Individual Tax Rate Comparison after Tax Reform

Tax Cuts and Jobs Act ("Tax Reform")

Tax Reform was signed into law December 22, 2017, while some of the provisions became effective in the year 2017, the majority of the changes in the law did not go into effect until the year 2018.

The question that most of you will have this year is whether you will make more money due to the Tax Reform. The fact is that for more people this will likely be the case. Although many sections of the IRS Tax Code are being changed, I want to illustrate how your bottom line will be affected when you do your 2018 federal income taxes as compared to the previous year.

Illustration

John is a single individual, has no kids, and rents an apartment in Miami. John was compensated $50,000 from his employer in 2018.

2017 Tax Rate

For the year 2017, your adjusted gross income was reduced by your personal exemption and either the standard deduction or the itemize deduction.

John would have been able to deduct $4,050 with the personal exemption and $6,350 for the standard deduction. For most individuals, the standard deduction would be a lot higher than the itemized deduction, specially if you don’t own a home. This is because the itemized deduction would allow you to deduct mortgage interest and real estate taxes.

The personal exemption and the standard deduction allows John to reduce the income for which he will be taxed. Subtracting the personal exemption and the standard deduction, John will have a taxable income of $39,600.

Based on the 2017 tax bracket for single individuals, the first $37,950.00 of income gets taxed in the amount of $5,226.25, and the difference between $37,950 and $39,600 ($1650) gets taxed at a rate of 25% for an amount equal to $412.50. This means that in 2017 John would have to pay $5,638.57 in taxes.

2018 Tax Rate

The Tax Reform eliminated the personal exemption, but it increased the standard deduction to $12,000 for individuals. In addition, the Tax Reform lowered the maximum rate of tax from 39.6% to 37%. The Tax Reform also modified the tax bracket so you get tax less at lower brackets.

Applying the Tax Reform to John, his increased standard deduction would reduce his gross income from $50,000 to $38,000. Since you cannot claim any personal exemption for the year 2018, we start our calculation. Applying the 2018 tax bracket, John would have to pay $4,369.50in 2018 for his federal income taxes.

Conclusion

Although you may not claim the personal exemption in your 2018 federal income tax, the increased standard deduction and the more favorable 2018 tax brackets allow you to reduce your federal tax liability compared to 2017.

Disclaimer

The preceding example is meant for illustration purposes only.  Every taxpayer is different and you should always consult a Tax Attorney or a CPA regarding your unique tax situation. Call us today at (305) 489-1415 if you have any questions or would like to have more information how the Tax Reform impacts you or your company.

2017/2018 Individual Income Tax Rate Table Comparison