“…but in this world, nothing can be said to be certain, except death and taxes.” To most of us, this infamous quote by Benjamin Franklin is instantly recognizable and today with many households living paycheck to paycheck, it is also relatable. Now more than ever, taxes are at the forefront of everybody’s minds thanks to the sweeping new changes that are taking place in 2018.
Because the new tax law is the most significant change we have seen in the United States in 30 years, it’s only natural to wonder, how will it affect me? That’s why we have decided to create a summary of the most significant changes that have gone into effect this year.
New Tax Law Basics
New Tax Rates and Brackets
The good news is that for most people, their overall income tax rates will be lower because while the new tax law keeps the same seven-bracket structure, it lowers marginal tax rate percentages and raises the income threshold in some brackets.
Below are the new 2018 tax rates and brackets.
| Tax Rate | Individual | Married – Joint | Married – Separate | Head of Household |
| 10% | Up to $9,525 | Up to $19,050 | Up to $9,525 | Up to $13,600 |
| 12% | Over $9,525 up to $38,700 | Over $19,050 up to $77,400 | Over $9,525 up to $38,700 | Over $13,600 up to $51,800 |
| 22% | Over $38,700 up to $82,500 | Over $77,400 up to $165,000 | Over $38,700 up to $82,500 | Over $51,800 up to $82,500 |
| 24% | Over $82,500 up to $157,500 | Over $165,000 up to $315,000 | Over $82,500 up to $157,500 | Over $82,500 up to $157,500 |
| 32% | Over $157,500 up to $200,000 | Over $315,000 up to $400,000 | Over $157,500 up to $200,000 | Over $157,500 up to $200,000 |
| 35% | Over $200,000 up to $500,000 | Over $400,000 up to $600,000 | Over $200,000 up to $300,000 | Over $200,000 up to $500,000 |
| 37% | Over $500,000 | Over $600,000 | Over $300,000 | Over $500,000 |
For comparison purposes below are the 2017 tax rates and brackets.
| Tax Rate | Individual | Married – Joint | Married – Separate | Head of Household |
| 10% | Up to $9,325 | Up to $18,650 | Up to $9,325 | Up to $13,350 |
| 15% | Over $9,325 up to $37,950 | Over $18,650 up to $75,900 | Over $9,325 up to $37,950 | Over $13,350 up to $50,800 |
| 25% | Over $37,950 up to $91,900 | Over $75,900 up to $153,100 | Over $37,950 up to $76,550 | Over $50,800 up to $131,200 |
| 28% | Over $91,900 up to $191,650 | Over $153,100 up to $233,350 | Over $76,550 up to $116,675 | Over $131,200 up to $212,500 |
| 33% | Over $191,650 up to $416,700 | Over $233,350 up to $416,700 | Over $116,675 up to $208,350 | Over $212,500 up to $416,700 |
| 35% | Over $416,700 up to $418,400 | Over $416,700 up to $470,700 | Over $208,350 up to $235,350 | Over $416,700 up to $444,550 |
| 39.6% | Over $418,400 | Over $470,700 | Over $235,350 | Over $444,550 |
Standard Deductions Double and Personal Exemptions Disappear
The good news is, the standard deduction for most filers has been almost doubled. Unfortunately, the personal exemption has been eliminated so most people will see a modest increase in benefit rather than a doubling. Additionally, removing the personal exemption may cause families with many children to pay higher taxes despite the doubled standard deduction. However, that loss could be mitigated by the increased child tax credit.
2018 Standard Deductions
- Single: $12,000
- Married Filing Jointly: $24,000
- Married Filing Separately: $12,000
- Head of Household: $18,000
Child Tax Credit Increase
If you are a parent or guardian of a child or children under 17, there is good news headed your way because in 2018 the child tax credit has doubled. Instead of $1000 per child, you get $2000 per child. Not only that but up to $1400 of that credit amount is refundable, which means that even if you owe $0 taxes, you may get $1400 back per child! However, there is a cap of 15% of any earned income over $4,500 on the refundable portion.
Itemized Deductions
For people that relied heavily on itemized deductions, the new tax law may not make itemization as beneficial as it has been in the past. In fact, many were distressed when the new tax bill initially proposed to eliminate most itemized deductions, and while the new law did, in fact, remove some deductions, it, fortunately, kept some of the most widely used ones, albeit some with changes. Because of this, taxpayers that have itemized in the past may find they are better off taking the doubled standard deduction for 2018. Below is a list of some of the most widely used deductions that have been kept, eliminated or changed.
Some deductions that have been kept for 2018 – Some with changes:
- Student loan interest
- Retirement savings — largely untouched, the only changes are longer payback periods for 401(k) loans after employment ends and Roth conversion rules.
- State, local sales and property taxes — while this is still a deduction you can take, it has been limited to $10,000 total. A far cry from being able to deduct 100% of those taxes as in previous years.
- Home mortgage interest deduction — This deduction is still allowed but is now restricted to the first $750,000 for mortgages incurred after Dec 15, 2017. Mortgages made before Dec. 15, 2017 still have the standard $1 million limit.
- Charitable contributions — The contribution limit to public charities has been increased from 50% to 60% of your adjusted gross income.
Some deductions that have been eliminated for 2018:
- Home equity loan interest
- Job change moving expenses — exclusion for active military members
- Casualty and theft losses — except in presidentially declared disaster areas
- Job expenses and other miscellaneous deductions — In previous years many unreimbursed job expenses and other miscellaneous costs such as tax preparation fees were deductible, provided they exceeded 2% of your adjusted gross income. These deductions have been eliminated for 2018.
What will be withheld from your paycheck this year?
Wondering how much will be taken out of your paycheck this year? You will want to refer to the new IRS withholding tables. The IRS has released the 2018 withholding tables that payroll services have been instructed to use as soon as possible but no later than Feb 15, 2018. You can view the new withholding tables here on Notice 1036. Withholding tables are how your company payroll determines the amount to withhold from your paycheck.
Considerations
While the new tax brackets and increased standard deductions certainly look good, it’s important to know that these rates are temporary. In 2026 the rates will revert to 2017 rates and while that doesn’t seem like a reason to be concerned, the temporary nature of the tax cuts paired with the new legislation to use chained consumer price index to calculate for inflation, means that more people will be pushed into higher tax brackets in the future. To better understand how changing to the chained CPI will affect your future tax rates, go to this excellent explanation by The Hutchins Center.
In Conclusion
How the new tax law will affect you relies on your unique situation. Everything from how you file to family size and employment circumstances will determine how beneficial this new tax bill is to you while it is in effect. Here at FFEF, we believe that education is vital to understanding how the new tax laws will impact you now and well into the future, we hope this summary and the resources we have provided will help.