New U.S. Tax Law – Tax Rates for Individuals/Families in 2018

New U.S. Tax Law – Tax Rates for Individuals/Families in 2018

A sweeping new tax law has been passed in the United States by the House of Representatives and Senate this week. How will it impact you? Let’s take a look.

Update: President Trump has signed this law (H.R. 1), known as the Tax Cuts and Jobs Act of 2017, on December 22, 2017.

The following rates take effect January 1, 2018, however the IRS is not expected to have tax withholding tables or forms reflecting new rates until further into the calendar year 2018.

New Federal Tax Rates for 2018 for Individuals and Families

Married and Filing Jointly

New Tax Cuts and Jobs ActPrevious Law (now replaced)
Tax RateOn Income ofTax RateOn Income of
10%$0-$19,05010%$0-$19,050
12%$19,050-$77,40015%$19,050-$77,400
22%$77,400-$165,00025%$77,400-$156,150
24%$165,000-$315,00028%$156,150-$237,950
32%$315,000-$400,00033%$237,950-$424,950
35%$400,000-$600,00035%$424,950-$480,050
37%$600,000+39.6%$480,050+

Single (Unmarried) Filer

New Tax Cuts and Jobs ActPrevious Law (now replaced)
Tax RateOn Income ofTax RateOn Income of
10%$0-$9,52510%$0-$9,525
12%$9,525-$38,70015%$9,525-$38,700
22%$38,700-$82,50025%$38,700-$93,700
24%$82,500-$157,50028%$93,700-$195,450
32%$157,500-$200,00033%$195,450-$424,950
35%$200,000-$500,00035%$424,950-$426,700
37%$500,000+39.6%$426,700+

Note: tax rates shown are marginal, meaning your income at each level is taxed at that rate. Putting aside other variables for a moment (such as deductions/exemptions, capital gains that are taxed at a different rate, AMT/Pease, Medicare Net Investment Income Tax, etc.) a household earning $240,000, for example, under the new law would have a federal tax due of $46,179, or an effective tax rate of 19.24%, less than its marginal tax rate of 24%.

See this for a better understanding of the difference between effective tax rates and marginal tax rates in 2018.

Itemized Deduction Options are Greatly Reduced

These new, lower marginal tax rates are offset by new limits on itemized deductions:

  • Local property taxes were previously combined with income/sales tax for deductibility, and were not directly limited in amount. Now, those itemizing deductions will no longer be able to deduct more than $10,000 per year in aggregate local taxes, including state/county/city income, property, and sales taxes.
  • Mortgage interest deductibility is also changing. For new mortgages taken out after December 15, 2017, only the interest attributable to the first $750,000 of debt principal is deductible, and now only for “acquisition indebtedness” (defined as mortgage debt used to acquire, build, or substantially improve a primary residence).
    • Any existing mortgages will retain their deductibility of interest on the first $1,000,000 of debt principal, and any refinance of these existing mortgages will also retain this same $1 million debt principal limit. Any debt added to the refinance, however, would not be eligible; only the original remaining principal.
    • Home equity debt is no longer deductible, for new or existing mortgages.
  • Alimony payments were previously deductible to the paying spouse, and taxable income to the receiving spouse. In the future, any divorce or separation instrument dated after December 31, 2018 will no longer permit such deductions/taxation.
  • Other miscellaneous itemized deductions are also being eliminated. This category includes accountant/tax preparation fees, payment processing fees for paying taxes, investment advisory fees, unreimbursed employee expenses, and so on. This category of expenses’ deductibility was previously limited to the portion that was greater than 2% of your income (AGI). This has no effect on the tax-free status of investment advisory fees paid in retirement investment accounts.

Standard Deductions and Personal Exemptions

New Tax Cuts and Jobs ActPrevious Law (now replaced)
Deductions
Standard DeductionNow $24,000 for Married Filers, $12,000 for Single Filers, and $18,000 for Head of Household FilersStandard DeductionWas $13,000 for Married Filers, $6,500 for Single Filers, and $9,550 for Head of Household Filers
The additional deduction of $1,300 /ea for married filers at least age 65, $1,600 for single filers at least age 65, and for blind filers is unchanged
Exemptions
Personal ExemptionsNo longer available; partially offset by now larger standard deductionPersonal Exemptions$4,050 per family member

Note: personal exemptions, under past law, began to phase out (and become unavailable) to married filers with an income (AGI) > $313,800, and single filers an income (AGI) > $261,500.

Other Notable Changes

This list is not comprehensive, but addresses the most significant changes.

  • The Alternative Minimum Tax (AMT) for individuals/families still exists, but with revisions. Taxpayers are now exempt from AMT calculations completely for married filers with an income of up to $109,400, and single filers with an income of up to $70,300 (previously these limits were $86,200 and $55,400, respectively). However, perhaps most significantly, the AMT exemption phase-out transition now reaches as high as $1,000,000 for married filers, and $500,000 for single filers.
  • The Pease limitation, which was previously an effective surtax of 1 to 1.2% on higher income tax filers, has been repealed through the end of 2025. This surtax worked by phasing out 3% of itemized deductions at $313,800 of income (AGI) for married filers, and $261,500 of income (AGI) for single filers.
  • Long-term capital gains and qualified dividends rates and income levels are unchanged, where taxpayers will pay either 0%, 15%, or 20% federal capital gains and dividend tax rates based on taxable income levels.
  • The (Medicare) Net Investment Income Tax surcharge also remains in place, where a 3.8% additional tax is applied to “unearned income” (including taxable interest, dividends, rents, royalties, annuities, capital gains, and other passive income) for married filers earning more than $250,000 of income (AGI) and single filers earning more than $200,000 of income (AGI).
  • The Child Tax Credit will increase from $1,000 to $2,000, also partially offsetting the loss of personal exemptions.
  • 529 accounts may now also be used for qualified K-12 expenses, and 529 accounts may now also be rolled over to a family member’s new 529A ABLE account (used for disabled beneficiaries) without any penalties, albeit subject to annual gifting limits.
  • Investment income earned by children (generally those under the age of 19, or full-time students under age 24) over $2,100 /year used to be taxed at their parents’ rates. Now such income is taxed at trust tax rates, which can reach the highest tax bracket of 37% at just $12,500 in annual income.
  • The moving expenses deduction/exclusion has been repealed, with the exception of active duty military. The ability for employers to pay for moving expenses tax free is also repealed, so this form of compensation will now be taxable income.

What Didn’t Change

There were controversial elements debated in the months leading up to the tax bill. For posterity, here are some things recently discussed that did not become law:

  • Changes to the Capital Gains Lot Selection (FIFO, LIFO, average, or specific lots)
    • This change would have required all investors (outside retirement accounts) to sell their oldest portion of an investment first. For example, if you bought Apple stock in 1980, and again in 1990 and 2000 subsequently, this law would have required you to deem any sales to have come from the 1980 investment first. The implication here, of course, is taxes would be due sooner, and sometimes for a higher amount, than they may have otherwise been.
  • The student loan interest deduction and graduate student tuition assistance exemption were left unchanged in the final bill, so the present law around these will remain.
  • The tax credit for plug-in electric vehicles was proposed for removal, but such changes were not in the final bill, and therefore the tax credit remains.
  • The adoption assistance tax credit was also proposed for removal, but such changes were not in the final bill, and therefore the tax credit remains.
  • The tax preference for private activity bonds has also been maintained, despite being proposed for removal as well.

Author: William A. Callahan, CFA, CFP®

William is a Certified Financial Planner™ practitioner and Chartered Financial Analyst charterholder. He serves as President and Chief Investment Officer at Callahan Financial Planning Company in Omaha, Nebraska.