By now you may have heard some of the rumors surrounding the 2018 tax reform bill and could be wondering how it will affect you and your taxes. Come with Flex Tax and Consulting Group walk through some of the most significant changes and what they could mean for you.
The New Tax Reform Bill Doesn’t Impact Your 2017 Taxes
First of all, the tax reform bill—formally known as the “Tax Cuts and Jobs Act”—won’t affect your 2017 taxes you’ll file by April 15 of this year. While it’s true some folks may start seeing a tax break in their paychecks in early 2018, the income tax credits and deductions won’t be applicable until next tax season. So, don’t panic! You have plenty of time to learn about the changes before you file.
What Does A&K Tax to Say About the New Tax Reform Bill?
According to the U.S. Congress’s Committee on Ways and Means—the primary tax-writing committee in the House of Representatives—the tax reform bill has a handful of explicit purposes.(1) The stated purposes include:
- Simplifying the tax process
- Preserving the mortgage interest deduction
- Eliminating Obamacare’s individual mandate penalty tax
- Increasing the standard deduction
- More support to American families
- Providing relief for Americans with expensive medical bills
- Improving savings vehicles for education
Difference in Marginal Tax Rates and Brackets
One of the most widely discussed changes in the 2018 tax reform bill involves income tax brackets and marginal tax rates. Tax brackets refer to specific ranges of income and their corresponding tax rates. Marginal tax rates apply to different levels of income—the higher the income, the higher the tax rate. What this means to you is that your income is not taxed at one rate but at several different rates, depending on your income.
For 2018, the tax brackets have shifted, and almost all of the marginal tax rates have been cut. That means nearly everyone will have lower income tax rates (on the same income) in 2018.
| 2017 Marginal Tax Rates | Single 2017 Tax Bracket | Married Filing Jointly 2017 Tax Bracket | Head of Household 2017 Tax Bracket | Married Filing Separately 2017 Tax Bracket |
|---|---|---|---|---|
| 10% | $0 – $9,325 | $0 – $18,650 | $0 – $13,350 | $0 – $9,325 |
| 15% | $9,326 – $37,950 | $18,651 – $75,900 | $13,351 – $50,800 | $9,326 – $37,950 |
| 25% | $37,951 – $91,900 | $75,901 – $153,100 | $50,801 – $131,200 | $37,951 – $76,550 |
| 28% | $91,901 – $191,650 | $153,101 – $233,350 | $131,201 – $212,500 | $76,551 – $116,675 |
| 33% | $191,651 – $416,700 | $233,351 – $416,700 | $212,501 – $416,700 | $116,676 – $208,350 |
| 35% | $416,701 – $418,400 | $416,701 – $470,700 | $416,701 – $444,550 | $208,351 – $235,350 |
| 39.6% | Over $418,400 | Over $470,700 | Over $444,550 | Over $235,350 |
Chart: 2017 Marginal Income Tax Rates and Brackets(2)
A single individual with a taxable income of $100,000 in 2017 paid $20,981.35 in taxes: (8,100 x 0.28) + (53,949 x 0.25) + (28,624 x 0.15) + (9,325 x 0.10).
| 2018 Marginal Tax Rates | Single 2018 Tax Bracket | Married Filing Jointly 2018 Tax Bracket | Head of Household 2018 Tax Bracket | Married Filing Separately 2018 Tax Bracket |
|---|---|---|---|---|
| 10% | $0 – $9,525 | $0 – $19,050 | $0 – $13,600 | $0 – $9,525 |
| 12% | $9,525 – $38,700 | $19,050 – $77,400 | $13,600 – $51,800 | $9,525 – $38,700 |
| 22% | $38,700 – $82,500 | $77,400 – $165,000 | $51,800 – $82,500 | $38,700 – $82,500 |
| 24% | $82,500 – $157,500 | $165,000 – $315,000 | $82,500 – $157,500 | $82,500 – $157,500 |
| 32% | $157,500 – $200,000 | $315,000 – $400,000 | $157,500 – $200,000 | $157,500 – $200,000 |
| 35% | $200,000 – $500,000 | $400,000 – $600,000 | $200,000 – $500,000 | $200,000 – $300,000 |
| 37% | Over $500,000 | Over $600,000 | Over $500,000 | Over $300,000 |
Chart: 2018 Marginal Income Tax Rates and Brackets(3)
Standard Deduction
Another important difference in the 2018 tax reform bill is that the standard deduction has almost doubled.
The standard deduction is an automatic reduction in a taxpayer’s tax obligation. U.S. taxpayers have long had the option of taking the federal standard deduction or itemizing their deductions—identifying which expenses they qualify for and calculating their deductions one by one. Itemizing is more of a hassle, but it’s worth it if your itemized deductions exceed the amount of the standard deduction.
| Filing Status | 2017 Standard Deduction | 2018 Standard Deduction |
|---|---|---|
| Single | $6,350 | $12,000 |
| Married Filing Jointly | $12,700 | $24,000 |
| Married Filing Separately | $6,350 | $12,000 |
| Head of Household | $9,350 | $18,000 |
Chart: Changes to the Standard Deduction(4)
At first glance, the increase in the standard deduction makes itemizing look even less worthwhile. But, the 2018 tax reform bill also eliminates the personal exemption—the amount a taxpayer gets to deduct from their taxable income for themselves and any dependents claimed on their tax return. Here’s how those two changes play out:
In 2017, the personal exemption was $4,050 per person and dependent.(5) So, in 2017, a married couple filing jointly with no dependents who made $100,000 received a $13,000 standard deduction and $8,100 in personal exemptions, leaving them with a taxable income of $78,900. In 2018, that same couple will receive a $24,000 standard deduction and no personal exemptions, leaving them with a taxable income of $76,000.
| Filing Status | 2017 Personal Exemption | 2018 Personal Exemption |
|---|---|---|
| Single With Income Less Than $261,500 |
$4,050 | Removed |
| Married Filing Jointly With Income Less Than $313,800 |
$4,050 | Removed |
| Head of Household With Income Less Than $287,650 |
$4,050 | Removed |
| Married Filing Separately With Income Less Than $156,900 |
$4,050 | Removed |
Chart: Changes to the Personal Exemption(6)
Child Tax Credit
In our current tax code, if parents make less than $110,000 jointly and $75,000 individually, they receive a $1,000 Child Tax Credit for qualified children under the age of 17.(7) The 2018 tax reform bill increases that credit to $2,000 per qualified child and raises the income limits for the credit to $400,000 jointly and $200,000 individually.(8) This means a lot more people will be able to receive tax credits for their children. Woo-hoo! The kids are finally paying off!
| Filing Status | 2017 Child Tax Credit Threshold | 2018 Child Tax Credit Threshold |
|---|---|---|
| Single | $75,000 | $200,000 |
| Married Filing Jointly | $110,000 | $400,000 |
Chart: Changes in Child Tax Credit Thresholds
More Changes for Taxpayers With Kids
If you have children, you may have a 529 college savings plan in place. This savings plan acts similarly to a Roth IRA for your kids’ college education. Funds within the account are invested and grow tax-free, but they can only be used for qualifying college expenses. The new tax reform bill changes this significantly.
Starting in 2018, if you have a 529 savings plan for your child, you can use it for levels of education other than college. For example, if you have children in private school, or if you pay for tutoring for your child in kindergarten through twelfth grade, you can use money from your 529 for these expenses tax-free.
As you consider college funding, don’t forget the Baby Steps! Paying off consumer debts, saving three to six months of expenses in an emergency fund, and contributing 15% of your income into retirement all come before college savings. There are a lot of ways to plan for college without going into debt!
Homeowners
Mortgage deductions in the new tax reform bill were a hotly debated topic. You may have heard whispers of disappointment in the final outcome. Here’s what everyone’s talking about:
Currently, if you itemize your deductions, the IRS allows homeowners to deduct the interest they pay on their primary residence and/or second home, up to a maximum of $1 million in original mortgage principal. This can include more than one loan—as long as the total is below the $1 million limit—and can include loans to refinance your home as well as mortgages to purchase the home. The new maximum in the tax reform bill is $750,000 in original mortgage principal. Not to worry, taxpayers with existing mortgages in between $1 million and $750,000 will be grandfathered into the old deduction.
Alternative Minimum Tax
The Alternative Minimum Tax (AMT) was put into place to ensure that top-income earners paid appropriate taxes. Basically, upper income taxpayers have to calculate their taxes two ways—once under the traditional tax system and once under the AMT—and pay whichever amount is more. Much of the AMT is fairly complicated, however, the AMT tax brackets are not. While the standard tax system has seven brackets, the AMT system has only two—26% and 28%. Below a certain income amount, the 26% rate is applied, and over that amount, the 28% rate is applied to the rest.
Once taxpayers have calculated what they owe in the AMT process, they can deduct an exemption from that amount. The problem is that these exemptions weren’t properly set up to account for inflation. So as time passed, more and more Americans were affected by the AMT—even those who it was never intended for, like the middle class. To address this issue, the Tax Cuts and Jobs Act makes the minimums for the AMT system much higher to avoid the average Joe from having to run their numbers twice. Here’s how the AMT exemptions are changing for 2018.
| Filing Status | 2017 AMT Exemption | 2018 AMT Exemption |
|---|---|---|
| Single or Head of Household | $54,300 | $70,300 |
| Married Filing Jointly | $84,500 | $109,400 |
Chart: Changes to the Alternative Minimum Tax Exemption
2017 AMT Exemption(10), 2018 AMT Exemption(11)
SALT Deduction
The SALT deduction is another deduction that was heavily deliberated before the tax reform bill was voted in. SALT stands for “state and local taxes” and refers to taxpayers’ ability to deduct their state income taxes and/or sales taxes, if itemizing deductions. In previous years, there was no limitation on the deduction of state and local taxes, which was an advantage to those living in high tax states like California and New York.
Tax Software vs. Tax Pro? Which Is Right for You?
Research shows that people who use a tax adviser get an average of $791 more back from the IRS. The average refund for people who used tax software was $1,824. The average refund for people who used a tax professional was $2,615.* That’s a big difference!
The bottom line? When in doubt, turn to a tax adviser. With years of experience behind them, they can take the guesswork out of taxes and prepare your withholdings for next year—protecting you and your wallet.
