Contributor, Benzinga
January 27, 2019

The Internal Revenue Service (IRS) has made annual inflation adjustments for over 50 tax provisions in 2018. These modifications include tax rate schedule changes, and in addition, many changes to taxable income have come into effect, thereby increasing exemptions for many taxpayers. How this could affect you depends on your tax bracket. Also,if you moved up or down a tax bracket this year, be sure your taxes are 100% perfect so you can maximize your refund.


What Are Tax Brackets?

In the United States, federal tax brackets make up the basis of the progressive tax system and represent the tax rate that you pay on each part of your income. In 2018,federal income taxes have seven different rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%. What you owe in taxes depends on your level of income and your filing status. These new tax rates came into effect after President Trump signed the Tax Jobs and Cuts Act of 2017 on December 22, 2017. The changes took effect on January 1, 2018. Overall, rates for the seven tax brackets were reduced. For example, the top rate was 39.6% and was reduced to 37% after the changes. The bottom rate continues to be 10%, but it now covers more income. Note that moving into a higher tax bracket does not necessarily mean that your entire income will get taxed at the higher rate. Only money that you earn within a particular tax bracket will become subject to that bracket’s tax rate.

The table below shows which of the various tax brackets apply to each of the filing status types. It also shows what standard deduction amount applies to each filing status. Note that you can choose to either take the appropriate standard deduction or itemize your deductions in order to pay the lowest tax amount. The relevant standard deduction amount gets subtracted from your adjusted gross income (AGI) to reduce your income subject to taxation.

Compare Taxable Income Range

Filing StatusTaxation RateLow End of Income RangeHigh End of Income Range
SingleStandard deduction = $12,00010% of taxable income$010% of taxable income
$952.50 + 12% over $9,525$9,526$38,700
$4,453.50 + 22% over $38,700$38,701$82,500
$14,089.50 + 24% over $82,500$82,501$157,500
$32,089.50 + 32% over $157,500$157,501$200,000
$45,689.50 + 35% over $200,000$200,001$500,000
$150,689.50 + 37% over $500,000$500,001upwards
Married Filing Jointly or Qualifying Widow(er)Standard deduction = $24,00010% of taxable income $0$19,500
$1,905 + 12% over $19,050$19,051$77,400
$8,907 + 22% over $77,400$77,401$165,000
$28,179 + 24% over $165,000$165,001$315,000
$64,179 + 32% over $315,000$315,001$400,000
$91,379 + 35% over $400,000$400,001$600,000
$161,379 + 37% over $600,000$600,001upwards
Married Filing Separately Standard deduction = $12,00010% of taxable income$0$9,525
$952.50 + 12% over $9,525$9,526$38,700
$4,453.50 + 22% over $38,700$38,701$82,500
$14,089.50 + 24% over $82,500$82,501$157,500
$32,089.50 + 32% over $157,500$157,501$200,000
$45,689.50 + 35% over $200,000$200,001$300,000
$80,689.50 + 37% over $300,000$300,001upwards
Head of HouseholdStandard deduction = $18,00010% of taxable income$0$13,601
$1,360 + 12% over $13,600$13,601$51,800
$5,944 + 22% over $51,800$51,801$82,500
$12,698 + 24% over $82,500$82,501$157,500
$30,698 + 32% over $157,500$157,501$200,000
$44,298 + 35% over $200,000$200,001$500,000
$149,298 + 37% over $500,000$500,001upwards

Progressive Taxes Explained with Examples

As it applies to taxes, the term “progressive” means that different parts of your income are taxed at different rates. Understanding the progressive tax system used in the United States can be an important part of implementing an effective investment strategy. The way progressive taxes work is that your income gets taxed in portions.For example, if half of your income gets taxed at 10%, while the tax rate on the other half comes in at 12%, then your effective tax rate would be 11%. This means that for every $1 you receive in income, $0.11 of that $1 goes to the IRS.Another example: An income of $30,000 would be taxed in the 12% tax bracket. Nevertheless, you would pay 10% tax on the first $9,526 and the remaining $20,474 would be taxed at the 12% rate. When averaging the amounts, you would pay closer to an 11% overall rate.On higher income, the portions getseparated by the different amounts that result from subtracting the deductions: On $50,000 of taxable income, you would pay 10% on the first $9,525 and 12% on the portion of income between the $9,526 deduction and $38,700. You would then pay 22% on the rest; however, the portion of income between $9,526 and $38,700 gets taxed at a 12% rate. This effectively lowers the total tax bill to $6,900, which represents a real tax rate of about 14% despite that income being in the 22% tax bracket.

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Final Thoughts

Significant changes have taken place with tax laws since the signing of tax reform by President Trump in December of 2017. To take advantage of the 2017 tax law changes, make yourself aware of the deductions you are entitled to and how those deductions apply to your final tax bill. Since these recent changes can significantly affect your tax liability, it makes sense to consult with a tax professional if you have any doubts or need to file a complex return. Finally, in addition to income taxes, you may also need to pay capital gains taxes, investment taxes and/or brokerage taxes