Why Your Income Tax May Decrease in 2018
Peter VanderWoude, MS, CPA, CGMA
June 1, 2018
Last month we went over the changes in standard deduction levels for your filing status and limits on itemized deductions for 2018. Even with personal exemptions being eliminated, and the possibility of having a higher taxable income on the same income level as the previous year, most of us will likely pay less federal income tax in 2018. Why is this the case?
The primary reason we will see an income tax decrease is that tax rates above the initial ten percent bracket have been reduced. The tax rates were 10, 15, 25, 28, 33, 35 and 39.6 percent in 2017 and are 10, 12, 22, 24, 32, 35, and 37 percent for 2018. The tax brackets or range of taxable income subject to each tax rate
have broadened as well. How do tax brackets work? As a single taxpayer you will pay federal income tax at the 10 percent level on the first $9,525 of your taxable income and at the 12 percent level on the next $25,675 of taxable income up to $38,700 of your total taxable income. Married taxpayers filing jointly will pay federal income tax at the 10 percent level on their first $19,050 of taxable income and at the 12 percent level on the next $58,350 of taxable income above the $19,050 amount up to $77,400 of total taxable income. In this case, the “12 percent bracket” for the married taxpayer is $19,050 to $77,400 of taxable income. Portions of taxable income that are higher than the 12 percent bracket for your filing status would be taxed at the next bracket level. If your tax professional says you are in the 22 percent tax bracket, that means that the upper portion of your taxable income is taxed at 22 percent, with the lower and middle portions at 10 and 12 percent, respectively.
How does this affect the tax you pay? Let’s say you and your spouse have taxable income of $75,000 in both 2017 and 2018. In 2017, you would have had $10,318 of income tax and in 2018, you will have $8,619. As a single person with taxable income of $35,000 in both years, your tax would have been $4,784 in 2017 and will be $4,010 in 2018. That’s a nice decrease, even if your taxable income increases a bit. Please be reminded that the federal income tax withholding tables were updated in early 2018 to have wage earners pay in less federal income tax and, consequently, receive more net earnings in their paycheck. Beware if you have expectations of a larger tax refund for 2018, it may not happen. Your federal income tax withheld this year will likely be lower than it was in 2017.
Next month’s article will cover another major reason that federal income tax may decrease for many of us. Enjoy the beginning of summer!