Cathy Collins
Due to the Tax Cuts and Jobs Act (TCJA) you will likely notice a number of changes when preparing your 2018 tax return. This article will discuss the new tax rates, elimination of the personal exemption, the increase in the standard deduction, and changes to certain itemized deductions.
Tax Rates
The federal income tax is a progressive tax, meaning those with the lowest taxable income also have the lowest tax rate. In contrast, those with the highest taxable income have the highest tax rate. The following chart shows a comparison of the tax rates between 2018 and 2017 for a taxpayer filing as Single. A number of tax rates were reduced for 2018. Interestingly, some of the income brackets were significantly changed from 2017 to 2018 while others were only adjusted to account for inflation. A taxpayer filing as Single with taxable income of $210,000 in both 2017 and 2018, will see a 2% increase in her tax rate for 2018. In comparison, a taxpayer filing as Single with taxable income of $420,000 in both years, will see a 4.6% decrease in her 2018 tax rate. Thus, the new tax brackets and rates will benefit certain taxpayers while disappointing others.
|
2018 tax rate |
2018 taxable income bracket |
2017 tax rate |
2017 taxable income bracket |
|
10% |
$0 to $9,525 |
10% |
$0 to $9,325 |
|
12% |
$9,526 to $38,700 |
15% |
$9,326 to $37,950 |
|
22% |
$38,701 to $82,500 |
25% |
$37,951 to $91,900 |
|
24% |
$82,501 to $157,500 |
28% |
$91,901 to $191,650 |
|
32% |
$157,501 to $200,000 |
33% |
$191,651 to $416,700 |
|
35% |
$200,001 to $500,000 |
35% |
$416,701 to $418,400 |
|
37% |
$500,001 or more |
39.6% |
$418,401 or more |
Elimination of the Personal Exemption
In the past, taxpayers claimed a personal exemption for themselves, their spouse, and certain dependents. In 2017, the personal exemption was $4,050 per person. A family of five was able to deduct $20,250 from their taxable income, provided adjusted gross income was below a certain threshold. For 2018, the personal exemption deduction has been eliminated.
Increase in Standard Deduction
For 2018, the standard deduction increased across all filing statuses. Given that taxpayers are entitled to deduct the larger of their standard deduction or itemized deduction, this change should reduce the number of individuals having to prepare a Schedule A tax form determining their itemized deduction. For those filing as Single, the standard deduction has increased from $6,500 to $12,000. For those filing as Married Filing Jointly, the standard deduction has increased from $13,000 to $24,000.
Changes to Itemized Deductions
Previously, the interest on home equity loans used to pay for college education, pay off credit card debt, cover unexpected bills, etc. was deductible. With the TCJA, that deduction has been eliminated.
Next, a limit has been imposed on the deduction for state and local taxes. Under the TCJA, property taxes and state and local income taxes, or sales tax, if greater, are now limited to a combined total deduction of $10,000. A taxpayer filing Married Filing Jointly with real estate taxes of $7,000, additional real estate taxes of $3,000 on a vacation home, and Illinois income tax withholding of $5,000 would have been entitled to a $15,000 deduction in 2017 but will now be limited to a $10,000 deduction.
The new law eliminated the itemized deduction for job expenses and certain miscellaneous deductions, that were previously deductible to the extent they exceeded 2% of adjusted gross income. Thus, taxpayers can no longer deduct union dues, tax preparation fees, dues to professional societies, and work-related education expenses to name a few.
Given the new increased standard deduction of $24,000 for Married Filing Jointly, the $10,000 state and local tax limitation, and other changes to itemized deductions, more taxpayers will take the standard deduction because it exceeds their itemized deduction. These changes will certainly impact taxpayers’ decisions going forward. For instance, charitable organizations are wondering whether donors, who no longer take the itemized deduction, will continue to contribute, if their donations do not reduce their taxes. Look for these and other differences when comparing your 2018 return with your 2017 federal tax return.
