October is a big month for nearly all Americans. The Social Security Administration releases updates to benefits that affect more than 61 million people, and the Internal Revenue Service (IRS) updates its tax code, allowing all taxpayers a look at what to expect for the upcoming year.
The U.S. tax code is complicated. According to the Tax Foundation, the code had reached nearly 10.1 million words as of 2015, and it's grown by an average of 144,500 words per year over the previous six decades. To put that into context, we're talking about enough words to fill 157 novels. Thank goodness for tax-preparation software and tax professionals.
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As you might imagine, there were a lot of announced changes from the IRS for 2018. Today we're going to look at the top 10 tax changes, not in any particular order.
1. Minor updates to the tax brackets
The change that most Americans are interested in is the one that'll most directly affect their paycheck: the 2018 tax schedule. As expected, inflation left its impact on the 2018 tax brackets, with the income ranges for each bracket increasing by right around 2%. That would suggest that any salaried employees who didn't receive a raise are likely to owe a bit less in federal taxable income in 2018, deductions and credits being equal, than they did in 2017.
It's also worth pointing out that the 2018 tax schedule affects your earnings in 2018 and will have nothing to do with the taxes you prepare for your 2017 earnings early next year.
Curious to see how things changed? Here's a quick comparison of the 2017 tax schedule:
| Tax Rate | Single | Married, Filing Jointly | Married, Filing Separately | Head of Household |
|---|---|---|---|---|
| 10% | $0 to $9,325 | $0 to $18,650 | $0 to $9,325 | $0 to $13,350 |
| 15% | $9,326 to $37,950 | $18,651 to $75,900 | $9,326 to $37,950 | $13,351 to $50,800 |
| 25% | $37,951 to $91,900 | $75,901 to $153,100 | $37,951 to $76,550 | $50,801 to $131,200 |
| 28% | $91,901 to $191,650 | $153,101 to $233,350 | $76,551 to $116,675 | $131,201 to $212,500 |
| 33% | $190,651 to $416,700 | $233,351 to $416,700 | $116,676 to $208,350 | $212,501 to $416,700 |
| 35% | $416,701 to $418,400 | $416,701 to $470,700 | $208,351 to $235,350 | $416,701 to $444,550 |
| 39.60% | $418,401+ | $470,701+ | $235,351+ | $444,551+ |
2017 federal income tax schedule. Data source: IRS.
And the 2018 brackets:
| Tax Rate | Single | Married, Filing Jointly | Married, Filing Separately | Head of Household |
|---|---|---|---|---|
| 10% | $0 to $9,525 | $0 to $19,050 | $0 to $9,525 | $0 to $13,600 |
| 15% | $9,526 to $38,700 | $19,051 to $77,400 | $9,526 to $38,700 | $13,601 to $51,850 |
| 25% | $38,701 to $93,700 | $77,401 to $156,150 | $38,701 to $78,075 | $51,851 to $133,850 |
| 28% | $93,701 to $195,450 | $156,151 to $237,950 | $78,076 to $118,975 | $133,851 to $216,700 |
| 33% | $194,451 to $424,950 | $237,951 to $424,950 | $118,976 to $212,475 | $216,701 to $424,950 |
| 35% | $424,951 to $426,700 | $424,951 to $480,050 | $212,476 to $240,025 | $424,951 to $453,350 |
| 39.60% | $426,701+ | $480,051+ | $240,026+ | $453,351+ |
2018 federal income tax schedule. Data source: IRS.
2. Standard deductions increase modestly
In addition to paying attention to what we'll owe Uncle Sam, taxpayers also love a good freebie. For those of you who don't itemize your taxes and wind up taking the standard deduction, you'll be getting a little extra in the upcoming year.
According to the IRS, single filers in 2017 are entitled to a standard deduction of $6,350, with married couples filing jointly receiving double that amount, $12,700. For heads of household, the standard deduction this year is $9,350.
In 2018, these levels are rising to $6,500 for a single filer, $13,000 for married filing jointly, and $9,550 for head of household. Assuming you earn the same amount in 2018, you should wind up paying a little less in federal income tax.
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3. A boost in the personal-exemption allowance
On the other hand, those of you who do itemize are also getting a boost. The personal-exemption allowance is rising by $100 in 2018, to $4,150 from $4,050 in 2017.
Personal exemptions are particularly popular among wealthier taxpayers, meaning the phase-out income limits and complete exemption increases for 2018 are important to know. In 2017, phase-outs for the personal exemption began at adjusted gross incomes (AGIs) of $261,500 for single filers and $313,800 for married filers, while ending completely at $384,000 for single filers and $436,300 for married couples.
Next year, these phase-outs increase to AGIs of $266,700 for single filers and $320,000 for married filing jointly, and they end completely at $389,200 for single filers and $442,500 for married filing jointly. In other words, the rich have a little extra wiggle room in 2018 for claiming a personal exemption.
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4. Higher contribution limits for 401(k)s
Investors, rejoice! Heading into 2018, you'll be away to sock away $500 extra a year in your employer-sponsored 401(k). Instead of being capped at $18,000 a year, workers under age 50 will now be able to contribute up to $18,500 a year. This increase also applies to those over age 50, who'll be able to contribute up to an extra $500 annually, or $24,500 per year, into their 401(k), up from $24,000 in 2017.
It's important to note that 401(k) contributions are made on a pre-tax basis, meaning the more you can contribute, up to the annual limit, the less tax liability you may have. In short, boosting your contributions next year can help lower your tax liability and improve your chances of retiring comfortably. Sounds like a win-win, right?
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5. IRA deduction phase-out and exemption limits jump (if covered by a retirement plan at work)
Although individual retirement account (IRA) contribution limits didn't increase, folks who contribute to a Traditional IRA, and have access to a retirement plan at work, will see their phase-out and exemption income limits adjust higher.
For example, single filers and head of household with modified adjusted gross incomes (MAGIs) under $62,000, along with married filing jointly under $99,000, can take a full deduction up to the amount of their contribution. A deduction phase-out then exists between $62,000 and $72,000 for single filers and head of household, and $99,000 to $119,000 for married filing jointly. After these levels, no deduction is allowed for a Traditional IRA contribution where a retirement plan can be accessed at work.
In 2018, single filers and head of household can earn up to $63,000 (an increase of $1,000), with a phase-out between $63,000 and $73,000. Married couples will be able to earn up to $101,000 (an increase of $2,000), with a phase-out between $101,000 and $121,000.
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6. Roth IRA phase-outs rise modestly
One of the quickest growing and most popular retirement tools is the Roth IRA, which allows a person to contribute after-tax dollars in exchange for lifetime tax-free growth. If you expect to wind up in a higher tax bracket once you retire, a Roth IRA can be an extremely smart way to keep more of your money. Annual contribution limits are currently capped at $5,500 for those under age 50, and $6,500 if aged 50 and over, just like a Traditional IRA.
However, not everyone is able to contribute to a 401(k). In 2017, the amount you could contribute began phasing out at $118,000 in MAGI for single filers and $186,000 for married and filing jointly. It phased out completely by $133,000 for single filers and $196,000 for married couples.
In 2018, the phase-out for single filers will now begin with a MAGI of $120,000, an increase of $2,000, and $189,000 for married couples, an increase of $3,000. It'll phase out completely by $135,000 for single filers and $199,000 for married couples filing jointly.
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7. The alternative minimum tax exemption amounts rise on par with inflation
Most Americans might not be familiar with the alternative minimum tax, or AMT, but it's designed to ensure that wealthier Americans pay their fair share of taxes given the copious number of deductions and credits available.
Next year, the income exemption limits tied to the AMT will be rising once more, since the AMT is now permanently tethered to the inflation rate. In 2018, the income exemption threshold rises to $55,400, up from $54,300 in 2017 for single filers. Married couples filing jointly will see ther income exemption rise to $86,200 in 2018 from $84,500 this year. The AMT begins to phase-out for single filers at $123,100 in 2018, and $164,100 for married couples.
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8. Earned Income Tax Credit maximums increased
Few, if any, tax credits are more popular than the Earned Income Tax Credit (EITC). The EITC is a credit given to hard-working low- and middle-income Americans. In 2017, the maximum EITC that could be earned for a family with three children was $6,318, but in 2018 this maximum is modestly increasing to $6,444.
Far too many folks eligible to receive the EITC don't get it, either because of fraud or simply not realizing they qualify for the credit. One thing taxpayers should realize is that the EITC is a credit that can be paid to eligible taxpayers even if they have no taxable income. If taxpayers have no taxable income, they might choose not to file a federal income-tax return, but this could be a mistake. Make sure you examine all of your options when preparing your taxes in 2017 and future years.
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9. The annual gift exclusion rose by a sizable amount
Passing money along to friends and family is about to get a little bit easier. In 2017, you could gift up to $14,000 to any person without creating any individual tax liability. This is known as the "gift exclusion." In 2018, up to $15,000 can be given as a gift to any person without triggering any tax implications. That's a $1,000, or 7.1%, increase.
It's also worth mentioning that the estate tax exemption increased. In 2018, you'll be able to leave up to $5.6 million without having the estate tax kick in. That's up from a $5.49 million basic exclusion in 2017.
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10. Social Security's maximum taxable earnings level rose
Last, but not least, the maximum taxable earnings cap associated with Social Security's payroll tax is rising once again. The increase will affect about one out of 10 working Americans.
In 2017, all earned income between $0.01 and $127,200 was subject to Social Security's 12.4% payroll tax, with income above and beyond $127,200 not subject to the tax. Next year, this earnings cap will be increasing by $1,500 to $128,700. That means well-to-do folks could owe up to $93 or $186 in additional payroll taxes. The difference will depend on whether they're employed by someone else, which would mean their employer covers half of the 12.4% payroll tax, or if they're self-employed and responsible for all 12.4% of the tax.
