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    Tax Season | 5 min read

    Federal Income Tax Update 2018: How Will it Affect Me?

    As you may have heard, the U.S. government recently signed off on a tax reform bill, and some of the changes are pretty big! To help you understand what to expect and what is likely to impact you personally, here is an explanation of the changes that will affect the average American the most.

    Revised Tax Brackets

    Probably the most important change for any of us is the revised tax brackets. In this case, "revised" largely means lower taxes, which I'm sure you'll welcome. There are still seven income tax brackets, but income ranges in each bracket have gone up by about 2%, so in 2018, you're likely to pay a bit less in taxes for each level of income.

    Increased Standard Deductions

    Available standard deductions for all filers have increased, to $12,000 for single, $24,000 for married filing jointly, and $18,000 for head of household. This change will help millions of Americans save time when filing taxes, because now the standard deduction is high enough that itemizing deductions will no longer be necessary or helpful.

    Increased Personal Exemption Allowance

    If itemizing deductions still makes more sense for you, you'll see a $100 higher personal exemption allowance in 2018, and the income levels that phase out this allowance have increased a bit, to complete phase out at adjusted gross income of $389,200 for single or $442,500 for married filing jointly.

    Increased Married Filing Jointly Income Brackets

    Good news for married couples with high incomes: for all but the two highest income brackets (couples earning more than $400,000), married filing jointly income brackets are now double single rates. This means that married couples ;earning less than $400,000 per year no longer pay more in taxes than they collectively would pay if they were single.

    Changes to Capital Gains Taxes

    The general structure of the capital gains tax system, which applies to things like stock sales and sales of other appreciated assets, isn't changing. However, there are still a few important points to know.

    For starters, short-term capital gains are still taxed as ordinary income. Since the tax brackets applied to ordinary income have changed significantly, your short-term gains are likely taxed at a different rate than they were before.

    Also, under the new tax law, the three capital gains income thresholds don't match up perfectly with the tax brackets. Under previous tax law, a 0% long-term capital gains tax rate applied to individuals in the two lowest marginal tax brackets, a 15% rate applied to the next four, and a 20% capital gains tax rate applied to the top tax bracket.

    Instead of this type of structure, the long-term capital gains tax rate income thresholds are similar to where they would have been under the old tax law. For 2018, they are applied to maximum taxable income levels as follows:

    Long-Term Capital Gains Rate Single Taxpayers Married Filing Jointly Head of Household Married Filing Separately
    0% Up to $38,600 Up to $77,200 Up to $51,700 Up to $38,600
    15% $38,600 - $425,800 $77,200 - $479,000 $51,700 - $452,400 $38,600 - $239,500
    20% Over $425,800 Over $479,000 Over $452,400 Over $239,500

    Higher Exemption for Alternative Minimum Tax

    High-income earners often must calculate their taxes two ways (standard and alternative minimum tax schedule), then pay the higher of the two calculations. Beginning in 2018, the income levels affected by the alternative minimum tax are much higher ($500,000 for single or $1 million for married filing jointly), meaning far fewer taxpayers will need to bother with the additional calculations.

    Higher 401(k) Contribution Limits

    In 2018, employees can save an extra $500 per year in their 401(k), up to a maximum of $18,500 ($24,500 for individuals 50 years and older).

    Enhanced Child Tax Credit

    Parents will enjoy a higher child tax credit in 2018, increased to $2,000, with the refundable portion increased to $1,400. Also, this credit benefits many more households since income phaseouts have increased substantially, to $200,000 for single or $400,000 for married filing jointly.

    No Penalty for Lack of Health Insurance

    Though this change won't be in effect until 2019, it was passed with the bill containing the 2018 changes . . . taxpayers will no longer be charged a penalty for not purchasing health insurance.

    Greater Exemption from Estate Taxes

    While most of us would not have had to pay estate taxes already, the new tax law makes it even less likely. Singles won't pay estate tax until they inherit $11.2 million, and married couples can inherit $22.4 million without being subject to an estate tax.

    Lower Corporate Taxes

    One of the biggest cuts comes to the corporate tax structure, which is greatly simplified. The corporate tax rate is now a flat 21% on profit, which is quite a bit lower than most U.S. corporations have been paying.

    Other Changes

    There are a number of smaller, miscellaneous changes that may affect you as well:

    • Mortgage interest can be deducted on only $750,000 (previously $1 million) of debt in 2018, though older mortgages will be grandfathered.

    • Home equity debt is no longer deductible.

    • Deductions for charitable contributions are a bit more generous, up to 60% (previously 50%) of income.

    • Medical expenses can be deducted once they reach 7.5% of adjusted gross income (formerly 10%).

    • Deductions for state and local property, sales, and income tax are limited to $10,000.

    • Income restriction phaseouts on Roth IRAs increased by $2,000 for single filers and $3,000 for married filing jointly.

    • The gift exclusion increased by $1,000, so in 2018, you can gift up to $15,000 to another individual without paying tax.

    Nobody likes filing and paying taxes, but at least the new bill might provide a bit of relief for many of us. For help keeping your financial resolutions this year, check out the tips in our ebook, Adulting: Money Essentials for Grown Ups.

    Member SIPC & FINRA. Advisory services offered through SWBC Investment Company, a Registered Investment Advisor.

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