How the Tax Reform Calculator Works.

• Confidentiality of the data you enter.
• A walk through the steps in calculating the effect of tax reform.
• Using consumer expenditure data to estimate sales and food tax savings.
• Known limitations of the Tax Reform Calculator.

What goes on inside your computer when you click the calculate button:

1. The Tax Reform Calculator first determines your deductions based upon your filing status, the number of dependents, and the number of seniors you claimed.  Both proposals differ in the deduction amounts, so the Calculator uses the appropriate deductions.
2. That deduction is then subtracted from the amount of income you entered in line 1. This gives the "taxable income."
3. Then your taxable income is broken down into tax brackets depending on your filing status.  Each bracket is then multiplied by the appropriate rate. The tiers are then totaled which gives you your income tax liability.
4. The computer model then calculates estimated expenditures based on consumer expenditure data using the computer simulation of consumer spending habits. This is then multiplied by the cut in sales tax between the local rate is in your city/county and the new unified state rate.
5. If you pay the Hall Tax, that amount is counted as savings because the Hall Tax is eliminated. It is replaced by the single income tax on both earned and unearned income.
6. If you pay income tax in a neighboring state, the amount of your Tennessee income tax is applied as a credit towards your out-of-state income tax. In some cases where the Tennessee income tax is greater than the out-of-state tax, the entire out-of-state income tax is effectively eliminated.
7. The net impact of the proposal on your state and local taxes is then calculated by taking the income tax due, and subtracting the sales tax savings, food tax savings, Hall Tax savings, and out-of-state income tax savings.
8. If your new state income taxes paid are greater than either current sales tax deduction or your current income tax deduction (from Hall Tax paid or income tax paid in neighboring states), then the calculator will estimate how much additional federal savings you may realize if you itemize on your federal taxes.
9. If you have significant federal savings, and you are in an income bracket that is likely to itemize, then the calculator will also show you the net effect of all taxes paid, subtracting the federal tax savings from any additional state taxes you may pay.

IMPORTANT NOTE ON KNOWN LIMITATIONS:

Following is a summary of the known limitations of the Tax Reform Calculator.

• The sales and food tax savings is based on actual consumer expenditure data from the U.S. Bureau of Statistics. These statistics show that people in very low income groups (generally under $3,000 per year) actually consume more than their annual income, in some cases as much as 280% of their income.

  The reasons for this is that many people in this income group actually do consume more than their income. A few examples of where this may occur include:

  • Seniors who live off of savings and equity with very little actual income.
  • People who are between jobs accumulating credit card or other forms of debt.

  In order to be conservative in our estimates of tax savings while still acknowledging the very real conditions in which many people live, we chose to cap the total consumption rates (food included) at 170% of income.

• Single people who cannot claim themselves, generally teenagers living at home with a part-time job (their parents already claim them on their tax return), cannot effectively use the Calculator. Neither the income tax liability nor the sales and food tax savings will accurately reflect their real circumstance.

• The Tax Reform Calculator does not take into account the differing taxation of capital gains under different proposals. If you have a significant amount of capital gains, the Tax Reform Calculator may not effectively estimate the effect of tax reform on your situation. Please consult an accountant in this case.

• The Tax Reform Calculator does not account for the differing sales tax rate on large ticket items. Under current law, the local option tax applies only to the first $1,600 of a purchase, with the full 9.75% applying to the next $1,600 in value, and the state 7% sales tax applying to the remaining value of the purchase.

  By combining the state and local sales tax into one consolidated sales tax, the Tax Commission Plan renders the cap null and void since there is no longer a local sales tax to cap. This means that the savings on big-ticket items is less (7% to 6%) than the savings on smaller items (as much as 9.75% to 6%). If you consistently make purchases above $1,600, consult an accountant for actual sales tax savings.

• For those who choose to itemize on their federal taxes, the Tax Reform Calculator will determine if your new income tax deduction is greater than your current sales tax deduction or Hall Income tax deduction as noted in lines 8 & 9 above. Because the sales tax deduction is based on IRS publication 600, it does not account for big ticket purchases like cars and boats which must be tracked separately according to the new IRS rules. As a result, if you have expect to purchase any big ticket items, the value of your sales tax deduction will likely be more. Because of this, and various other factors, the estimated federal tax savings can vary significantly. As a result, the estimated savings given should serve as a guide, but consult an accountant for actual savings from federal deductibility.

• Other factors affecting your adjusted gross income may possibly change your actual liability.

The Tax Reform Calculator is designed to ESTIMATE the impact of tax reform on your personal situation. Please consult an accountant for exact calculations.