Check out the video log on this topic: Tuesday’s Tax Tips Vol 1 Ep 2
Tax Bracket Changes
Part 1 of 4
The short answer is: YES! For some, it will have a positive effect. But for others, it will result in a tax increase. We’re giving you the tools to help you determine if you are a big winner…or, a big loser.
FACT: The new tax reform bill will impact every taxpayer in the country due to tax bracket changes.
Right now the focus is on 2017 tax returns, therefore most taxpayers have not looked ahead to understand what the new tax reforms will mean for them. That means many people may be surprised about this time next year when they’re preparing their 2018 tax return. Given that, we want to help you avoid surprises and break down some of the ways the tax reforms will affect us all.
The first is due to the change in the tax brackets and the tax rates. The new bill drops the top rate from 39.6% to 37% impacting single filers whose taxable income is over $300K. Meanwhile, the bottom rate remains at 10% and a new rate was established at 12% impacting single filers whose taxable income is under $38,750. In short, this means those in the highest bracket will be taxed at a lower rate, and people who will fall into the lower brackets will experience the same. While that’s great news for those who fall into the far ends of the brackets, if you fall into the middle section you may experience the opposite effect. For example, a single filer whose taxable income was $200k last year paid tax at 33%; a single filer at that same income level would pay 35% this year. This is the impact that will be felt by most upper middle-income households with income that is reported on a W-2. This impact is expected to be felt by single filers with income over ~$92K, and married filers with income over ~$158K. If your household income exceeds these number you will experience a significant tax increase this year.
Here is a side by side comparison of the old brackets in 2017 compared to the new brackets for 2018. For simplicity we’ve limited this review to single filers. The trend seen in single filers applies to all taxpayers. Use these tables to find where you are, and what bracket you will fall in for each year.
If you find you’re in a higher bracket, you’ll need to take actions to improve your tax position. Even if you find yourself in a lower bracket, be mindful that this is just the first of many ways the tax reforms will impact you. Therefore, we’re providing action items that you can employ to improve your tax position.
Bear in mind, your tax bracket is based on your taxable income. The lower your taxable income, the lower bracket you’ll fall into. Now, you certainly don’t want to take a pay cut just to fall into a lower tax bracket, but you can lower your taxable income without changing your actual income. The way to do so is to maximize your pre-tax contributions.
Here are the top 5 pre-tax contributions that nearly every taxpayer can use to their advantage:
- Retirement Savings: Pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) or 403(b).
- Medical Expenses: Pre-tax contributions to a flexible spending account (FSA) can be used to cover out-of-pocket medical expenses including co-pays, deductibles, prescriptions and OTC drugs.
- Childcare Expenses: Pre-tax payroll deductions can be used to fund a dependent-care account to cover childcare costs.
- Insurance Expenses: Pre-tax deductions can be used to cover group health insurance premiums. If you purchase life insurance through your employer, those premiums are also taken from your paycheck before tax.
- Charitable contributions: You can also contribute to many 501(c)3 charities on a pre-tax basis.
Contact your employer to incorporate these pre-tax contributions that serve to improve your overall tax position. These changes alone will be helpful to all taxpayers. Then, when you’re ready to add in more layers to a tax savings strategy, contact us. We can help to ensure you pay less tax in 2018 than you have any year prior.