Individual Income Tax Brackets Change

Tax Bracket Checkboxes on Tax Return

You have no doubt heard a lot about the recently-enacted tax reform, and may be wondering what that means for your tax bracket. While tax reform has changed much about how we will pay taxes, one detail has not changed: there are still seven tax brackets, as there were previously. What has changed is that, overall, the new Tax Cuts and Jobs Act (TCJA) has lowered the tax rate for most people.

For the sake of comparison, let's take a look at what a single filer would pay under both previous law and the TCJA:

Old Bracket    

Income Range

TCJA Bracket     

Income Range

10% $0-$9,525 10% $0-9,525
15% $9,525-$38,700 12% $9,525-$38,700
25% $38,700-$93,700 22% $38,700-$82,500
28% $93,700-$195,450 24% $82,500-$157,500
33% $195,450-$424,950 32% $157,500-$200,000
35% $424,950-$426,700      35% $200,000-$500,000   
39.6% $426,700+ 37% $500,000+
       

For most people, taxes will go down under this structure. But a single filer with taxable income of just over $200,000 will actually be paying taxes at a higher rate under this system.

For married couples filing jointly, the tax brackets are expanded much as for single filers.

Old Bracket   

Income Range

TCJA Bracket   

Income Range

10% $0-$19,050 10% $0-$19,050
15% $19,050-$77,400 12% $19,050-$77,400
25% $77,400-156,150 22% $77,400-$165,000
28% $156,150-$237,950 24% $165,000-$315,000
33% $237,950-$424,950 32% $315,000-$400,000
35% $424,950-$480,050    35% $400,000-$600,000   
39.6% $480,050+ 37% $600,000+
       

These tax brackets will apply to filings for 2018, and are not retroactive to 2017. Of course, your tax bracket is far from the only thing that determines how much tax you will pay. Another notable change is the repeal of the personal exemption. This will be offset by an increase in the standard deduction.

Currently, the standard deduction for a single taxpayer is $6,500. This will nearly double for tax year 2018. For a married couple filing jointly, the standard deduction will increase from $13,000 to $24,000. In addition to the significant increase in the standard deduction, the child tax credit (CTC) doubles under the TCJA, from $1,000 to $2,000. What's more, $1,400 of that amount is refundable.

It's important to note that these changes to the tax laws which affect individuals have a "sunset provision" of December 31, 2025, after which things will go back to the way they were prior to the enactment of the law.

How Will the New Tax Law Affect My Estate Planning?

For gifts made between January 1, 2018 and December 31, 2025, and for the estates of people who die in that time frame, gift and estate tax exemptions and exemption amounts go up to $10 million (adjusted for inflation) or $20 million for married couples. As of January 1, 2026, the exemptions will revert to their pre-TCJA 2017 levels.

The increased exemption amounts could reduce the number of estates in the U.S. that are subject to estate tax from about 5,000 to closer to 2,000. Even though estate tax liability already affects relatively few families, and is about to affect even fewer, that doesn't mean you should ignore your estate plan.

The new, much higher exemption amounts offer a unique opportunity to strategize and avoid transfer taxes in the future, perhaps even after the sunset of the newly-enacted provisions. For instance, you might wish to use some of the increased exemption amount to make tax-free gifts during your lifetime that could ultimately reduce those assets from later taxation in your estate. The new tax landscape may also make this a good time to establish a dynasty trust, an irrevocable trust that allows wealth to grow free of generation-skipping transfer tax as well as federal gift and estate tax.

Tax planning is not the only reason for estate planning, of course. For example, the new tax law will not affect your need for asset protection, succession planning for family businesses, protection for loved ones with special needs, and appointing guardians for minor children. Consult your estate planning attorney to discuss how the tax law, and your personal circumstances, might impact your planning needs.

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Categories: Tax Law

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