How Could Your 2018 Tax Bracket Change Under the GOP's Tax Bill?

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Shortly after the GOP's tax reform bill titled "The Tax Cuts and Jobs Act" was released, Speaker of the House Paul Ryan said that the bill would save the average American family $1,182 per year. While the bill is certainly a tax cut for the average American if that's true, it doesn't tell the whole story.

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The bill won't affect all taxpayers the same way. Some Americans could indeed see a tax cut of $1,182 or more, while others could actually see their taxes go up.

The Tax Cuts and Jobs Act's 2018 tax brackets

For married couples and individual taxpayers, here's an overview of the four proposed tax brackets in the Tax Cuts and Jobs Act. The numbers in the table represent the taxable income level at which each marginal tax rate would kick in.

Marginal Tax Rate

Married Couples

Individuals

12%

$0

$0

25%

$90,000

$45,000

35%

$260,000

$200,000

39.6%

$1,000,000

$500,000

For example, if a married couple has $100,000 in taxable income, they would pay the 12% rate on the first $90,000 and the 25% rate on the other $10,000.

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How these differ from the current 2018 tax brackets

Aside from a tax cut, one of the GOP's goals was to simplify the tax code. And in this area, they have certainly succeeded. We currently have seven marginal tax brackets, and here are the taxable income thresholds for each in 2018, under the current tax law:

Marginal Tax Rate

Married Couples

Individuals

10%

$0

$0

15%

$19,050

$9,525

25%

$77,400

$38,700

28%

$156,150

$93,700

33%

$237,950

$195,450

35%

$424,950

$424,950

39.6%

$480,050

$426,700

Here's why I say that this isn't an across-the-board tax cut. According to the current tax brackets, a married couple with $350,000 of taxable income would fall into the 33% tax bracket. Under the Tax Cuts and Jobs Act, the same couple would fall into the 35% bracket. In other words, their marginal tax rate would actually increase.

Other things to consider

In addition, keep in mind that your tax bracket is just one piece of the puzzle. The plan makes several other major tax changes that could affect how much you end up paying. Here are just a few of the most important changes proposed in the Tax Cuts and Jobs Act and how they could end up affecting your taxes.

  • The bill dramatically increases the standard deduction to $24,400 for couples and $12,200 for individuals -- up from $13,000 and $6,500, respectively. However, it eliminates the personal exemption that is an additional $4,150 deduction per person. This could be a good thing for individuals and couples with no children, but could be bad for larger families.
  • The bill increases the Child Tax Credit to $1,600, and gives a $300 credit per person for nonchild dependents. This could help offset the loss of the personal exemption.
  • The bill eliminates most itemized deductions, except mortgage interest, charitable contributions, and property taxes (up to $10,000). If you currently claim deductions like student loan interest, medical expenses, or other things, your tax bill could be negatively affected. Also, the higher standard deduction makes the three remaining deductions less usable by many taxpayers.

A tax cut or a tax increase for you?

The bottom line is that although we now know what the 2018 tax brackets could look like under the GOP's tax reform plan, don't assume you're getting a tax cut or that your taxes are going up based on your tax bracket alone. The Tax Cuts and Jobs Act makes many tax changes, and it is the combination of all of the changes that determines whether you'll end up paying more or less.

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