The New Tax Law and Its impact to you as a Taxpayer

By: Jennifer P., Published: Apr 24, 2020 | Related: Unclaimed Tax Refund


President Donald Trump signed a tax reform bill in December 2017 that went into effect on the first day of 2018. It is important to note that the new tax brackets only apply to income earned in 2018 and beyond. Taxpayers will use the 2017 tax brackets when filling out returns due by April 17.

How the Tax Law Impacts Single Filers

There are seven tax brackets in 2018, which is unchanged since 2017. Those who make $9,525 or less will be in the 10 percent bracket while those who make $500,001 or more will be in the 37 percent bracket. The 15, 20 and 25 percent marginal tax rate brackets have been reduced to 12, 22 and 24 percent.

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It is important to note that a marginal tax rate does not apply to a taxpayer's entire income. For instance, someone who is in the top bracket will only pay the 37 percent rate at or above the $500,001 threshold. The standard deduction has been increased to $12,000 while the personal exemption has been eliminated.

Income Thresholds Have Been Adjusted Across Most Brackets

If you were a single filer in 2017 who made $38,000, you would have been in the 25 percent bracket. In 2018, you would have been in the 12 percent tax bracket as it covers income up to $38,700. However, if you made between $200,001 and $416,700, you may pay tax at a higher marginal rate. In 2017, you would have been in the 33 percent tax bracket while you would be in the 35 percent tax bracket in 2018.

How the Tax Law Impacts Married Couples Filing Jointly

As with single filers, the standard deduction has been increased while the personal exemption has been eliminated. Married couples filing jointly receive a standard deduction of $24,000. While the tax brackets remain the same, the income thresholds to qualify for a given tax bracket are different.

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For instance, married couples that make more than $600,000 in a year would pay the top rate of 37 percent. However, those who make between $500,001 and $600,000 would only pay 35 percent compared to an individual who would pay 37 percent. As married couples are allowed to file individual tax returns, it may be worth comparing tax rates to determine what the best option may be.

What Are the Tax Brackets for Married Couples Filing Separately?

If you are married and choose to file a separate tax return, your tax brackets would be the same as those who are filing an individual return. If you made $82,000 in 2018, you would pay a marginal tax rate of 22 percent. Anyone who is filing a tax return should take note that your marginal rate is based on taxable income remaining after deductions have been accounted for.

Does It Matter That the Personal Exemption Has Been Eliminated?

In 2017, the personal exemption was $4,050 for a single filer while it was $8,100 for married couples filling jointly. While this loss may seem significant, the increased standard deduction is higher than the personal and standard deductions put together. This is true for both single and married filers. It is believed that 70 percent of Americans claim the standard deduction. To receive more than the standard deduction, a person would need to itemize all eligible deductions.

What If I Have Questions About My Tax Return?

Those who have questions about their tax return should seek the advice of a tax attorney or similar professional. He or she may be able to provide information about how the new tax brackets may influence your decision to file on your own as opposed to as jointly with a spouse. An attorney or CPA may also be able to talk more about how those who are self-employed or otherwise operate a pass-through entity may be impacted by changes to the tax law.

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How the changes to the tax law impact you depend on your income, filing status and what your tax bracket is relative to last year. Regardless of how much a person owes, it is important to have returns filed by April to avoid paying interest and other penalties. Extensions to file may also be available if necessary.


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