How Would the Senate Tax Bill Change Your 2018 Tax Bracket?

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The United States Senate recently released its own version of the Tax Cuts and Jobs Act, and there were several key differences from the original version the House Ways and Means Committee released.

Perhaps the most striking difference is the proposed tax brackets. Instead of consolidating the tax structure into fewer brackets, the plan surprised many people by keeping seven individual tax brackets and simply lowering marginal tax rates for most Americans. Here's a rundown of the Senate bill's proposed tax brackets, and how they differ from current tax law.

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The plan still calls for seven tax brackets

There are several key differences between the two versions of the Tax Cuts and Jobs Act that we've seen so far, and one of the biggest discrepancies is how the two bills would reform the tax-bracket structure for individuals.

The House version of the bill calls for a simplification of the tax structure by consolidating the current seven brackets into just four, and it would keep the highest marginal tax rate unchanged at 39.6%. On the other hand, the Senate's version keeps the seven-bracket structure but makes two key changes. Most of the marginal rates would be lower than they are under current law, and the infamous "marriage penalty" would be reduced.

Here's the Senate bill's 2018 tax brackets

As I mentioned, the Senate's version of the Tax Cuts and Jobs Act keeps the seven-bracket structure. However, it uses generally lower rates of 10%, 12%, 22.5%, 25%, 32.5%, 35%, and 38.5%. It also changes the income thresholds for each range. Let's look at the Senate's proposed 2018 tax brackets, as well as a chart of the tax brackets the IRS has announced for 2018 based on the current tax law.

First, here are the proposed tax brackets under the Senate's bill for the three most popular filing statuses:

For comparison, here are the 2018 tax brackets that are scheduled to go into effect under current tax law:

A few interesting but not-so-obvious things to notice:

  • The first couple of tax brackets are virtually identical to those in the current tax law, although the marginal rate for the second bracket would drop from 15% to 12%.
  • The marriage penalty would not be completely eliminated. That would mean the single-income ranges would be exactly half of the married brackets. However, the plan does a good job of reducing the marriage penalty in the higher-income ranges. Under current law, two single individuals who earn $400,000 each would have a marginal tax rate of 33% but would see their rate rise to 39.6% if they get married. Under the proposed brackets, this couple would have a marginal tax rate of 35% regardless of whether they get married.
  • In some cases, taxpayers' marginal tax rates could go up. For example, a single filer who earns $300,000 would pay 33% under current law. With the Senate's proposed brackets, the rate would rise to 35%.

Take this with a grain of salt

It's important to keep in mind that this is just a proposal at this point, and that it conflicts with the tax brackets that the president and House GOP leaders have supported.

For a tax reform bill to become law, the House and Senate will need to pass identical bills, which President Trump would then need to sign into law. So there's likely to be significant compromise before we know what a final product will look like.

Having said that, the Senate's plan would indeed result in a lower marginal tax rate for most, if not all, Americans, and it's important to know how it could affect you.

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