Never forget these two axioms:
Money frees us, but its pursuit enslaves us.
It’s not how much you have at the end; it’s how much you could have made.
INCOME TAXES
Benjamin Franklin, the indispensable American, was absolutely 1000% (my math may be off here by a little bit or a factor of ten [whichever is closer]) correct as per usual. Let’s avoid the topic we all like to avoid talking about both in our professional and personal lives and delve into the other topic we cannot dodge indefinitely.
First of all, and most importantly, the federal income tax rates changed with the recent massive tax reform law passed in December 2017(officially titled as The Tax Cuts and Jobs Act of 2017 [TCJA]).
Below are the 2018 and then 2017 tax brackets in reverse chronological order.
2018 Income Tax Brackets In The Way We All Think Of Them
| Rate | Individuals | Filing Jointly | |
| 10% | Up to $9,525 | Up to $19,050 | |
| 12% | $9,526-$38,700 | $19,051- $77,400 | |
| 22% | 38,701-$82,500 | $77,401-$165,000 | |
| 24% | $82,501-$157,500 | $165,001-$315,000 | |
| 32% | $157,501- $200,000 | $315,001-$400,000 | |
| 35% | $200,001-$500,000 | $400,001-$600,000
37% Over $500,000 Over $600,000 |
2018 Tax Brackets In Greater Detail (ie, the way your income is actually taxed)
| Rate | Taxable Income Bracket | Tax Owed |
| 10% | $0 to $9,325 | 10% of Taxable Income |
| 15% | $9,325 to $37,950 | $932.50 plus 15% of the excess over $9,325 |
| 25% | $37,950 to $91,900 | $5,226.25 plus 25% of the excess over $37,950 |
| 28% | $91,900 to $191,650 | $18,713.75 plus 28% of the excess over $91,900 |
| 33% | $191,650 to $416,700 | $46,643.75 plus 33% of the excess over $191,650 |
| 35% | $416,700 to $418,400 | $120,910.25 plus 35% of the excess over $416,700 |
| 39.60% | $418,400+ | $121,505.25 plus 39.6% of the excess over $418,400 |
2017 Taxes in Greater Detail
| Rate | Taxable Income Bracket | Tax Owed |
| 10% | $0 to $18,650 | 10% of taxable income |
| 15% | $18,650 to $75,900 | $1,865 plus 15% of the excess over $18,650 |
| 25% | $75,900 to $153,100 | $10,452.50 plus 25% of the excess over $75,900 |
| 28% | $153,100 to $233,350 | $29,752.50 plus 28% of the excess over $153,100 |
| 33% | $233,350 to $416,700 | $52,222.50 plus 33% of the excess over $233,350 |
| 35% | $416,700 to $470,700 | $112,728 plus 35% of the excess over $416,700 |
| 39.60% | $470,700+ | $131,628 plus 39.6% of the excess over $470,700
|
All the above charts are from The Tax Foundation.
Deductions
The standard deduction (ie, what you get for just being alive as a federal taxpayer and using this amount rather than itemizing deductions) in 2018 will jump to $24,000. For single filers, it jumped from $6,500 in 2017 to $12,000 now.
The child tax credit currently was at $1,000 and started to phase out at $110,000 in income for couples and $75,000 in income for single people or married, but separate filers (more on them later). Moving forward, this credit doubled to $2,000, $1,400 of which is a refundable tax credit. Furthermore, it only starts phasing out at $400,000 in income for couples and $200,000 for singles.
State and local taxes can still be deducted from your federal taxes, but they are now capped at $10,000 when it used to be unlimited, but just dependent on how much you paid in state and local taxes.This was the so-called SALT (State And Local Taxes) deduction that was being so hotly debated as the tax reform bill wound its way through Congress.
Interest on mortgages for primary and secondary homes (ie, the proverbial vacation home) is still deductible. The limit, however, has come down from loans up to $1 million to loans up to $750,000. (Remember that this deduction is just the interest on the home loan, not the entire mortgage.)
Medical expenses in 2017 and 2018 are deductible if they exceed 7.5% of your income (down from 10%).
The Alternative Minimum Tax (AMT)
The AMT, created in the 1960s, was designed to prevent high-income taxpayers from avoiding the individual income tax. Unfortunately for these individuals or families, the AMT requires high-income taxpayers to calculate their tax bill twice: once under the ordinary income tax system (the one we all fear and loathe) and again under the AMT. (Talk about your invisible taxes.) Then, you are required to pay the higher of the two.
Ouch.
The AMT uses a different definition of what is taxable income called Alternative Minimum Taxable Income (AMTI).
SR: It’s the government. Of course, it does…
A source of major consternation and even bitterness has been that occasionally in the past, it has nabbed middle-income (and even more rarely low-income) taxpayers forcing them to pay more than they should have by all rights.
To prevent this problem, taxpayers are allowed to exempt a significant amount of their income from AMTI. However, this exemption phases out for high-income taxpayers (depending on what your definition of high income is).
Dr. Know It All: $40 million a year!!
PWT: Uh, yeah…sure…OK….Anyway…
The AMT is at two similar rates: 26 percent and 28 percent.
The 26% AMT rate for 2018 has the exemption expire at $70,300 for singles and $109,400 for married couples that are filing jointly.
In 2018, the 28 percent AMT rate applies to excess AMTI of $95,750 for singles and $191,500 for all married joint filers.
Last thing of note:
If you’re wondering why a married couple would file separately (which is rather rare), it’s usually a couple making about the same amount of each money yearly. In this scenario, depending on what state you live in, filing separately may save you and your spouse on your state taxes though it will likely cost you both more as a federal tax payer (no spousal tax breaks any longer). Therefore, the savings on state taxes for each of you have to exceed the federal tax hit you’re both taking. It’s a rare instance that this happens, but it does happen therefore make sure if you and your spouse are making roughly the same in any given year (or every year), your tax preparer should be checking which route makes sense for you as a couple. If not, FIRE THEM!!
Just kidding.
Check with them if they have done so…and, if not, have them do it for your 2017 taxes and make sure joint filing is the way to go for you. After all, you’re paying them. They really should have done that for you anyway without you prompting them to do so. My people do every year (and I’ve joint filed every year as a result armed with the knowledge and security of paying less) without me ever asking once.
Finally, one last thing…
The state you live in likely taxes you (there are seven total that have no state income taxes) in many ways (income, sales, property, alcohol, sin…yep, sadly, even something as American as sin is taxed…stupid moralists!) that are complex making state to state comparisons difficult for an individual and nearly impossible for a large mass of people with different homes, wants, and needs.
I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.
Please spread the word about this blog to your friends (real and virtual), family, and colleagues.
Talk to you soon.
Until next time…