Tax season is just about to start, and now's the moment of truth to see what impact the late-2017 tax reform laws will have on your tax return. Many expect that major changes under the new tax laws will make their returns a lot simpler to complete, and everyone's hoping that they'll be among the millions who owe less in taxes this year than they had to pay last April.
In particular, there are four key areas in which taxpayers are most likely to see the impacts of tax reform on their total bill for the 2018 tax year. They won't necessarily add up to reduced taxes for every single taxpayer, but they're sure to feature prominently for the American population as a whole. Here's more on where to expect the biggest changes on your return this year.
Image source: Getty Images.
1. Reductions in tax rates
Tax reform changed most of the tax rates that applied to various income brackets. The table below shows what the old brackets were and what they were replaced by in the new law.
|
Old Tax Rate |
New Tax Rate |
|---|---|
|
10% |
10% |
|
15% |
12% |
|
25% |
22% |
|
28% |
24% |
|
33% |
32% |
|
35% |
35% |
|
39.6% |
37% |
Data source: IRS.
As you can see, the 10% and 35% rates remained unchanged. However, the other brackets saw reductions of anywhere from 1 to 4 percentage points. The tax reform law sets new tax rates for most of the seven individual tax brackets. The old rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% will now be replaced by rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Many taxpayers will see rate reductions of between 1 and 4 percentage points on their taxable income.
2. Changes to the bracket structure
In addition to the changes in the tax rates themselves, the structure of the brackets differs from what prevailed under the old tax laws. For instance, take a look at the brackets for single taxpayers for 2017 and 2018:
|
Rate |
2017 Bracket |
2018 Bracket |
|---|---|---|
|
10% |
$0 to $9,325 |
$0 to $9,525 |
|
15%/12% |
$9,325 to $37,950 |
$9,525 to $38,700 |
|
25%/22% |
$37,950 to $91,900 |
$38,700 to $82,500 |
|
28%/24% |
$91,900 to $191,650 |
$82,500 to $157,500 |
|
33%/32% |
$191,650 to $416,700 |
$157,500 to $200,000 |
|
35% |
$416,700 to $418,400 |
$200,000 to $500,000 |
|
39.6%/37% |
Over $418,400 |
Over $500,000 |
Data source: IRS.
Some of the changes are due to typical inflation adjustments from year to year. However, the top of the new 22%, 24%, and 32% brackets were reduced considerably compared to where the 25%, 28%, and 33% brackets would have been under the old rules. For those whose incomes are in those areas, some income might now get taxed at 32% that would have gotten taxed at 28% under the old law.
On other hand, there's been a huge reduction in the marriage penalty that used to apply to married couples. Under the old rules, joint filers had income limits that were exactly double the single-filer limits only in the 10% and 15% tax brackets. However, the new law has double-sized brackets for married couples all the way up to $400,000 in income, with only the new 35% and 37% income limits kicking in at less than double the single-filer amounts. That's a huge bonus for joint filers in many cases, eliminating the marriage penalty for many two-earner families and creating an even bigger benefit for single-earner taxpayers.
3. An increased standard deduction
A major change to tax calculations happened in the tax law's elimination of personal exemptions in favor of a larger standard deduction. Below, you'll see the new standard deduction amounts, along with how much bigger they are than they were in 2017.
|
Filing Status |
Standard Deduction for 2018 Tax Year |
Change From 2017 |
|---|---|---|
|
Single |
$12,000 |
+$5,650 |
|
Married filing jointly |
$24,000 |
+$11,300 |
|
Head of household |
$18,000 |
+$8,650 |
|
Married filing separately |
$12,000 |
+$5,650 |
Data source: IRS.
However, offsetting those gains is the fact that you no longer get to take personal exemptions, which amounted to $4,050 per person in 2017. Therefore, depending on how many people you have in your household, the boost to the standard deduction may or may not be sufficient to offset the loss of the personal exemption.
For simplicity, the higher standard deduction means that fewer people will need to itemize deductions. That, too, has pros and cons, as new limits on certain itemized deductions means that some taxpayers will lose substantial amounts they were able to deduct in the past.
4. An increase in the child tax credit
Finally, tax reform augmented the child tax credit and made it available to a wider range of taxpayers. The amount of the raw credit doubled $1,000 to $2,000, and even for those who pay little in taxes, $1,400 of the credit is potentially refundable in the form of a tax refund.
Higher income limitations on the child tax credit will let more parents use it. In 2018, joint filers will be able to have income of up to $400,000 without losing their credit, compared to just $110,000 in 2017. For single filers, the income limit rises from $75,000 to $200,000. Those moves will go a long way to offset the loss of personal exemptions in many cases.
Good luck
Of course, every taxpayer's situation is different, so there's no guarantee whether your tax return will look better or worse in 2018. However, one thing is certain: You can expect a lot of changes to affect the return you'll file within the next few months.
