrats say it’s just a tax break for the wealthy.

We have investigated the major tax changes in the bill to determine how they will affect families and individuals, particularly those in California. From that analysis we created an online tax calculator that allows you to input your information and immediately see how the taxes you owe will change. For now, it just covers the House bill as compared to current tax law. Once the Senate passes a bill we will incorporate those changes.

If you would like to know what impact the tax bill will have on your taxes, you can find out using the calculator here.

Everyone will need to enter the data at the top (filing status, income, etc.) and if you itemize deductions, you’ll need to enter all your deductions. If you’re not a California resident, but want to include your state income tax as a deduction, select “No” for California resident and you can add your state income tax to the student loan interest field which will then deal with this as a deduction under the current law, but not under the proposed law in the House bill. If you have any questions or comments, just let us know!


Along with allowing individuals and families to understand their situation better, we used our calculator to measure the impact the bill will have on various types of households for different income levels. The following charts show our results at various income levels for a family of four who owns their home in California.

Taxpayers take the larger of either the standard deduction or the sum of their available itemized deductions. The proposed plan increases the standard deduction while eliminating or capping many of the itemized deductions currently available. Many California families itemize due to our high state income taxes and high property values. Currently, state income taxes as well as property taxes and interest expense on most mortgages are deductible. Now going back to our family of four, how will the changes in itemized deductions impact the taxes they owe?

We had to make a few assumptions about our family and their home to do this:

  • •Both children are under 17 years old. The new plan is worse for you if your dependents are 17 or older.
  • Assessed home value is four times the first $250,000 in annual income. For example, $250,000 in income assumes a $1M home. For income above $250,000 we added an additional $2 in home value per dollar of income. Example: $300,000 income equals a $1.1M home.
  • Mortgage balance is three times annual income and interest rate is 4%.
  • Household contributes 5% of income to tax-deferred retirement accounts (401k, etc.)
  • Household makes charitable contributions of 3% of income.

We calculate the taxable income taking into consideration standard deduction vs. itemizing deductions along with exemptions in the current tax system (these are gone in the proposed plan). Uncommon deductions are not included, although the changes to some of those are likely to be very painful for many people (see more below). Then we apply the tax brackets, current and proposed, and finally apply the child tax credit, taking the phase-outs due to income limits into account.


The first chart shows the change in the family’s taxes under the proposed House tax reform bill with income level increasing from left to right. The second shows this same value as a percentage of household income.

Figure 1: Family of four with both children under 17
Figure 2: Family of four with both children under 17

These numbers aren’t really much of a tax cut for our family. While families with incomes between $60,000 and $250,000 do get a small tax cut, it’s largely because of the child tax credit. As soon as one of those two kids turns 17, the tax cut goes away. The next chart shows the same family of four with one child under 17 and one child 17 years old or older.

Figure 3: Family of four with only one child under 17

For a single person who is a homeowner and contributes 5% of income to tax-deferred retirement accounts and gives 3% to charitable organizations, the tax cut goes away completely above $70,000 in annual income. Here’s the chart of change in tax as a percentage of income for people who file as single.

Figure 4: Homeowner who is single

None of this considers the many tax deductions related to education and healthcare that are being removed. High levels (generally greater than 10% of income) of medical and dental expenses are currently tax deductible as are qualified education expenses and student loan interest. This tax bill is removing help for the sick and those seeking to better themselves through education. It’s also attacking higher education directly with tuition waivers for graduate students to be treated as taxable income.

It’s hard to write about this and not address the elephant in the room. The real tax cut is going to business owners with the hope that their windfall will somehow trickle back down to employees.  The increase in taxes for high income families in the charts above only apply to those who are employees. If you are an employee living in a state with income tax (even a 4% to 5% tax rate) and your income is high (over $250,000 annually) your taxes are likely going up. But not if you own a corporation. There are plenty of others who have addressed this point so we will not go through all the details. Taxpayers should realize that any potential savings they may enjoy will be dwarfed by the benefits received by wealthy business owners.  

Please Note: While our tax comparison calculator takes most of the major tax changes into account, it doesn't cover everything. One item that is missing is the alternative minimum tax (AMT). We have tried to model all the incorporated changes accurately and believe we have, but we can't guarantee it's perfect and there are certainly provision of the Tax Cuts and Jobs Act that are not included in our calculator.

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Jason Draut, CFP®
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Chris Sheehy, CFP®
180 7th Ave Suite 204
Santa Cruz, CA 95062
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