With the new year arrive some new tax code changes. One of the most significant is the reorganization of tax brackets. Make sure you know how these changes will affect your tax liability so you can make sound financial plans for the rest of the year.
What Is a Tax Bracket?
A tax bracket indicates the range of income taxed at a specific rate. The United States uses a progressive tax bracket system. This means your income is progressively taxed at a higher rate the more you earn. Using 2018 numbers for single filers, this means:
- The first $9,525 you make will be taxed at a 10% rate.
- If you earn more than $9,525, the next chunk of your income up to $38,700 will be taxed at a 12% rate.
- If you earn more than $38,700, the amount you make between $38,701 and $82,500 will be taxed at a 22% rate.
- And so on…
This pattern continues with several more income thresholds. As you make more money, you shift into a higher tax bracket and pay the corresponding tax rate on that income.
What Has Changed?
In 2017 there were seven tax brackets. In 2018 there are still seven, but the numbers that define each of them have shifted. Tax rates have gone down and the income range for each bracket has gone up. This means that more of your income will be taxed at a lower rate.
The easiest way to see this change is to look at the upper range of taxable income. In 2017 the top tax brackets looked like this:
- Income of $418,401 and higher was taxed at a rate of 39.6%.
In 2018, that top tax bracket looks a bit different:
- Income of $500,001 and higher is taxed at a rate of just 37%.
As you can see, in 2018, the taxable income for this topmost bracket starts at a threshold that is $81,600 higher, yet the rate is 2.6% lower. This is just one example of a larger pattern of increased income ranges and decreased tax rates. Importantly, it could mean you will pay less in taxes this year! There are, of course, several other factors that go into determining your tax liability, but the new tax brackets could well have an impact.
To find out more about how the new 2018 tax brackets will affect your financial picture this year, reach out to the experts at Taxation Solutions, Inc. We are your source for tax advice and planning in Memphis. Call us today to see how we can help you better understand your tax liability and financial landscape.