How Tax Brackets Have Changed
The tax plan that was passed late last year has been all over the news lately, which should come as no surprise; it represents the biggest change to U.S. tax code in almost 30 years. While tax brackets have shifted slightly over the years and are updated regularly for inflation, the Tax Cuts and Jobs Act changed tax brackets for individuals to a noticeable degree. Combined with other changes to the individual tax laws, you will almost certainly see an impact on your bottom line.
Congress retained the seven different tax brackets for both single and married filers, but the rates have changed, as have the income levels that apply to each tax rate. Below you can see the changes.
By now, it is likely you are familiar with these tables, but you might be confused about what the changes really mean. Let’s discuss how these tax tables actually work.
How Income Tax is Calculated
The percentages you see in the above tax tables are called marginal tax rates. A marginal tax rate is the tax rate that is applied on your next dollar of income. So, if you are in the new 24% tax bracket, your next dollar of income would be taxed at 24%. If you are in the 35% tax bracket, your next dollar of income will be taxed at 35%. That does not, however, mean that all of the previous dollars you earned were taxed at that same rate.
Federal income tax is considered a “progressive tax.” This means that, as income increases, so does the tax rate. This graduated scale is predicated on the theory that people who make more money have the theoretical ability to pay a larger percentage of their income in taxes. In other words, this means that the first $8,000 a person makes will be taxed at the same rate as a millionaire’s first $8,000 in income. As the millionaire makes more money, his or her additional earnings will be taxed at progressively higher rates.
What is the Outcome?
The tax rates, and the income brackets, have been reduced for most taxpayers compared to previous years. As such, taxpayers with the same taxable income will almost certainly see a tax savings from 2017 to 2018. Let’s look at a few examples:
Taxpayer A, a single filer, has taxable income of $45,000. Under 2017 tax law, they would owe taxes of $6,995. Under the TCJA, they would owe $5,840. This results in a 17% savings.
Taxpayer B, a single filer, has taxable income of $90,000. Under 2017 tax law, they would owe taxes of $18,245. Under the TCJA, they would owe $15,890. This results in a 13% savings.
Taxpayer C, a single filer, has taxable income of $550,000. Under 2017 tax law, they would owe taxes of $173,618. Under the TCJA, they would owe $169,190. This results in a 3% savings.
While this is an interesting exercise, it does not tell the whole story. Tax rates were not the only changes included in the Tax Cuts and Jobs Act that will affect your returns. The standard deduction has almost doubled; personal exemptions have been eliminated; the AMT exemption amount has increased, subjecting fewer taxpayers to AMT; the child tax credit has expanded; the list goes on, and you can read more about those changes here. It is important to note that, yes, while tax rates have generally dropped for most taxpayers, this is not the only metric that you should concern yourself with. The other changes to the individual tax code will affect your tax bill, as well.
How Can You Plan for the Future?
With all these moving parts, it can be difficult for you to predict what your final 2018 tax bill will look like. Luckily, our Spire professionals can help. We work with taxpayers to estimate just how these changes will impact their future tax positions. Our goal is to help you plan for these changes so that you can save the most money in taxes as you possibly can. Give us a call today at 732-381-8887.