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5 Key IRS Tax Changes for 2018 -- and Why They Might Not Even Matter

By Matthew Frankel, CFP® - Oct 30, 2017 at 6:37AM

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If tax reform doesn't pass, here's what to expect in 2018.

The IRS recently released a number of tax changes for 2018. We now know next year's tax brackets, standard deductions, retirement contribution limits, and several other key figures.

However, with the White House and Congressional Republicans preparing for an all-out push to get tax reform done before the end of 2017, there's a strong possibility that many of these changes won't matter. Certain tax items are likely to stay the same, such as the deduction for retirement contributions. On the other hand, here are five things that could change dramatically if a tax reform bill passes.

Pencil on US tax forms on a background of money.

Image source: Getty Images.

1. The standard deduction is rising

The IRS recently announced that the standard deduction is rising for 2018, to keep up with inflation. Married taxpayers are getting a deduction that's $300 higher, while singles will get half of that amount.

Tax Filing Status

2017 Standard Deduction

2018 Standard Deduction

Single or married filing separately

$6,350

$6,500

Married filing jointly

$12,700

$13,000

Head of household

$9,350

$9,550

Data source: IRS.

There's a chance that if a tax reform bill passes, the standard deductions could be quite different from those in the chart. The GOP's tax framework calls for a standard deduction of $12,000 for single filers and $24,000 for married couples filing jointly -- nearly double the IRS's 2018 amounts. In addition, while it wasn't specifically mentioned in the outline of the GOP's tax agenda, President Trump has proposed eliminating the head of household filing status in previous tax plans.

2. Higher personal exemption

For 2018, the personal exemption is set to rise to $4,150, $100 higher than in 2017. This is an additional reduction of taxable income, and a personal exemption can be taken for each taxpayer and dependent on a return. For example, a married couple with two children can take four personal exemptions.

Here's the bad news. The higher standard deductions are designed to consolidate the current standard deduction and the personal exemption into a single tax break. So the personal exemption would no longer apply, which could cause taxes to go up for many Americans. The framework calls for expanding tax benefits for families with children, but it's unclear what that means at this point.

3. Tax brackets are adjusting upward

The IRS recently released its 2018 tax brackets, with slightly higher income thresholds than the 2017 version. The same seven marginal tax rates apply -- 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

Republicans aim to consolidate these brackets into just three, with marginal tax rates of 12%, 25%, and 35%, with the possibility of a fourth bracket for higher-earners. While we don't yet know the income ranges for the proposed tax brackets, it's fair to say that if tax reform passes, your tax structure could look significantly different than it does now.

4. Wealthy individuals get a bigger estate tax exemption

When Americans die, a certain amount of their estate is exempt from estate taxes. This is designed to make the estate tax apply to wealthy families only, as the excluded amount for 2018 is $5.6 million per person ($11.2 million per married couple), which is up by $110,000 from last year. In addition, the annual gift exclusion is rising from $14,000 to $15,000 per person, per year.

Republicans have been trying to get rid of the estate tax for some time now, and the September 2017 GOP tax framework does call for the estate tax to be abolished.

5. The AMT exemption is rising

The alternative minimum tax, or AMT, is designed so that higher-income taxpayers pay their fair share of taxes, even if they have lots of deductions and tax credits.

For 2018, the AMT exemptions will be $55,400 for single filers and $86,200 for married couples, up from $54,300 and $84,500, respectively, in 2017. These exemptions begin to phase out for higher-income taxpayers.

Republicans are generally opposed to the AMT, for two reasons. First, it adds complexity to the tax system, and Republicans want a simpler tax code. Second, many critics on both sides of the aisle acknowledge that the AMT affects significantly more middle-income taxpayers than it was originally intended to. The GOP tax framework has the AMT on the chopping block, so there's a possibility that this second method of calculating taxes will end up going away -- at least the current form of it.

So, how should you plan for 2018?

We know what the IRS's tax changes for 2018 are, but many of the changes won't matter if a tax reform bill is passed. And not only do we not know whether a tax reform bill will pass this year, but we also don't know what it would look like beyond the loose guidelines revealed in the GOP tax framework.

For the time being, the wise thing to do is to expect that the 2018 changes discussed here will be implemented, and if a tax reform or tax-cut bill passes, make adjustments accordingly.

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