What’s New in Tax Reform?
In our previous look at how the new tax plan will affect your income taxes in 2018, we examined the Senate and House plans. The tax reform bill has undergone reconciliation and has now passed. Here’s what you can look forward to in the new package, broken down for single and joint filers.
Shifting Tax Brackets
The Senate’s seven-bracket plan has been adopted in the final bill over the House’s original four-bracket proposal. The previous top tax bracket paid taxes at a rate of 39.6 percent; under the reconciled tax package, that rate drops to 37 percent and raises thresholds for many brackets, allowing these households to keep more of their earned income while lowering taxes on middle-income families. The top-tier tax bracket is now lower than the proposed 38.5 percent rate of the preliminary bills, a boon for job creators.
The new plan is a progressive tax, which means you pay graduated percentages on portions of your income instead of being taxed at the top rate for total income. For the first $9,525 of your household’s taxable income, for example, you would pay 10 percent in taxes. On the next $29,175 of your taxable income, you can expect to pay 12 percent in federal income tax. The following tables clarify payment brackets.
Because progressive taxes apply only to earnings that exceed the minimum threshold within each bracket, it’s important to know these thresholds for all tax brackets and not just your top bracket. The figures in the tables below are for unadjusted income and do not include additional deductions and credits.
|New Individual & Married Tax Brackets
Under Final GOP Tax Plan
|Not over $9,525||10% of the taxable income|
|Over $9,525 but not over $38,700||$952.50 plus 12% of the excess over $9,525|
|Over $38,700 but not over $82,500||$4,453.50 plus 22% of the excess over $38,700|
|Over $82,500 but not over $157,500||$14,089.50 plus 24% of the excess over $82,500|
|Over $157,500 but not over $200,000||$32,089.50 plus 32% of the excess over $157,500|
|Over $200,000 but not over $500,000||$45,689.50 plus 35% of the excess over $200,000|
|Over $500,000||$150,689.50 plus 37% of the excess over $500,000|
|New Individual & Married Tax Brackets
Under Final GOP Tax Plan
|Married Filing Jointly|
|Not over $19,050||10% of the taxable income|
|Over $19,050 but not over $77,400||$1,905 plus 12% of the excess over $19,050|
|Over $77,400 but not over $165,000||$8,907 plus 22% of the excess over $77,400|
|Over $165,000 but not over $315,000||$28,179 plus 24% of the excess over $165,000|
|Over $315,000 but not over $400,000||$64,179 plus 32% of the excess over $315,000|
|Over $400,000 but not over $600,000||$91,379 plus 35% of the excess over $400,000|
|Over $600,000||$161,379 plus 37% of the excess over $600,000|
|©Michael Kitces www.kitces.com
Source: Joint Explanatory Statement of the Committee of
Conference regarding the Tax Cuts and Jobs Act (12/16/2017)
Higher Standard Deductions
According to IRS records, most taxpayers – 7 out of 10 – claim their standard deduction. The old standard deductible amount was significantly lower than under the new plan, which is now $12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples filing jointly. The higher standard deduction is designed to simplify and streamline the tax plan while helping families keep more of what they earn. In practice, the higher standard deduction will also benefit middle-income families who will now see more of their income free of taxation. For high-wage households, larger standard deductions also put more wealth back in the hands of earners.
Deductibles for State, Local, and Property Taxes
While earlier versions of the Senate tax plan considered eliminating state and local tax (SALT) deductions, the final bill that passed includes the House’s provision for deductions of up to $10,000 on state, local, and property taxes. For homeowners, mortgage interest on both primary and secondary residences remains deductible, but the limits have been revised. Under the new plan, mortgage interest deductibles will be available on loans of up to $750,000.
Changes to the Alternative Minimum Tax and Estate Taxes
The original proposal in the House removed the Alternative Minimum Tax (AMT) and estate taxes, while the Senate bill included both of these provisions. The final tax reform program is a compromise, keeping the estate tax and the AMT but raising thresholds much higher so they affect fewer taxpayers. The new estate tax applies to individuals receiving more than $11 million in inheritance or $22 million for joint filers.
The old threshold for the Alternative Minimum Tax was $120,700 for individual filers and $160,900 for married couples. Changes to tax laws raise these thresholds for full AMT payment to $500,000 for individuals and $1 million for jointly filed tax returns. Some families may pay a portion of AMT at incomes below these thresholds, so it’s important to talk with a CPA to assess your tax responsibility under the streamlined new program.
Larger Child Tax Credits
The House bill retained the current $1,000 child tax credit, but in the Senate, this credit saw an expansion that carried over into the reconciled tax reform bill. The new tax program now includes a child tax credit of up to $2,000 per child, available to families who earn up to $400,000. These changes present a significant benefit for single and married parents at higher income levels, revising thresholds upward to offer the child tax credit to families that were ineligible for it under last year’s tax legislation.
Your Next Steps
In our previous article, we discussed how sweeping reform will change the flow of wealth and how households manage their tax responsibilities. When the tax landscape shifts rapidly, you need smarter tax planning and professional guidance to make the most of upcoming changes and secure the wealth you’ve earned. Sound financial management decisions are more important now than ever and could chart your positive financial course for years to come.
In an upcoming article, we’ll take a look at corporate taxes and the changes you can expect to see for your business.
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Great info on the tax brackets categories for both individuals and Married. I hope these changes don’t affect Long Islanders as much.
I like the fact that this new law doubles on child credits. $2,000 per kid will help us tremendously. Every little bit helps specially when you live in Long Island.