Personal income taxes

Several provisions of the tax law will affect National Income and Product Account (NIPA) estimates of personal income taxes. These include:

  • Redefinition of income ranges and marginal tax rates of the seven individual income tax brackets
  • Elimination of the personal exemption deduction
  • Doubling of the standard deduction
  • Increase in the Child Tax Credit
  • Increase in the amount of income exempt from the Alternative Minimum Tax
  • Repeal or limitation in the size of other existing deductions including mortgage interest, state and local taxes, and interest on home equity loans
  • Increase in the amount of pass-through income that can be deducted

In the NIPAs, federal personal income taxes consist of withheld taxes and nonwithheld taxes. Withheld taxes are collected through withholdings from employee wages. Nonwithheld taxes are personal income taxes collected in any other way: as final settlements or refunds paid when taxpayers file their tax returns, as well as payments of back taxes, fiduciary taxes, and taxes on income reported to the IRS through declarations. Income reported through declarations includes the income of pass-through businesses, which is taxed as the personal income of business owners and investors rather than as business income.

Monthly estimates of personal current taxes are published on NIPA Table 2.6 – Personal Income and Its Disposition.

Withheld personal income taxes

Annual estimates of withheld taxes are published on line 4 of NIPA Table 3.4 - Personal Current Tax Receipts and quarterly estimates are published on Underlying NIPA Table 3.4U. Most of the tax provisions listed above will affect estimates of withheld taxes beginning in January 2018 as taxpayers and their employers adjust withholding rates to anticipate 2018 tax liabilities.

NIPA estimates of withheld personal income taxes generally follow trends in wages. To recognize the effects of changes in tax laws from one year to the next, a step up or step down is applied to the estimates of withheld personal taxes in January of the year of the law change. The size of the step down for January 2018 represents the total amount by which withheld tax revenue decreases from calendar year 2017 to 2018 because of the new tax provisions. The estimated size of this adjustment will initially be based on projections prepared by the Treasury Department’s Office of Tax Analysis (OTA).

Nonwithheld personal income taxes

NIPA estimates of nonwithheld taxes are published on lines 5 and 6 of NIPA Table 3.4. Estimates of nonwithheld taxes paid for 2018 will decrease because of the impact of the tax law changes on income reported through declarations. Monthly NIPA estimates of these taxes are derived through an interpolation of the annual estimate of tax collections, which will initially be based on projections prepared by Treasury’s Office of Tax Analysis. Because taxes on declared income are typically not paid until the quarter after the income is reported, the decrease in annual tax liabilities will not be fully reflected in our annual tax estimates until 2019.

Estimates of nonwithheld taxes for 2019 also will reflect the amounts people pay as final tax settlements or receive as refunds in 2019 for tax liabilities incurred in 2018. The amounts of these settlements and refunds will reflect the extent to which taxes withheld in 2018 under- or over-anticipated taxpayer liabilities for 2018 under the new tax provisions. In the NIPAs, annual projections of tax settlements, refunds, and back taxes are recorded equally in each of the 12 months of the calendar year in which they are paid, causing a step up or down in our estimates every January. The size of the step up or down for January 2019 will primarily represent the amounts by which settlements and refunds paid in 2019 differ from the comparable totals for 2018.

Estate and gift taxes

The tax law doubles the exemption amount for taxes on estate, gift, and generation skipping transfers from $5.5 million to $11.0 million for fiscal years 2018 through 2024.

In the NIPAs, taxes on estate and gift transfers are classified as capital transfers to the federal government because they are associated with transfers of property and assets rather than with income from current production. Gift taxes are assessed on transfers of money or property during a taxpayer’s lifetime and estate taxes are assessed on transfers of money or property following a death. These taxes are shown on line 41 of NIPA Table 3.2 – Federal Government Current Receipts and Expenditures and on lines 19 and 37 of NIPA Table 5.11U – Capital Transfers Paid and Received, by Sector and by Type.

NIPA estimates of these taxes are based on collections reported by the U.S. Treasury Department and are included in the NIPAs as they are paid, which can often be several quarters after the gift or death occurs.