Approximately 239 million tax returns are filed each year, and many would agree that the current tax system is outdated.
In this article, you’ll learn what you can expect based on what we know about the changes so far. Ready? Let’s get started.
Recently, the IRS announced that the standard deduction will rise for 2018 so it can keep up with inflation. Right now the single standard deduction is $6350 and this will increase to $6500 for 2018. For married couples filing jointly, the standard deduction will increase from $12,700 to $13,000.
However, these deductions could be quite different if the GOP’s tax reform bill ends up passing in time for the 2018 tax year. This tax framework nearly doubles the current deductions, calling for a $12,000 deduction for single filers and $24,000 for married couples.
2. Personal Exemptions
Personal exemptions will also rise slightly for 2018- from $4,050 to $4,150. This reduces your taxable income, and personal exemptions can be used for each taxpayer and dependent on your tax return.
Unfortunately, this is one of those confusing tax changes that mean you may not actually be better off. Since the standard deductions will be used to consolidate the current personal exemption and standard deduction into one tax break, the personal exemption won’t actually apply. This may mean that your taxes will actually increase.
3. Tax Bracket Changes
Recently, the IRS released the 2018 tax brackets. These have the same marginal tax rates, however, the income thresholds are slightly higher. The tax rates are currently:
Under the Republican tax plan, these would be consolidated into three brackets, which would be 12%, 25%, and 25%.
The tax changes are good news if you’re preparing for retirement. In 2018, savers who are contributing to their individual retirement accounts will be given higher income ranges after any adjustments for cost of living. For single taxpayers, the 2018 limit will be between $63,000 and $73,000.
This will work a little differently for married couples. This is because the phase-out range depends on whether you’re covered by a workplace retirement plan.
For Roth IRAs, the phase-out will be increased from $120,000 to $135,000. Married couples filing jointly also now benefit from a $10,000 increase to $199,000.
5. Alternative Minimum Tax
The AMT is designed to ensure that people earning a higher income are paying their fair share- even if they’re benefiting from lots of tax credits and deductions.
For 2018, the exemptions start at $55,400 for single taxpayers (up from $54,300) and $86,200 for married taxpayers filing jointly (increasing from $85,200).
The GOP is opposed to the alternative minimum tax as they say it makes the tax system more complex. Critics on both sides say that it also impacts more people in middle-income tax brackets than it was intended to. Under the Republican tax reform, the AMT would be gone altogether.
Ready for These Tax Changes?
While we now know what the planned tax changes are for 2018, many of these won’t matter if the GOP manages to pass a tax reform bill. For the time being, assume that these changes will be implemented, and be prepared to make adjustments if tax reform does end up passing before the next tax year.
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