Study: Americans could save $430 billion in federal taxes this year

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In a Nutshell

A Credit Karma analysis finds up to 94% of Credit Karma members may see their overall tax obligation decline for 2018 because of the Tax Cuts and Jobs Act, and that those with the highest credit scores and incomes could reap the biggest savings. Based on the analysis, Americans overall stand to pay $430 billion less in federal taxes this year.

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Credit Karma studied data from more than 1 million members who entered self-reported information into the company’s Tax Reform Impact tool, which is designed to help members understand how the Tax Cuts and Jobs Act could affect their 2018 federal income tax liability.

The study found that 94% of those members could see their overall federal income tax liability shrink for 2018. Those with the highest credit scores could reap the greatest savings — more than double what those with the lowest scores could expect to save. And overall, after extrapolating the results of the analysis, we found that Americans could owe $430 billion less in federal taxes this season. (See our methodology.)

Key findings from the study

94% of Credit Karma members could see their federal income tax liability decrease when they file their 2018 federal income tax returns this year.
Americans overall could save $430 billion in federal taxes this year, while Credit Karma members could see an average decrease in federal tax liability of $1,821 compared to what they could have owed without tax reform.
For members with the highest incomes ($510,301 or more), average savings would likely be the highest, at $7,685 on average. On the other hand, those with incomes between $9,701 and $25,000 could save the least — $974 on average.
Members with high credit scores (760 or higher on a scale of 300 to 850) may realize savings that are more than double what those with lower credit scores (less than 500) may receive; $2,816 and $1,220, respectively.
Among the tiny fraction of members who could see their tax liability increase (less than 1%), the additional amount averages just over $2,200.

 


Who could save

Most of the Credit Karma members who used the Tax Reform Impact tool could see their overall federal income tax bills decrease for 2018 due to tax reform. The majority of members in every credit score range (on a scale of 300 to 850) could see a lower tax bill, including …

  • More than 95% of members with credit scores between 660 and 759
  • 93% of those with scores between 500 and 579
  • 92% with scores lower than 500

Savings may range from $1,220 on average (for those in the lowest score range) to $2,816 for members with scores greater than 760 and up.

The majority of members on every income level could see a decrease in their 2018 federal taxes. This includes …

  • 97% of members earning from $84,201 to $110,000
  • 96% of those earning from $39,476 to $84,200 (the income level that encompasses the majority of Credit Karma members in the study)
  • 89% of those earning from $9,701 to $25,000

Factors driving the changes

The tax reform bill passed at the end of 2017 made a number of changes to the tax code that will affect 2018 federal income tax obligations for many Americans. Some of those changes include …

  • Lower tax rates for all filing statuses. For example, in 2017 a single filer earning $40,000 would have fallen into the 25% tax bracket. In 2018, that person’s tax rate would be 22%.
  • Higher standard deductions. Tax reform substantially increased the standard deduction for every filing status, starting with 2018 taxes.
  • Expanded child tax credit. The child tax credit increased to $2,000 per qualifying child, $1,400 of which could be refundable. Tax reform also added a $500 nonrefundable credit for qualifying dependents other than children and substantially raised the credit’s phase-out threshold so that more higher earners could be eligible for the credit.
  • Alternative minimum tax. Tax reform increased the amount of income automatically exempt from AMT calculations and increased the income level at which taxpayers gradually lose that exemption. This means fewer taxpayers will likely be affected by the AMT.

Points to remember

It’s important to note that even if a taxpayer’s 2018 federal tax obligation is less thanks to tax reform, that’s no guarantee they’ll be due a refund when they file their 2018 federal income tax return this year.

Whether they’ll get a refund or owe a balance come April 15 depends on how much federal income tax they had withheld from their paycheck (or paid in estimated payments) throughout the year. Taxpayers who overpaid would be likely to get a refund.

Those who underpaid would be likely to end up owing — and that could be true even if the total amount of their 2018 federal income tax is less than what they owed in 2017.

In fact, the U.S. Government Accountability Office predicts that about 30 million taxpayers didn’t have enough federal income tax withheld from their paychecks last year. That means approximately 21% of Americans could end up owing when they file their 2018 tax returns this year.

What you can do

You can file your federal income tax return with the IRS any time between Jan. 28 (when the IRS will begin processing returns) and April 15, but any tax you owe is due by April 15. If you’ll owe, you have options:

  • File early, make plans for how you’ll cover the amount you owe, and pay in full by April 15 to avoid interest and penalties.
  • Request a 120-day extension to pay. Interest will accrue on the unpaid balance, and you may face a late-payment penalty. But there are no fees for this type of arrangement.
  • Set up a longer-term payment plan with the IRS. You’ll pay interest and penalties on any balance that’s unpaid. Your payment plan may come with fees.

 


Methodology

This analysis is based on self-reported data from more than 1 million Credit Karma members (actual sample size: 1,001,783) who input their information into Credit Karma’s Tax Reform Impact tool, which estimates a member’s federal tax liability by taking a look at the taxes they pay throughout the year. This analysis shows how much a person may owe (liability) based upon self-reported annual household income, status (single or married) and new tax laws. This is not a nationally representative sample. However, we were able to determine how much less Americans could owe overall by extrapolating the results of our analysis. To create a representative savings amount on a national level, we looked at the number of Credit Karma members who used the Tax Reform Impact tool by score band by analyzing a representative sample of more than 1 million people. Then we used 2017 TransUnion® data on the percentage of people represented by each score range and multiplied that by the number of people in the total population based on 2017 U.S. Census Bureau population estimates (adult, +18). Once we had an estimate for the total number of Americans who had input their information into the Tax Reform Impact tool, we could determine, by score band, how much Americans could save collectively based on changes made under the Tax Cuts and Jobs Act. All percentages and dollar amounts were rounded to the nearest whole number.