Many Georgians will experience a tax increase in 2018, unless our elected officials take action now.
Many of these same public servants have pledged not to raise taxes, but unless they address a looming issue, their inaction will do just that.
In December 2017, the federal government made sweeping changes to the federal tax system. In 2018, these changes will reduce taxes for most individuals who pay federal tax. These changes include reduced rates, improved child tax credits and increases to the standard deduction. The increases to the standard deduction will negatively impact many Georgians, with a potential negative surprise next tax season.
For a little background, the Georgia tax system piggybacks off the federal tax system. A taxpayer calculates their adjusted gross income (AGI) on their Federal Form 1040. Georgia uses that federal AGI number, with a few minor variations, (e.g. depreciation differences, retirement income exclusions or out-of-state municipal bond interest).
The taxpayer also calculates deductions on his Federal form 1040. The taxpayer can use two different methods of deductions: either take the standard deduction (in 2017, $6,350 for single, or $12,700 for married filing joint), or itemized deductions. Whichever method the taxpayer chooses on the Federal form, he must do the same on the Georgia return. On both returns a taxpayer then deducts personal exemptions, resulting in taxable income.
The federal standard deduction adjusts for inflation each year, but the Georgia standard deduction has been unchanged for many years. For 2017, the federal standard deduction for a married couple is $12,700. The Georgia standard deduction is $3,000. Fifteen years ago, in 2002, the Federal standard deduction was $7,850 and the Georgia standard deduction was $3,000. That’s a 62 percent increase in the Federal deduction with no change to the Georgia number.
The real issue is Georgia’s standard deduction. Under current law, if a married couple uses the standard deduction ($12,700) under the Federal system, they must use the Georgia standard deduction ($3,000). For those who have filed, using the standard deduction in the past, the federal law change will not affect their Georgia return.
In 2018, the federal standard deduction increases to $24,000, but the Georgia standard deduction remains unchanged at $3,000.
Because of the Federal Standard deduction increase, more Georgians will elect to take the standard deduction on their Georgia returns. Doing so will result in a state tax increase. This tax increase could be as much as $1,260 for a married couple (difference between $24,000 Federal Standard deduction and $3,000 Georgia Standard deduction, at 6 percent tax rate).
This tax increase affects middle income Georgians. For families that earn between $75,000 and $200,000 annually, their tax bill will potentially increase from $500 to $1,200.
To be transparent, here’s my assumptions in calculating these numbers. First, I assumed the family owned a home around $135,000 in value. This house had a mortgage around $100,000. The family also contributes 5 percent of their income to charity annually. These are not wealthy Georgians, these are our neighbors and friends.
For families who earn over $200,000 annually, the federal tax change will most likely not impact their Georgia returns. These taxpayers will itemize regardless, and for families under $75,000, they most likely filed using the standard deduction previously.
There are always exceptions and variations that will impact these calculations, but generally speaking, the middle class of Georgia will have a tax increase in 2018.
What can be done? The Georgia legislature needs to take action before cross-over day. There are countless options available, but here are a couple simple options to consider. First, the state could increase the standard deduction.
If Georgia tripled or quadrupled the standard deduction to $9,000 or $12,000, it would reduce the tax increase by $360 to $540. It would result in lower taxes for lower-income Georgians and reduce the impact on those making between $75,000 and $200,000.
It is not a perfect solution, but it is the simplest.
Another option would be to allow Georgians to calculate itemized deductions on their state return, regardless of how they calculate deductions on the Federal return. This would be the best solution, resulting in the least impact on all Georgians, but it would place a greater burden on the Department of Revenue.
Timothy Higgins, CPA and partner at Higgins and Smith