The recently enacted tax reform did bring lower tax brackets, but it didn’t bring promised simplification of them. In 2018 our income will still be split among seven brackets, but they are now smaller and are intended to reduce what we owe.
Below is a table summarizing the new tax brackets based on filing status:
And here is a comparison of the tax rate before and after the Tax Cut and Jobs Act:
- 2017 – 10/15/25/28/33/35/39.4
- 2018 – 10/12/22/24/32/35/37
Here is an example of how the two brackets compare. Let’s look at a household reporting annual income of $110,000 and how that money would be taxed in 2017 and 2018:
Taxpayers will enjoy a head start this year filing taxes and should see impact early in the year. The above scenario differs by roughly $5,500 and savings can be seen at each tax bracket except for the base one.
IRS is currently working on tax tables to distribute to companies. Our 2018 income tax will be withheld based on new rates and there should be more buck in our packets. The recent reform is intended to produce noticeable impact to our bottom line immediately.
Keep in mind that the above example simplifies the calculations and doesn’t include any additional assumption. There are many situations that can impact the final number and because they may differ significantly from one taxpayer to another, we exclude them from the analysis. Additionally, differences in the new tax law include elimination of personal exemption and increase (double) to standard deduction.