Financial Matters

The New Tax Law – How does it affect me?

By  | 

Over 1,000,000 Viewers

Benjamin Franklin is most often cited as the author of the expression, “in this world nothing can be said to be certain, except death and taxes”. While this was written in 1789 the phrase can be traced back to a musical farce written by Christopher Bullock in 1716.1 Interestingly, even by the 1700s, taxes had already been around for thousands of years, dating as far back as 6000 BC in Ancient Mesopotamia2.

The history of taxation in the United States starts in 1812 with a sales tax enacted to offset the cost of the War of 1812.3. According to irs.com, income tax was first introduced in 1862 to offset the cost of the Civil War. Tax was set at 3% of income greater than $800 a year. That year the office of the Commissioner of Internal Revenue was established. It was not until 1913 that the 16th Amendment to the Constitution created federal income tax.

Over the years our income tax system has experience many changes and again at the end of 2017 we saw yet another modification to the tax code. On December 22, 2017 the president signed the new law commonly referred to as the Tax Cuts and Jobs Act. This law made changes to the income tax brackets which will partly determine your tax liability for 2018.

TAX BRACKETS

How many times has someone said they are in a certain tax bracket? While a common topic of conversation, few really understand the bracketed system that is our tax code. In 2017 there were seven brackets of income and while the new law kept the same number of brackets, it changed the income levels of each bracket.

The amount of income tax a taxpayer pays is partly determined by income and filing status. The tax filing status for individual filers (not corporations or estates) include individual, married filing jointly, married filing separately, and head of household. A taxpayer pays based on his/her status on December 31 of the filing year. An example of two of the classifications and brackets under the new law are as follows:

2018 TAX BRACKETS

Rate Individual Married Filing Jointly
10% Up to $9,525 Up to $19,050
12% $9,526 to $38,700 $19,051 to $77,400
22% 38,701 to $82,500 $77,401 to $165,000
24% $82,501 to $157,500 $165,001 to $315,000
32% $157,501 to $200,000 $315,001 to $400,000
35% $200,001 to $500,000 $400,001 to $600,000
37% over $500,000  over $600,000

 

A common misconception is that if you fall in a particular bracket your entire income is taxed at that rate. This is not true. The taxable percentage only applies to income corresponding to that bracket. For example, a married couple with taxable income of $100,000 pays 10% of the first $19,050, 12% on the next $58,350, and 22% on $22,600 for a total of $13,879.

MARGINAL VERSUS EFFECTIVE RATE

The $13,879 represents the amount of tax based on the marginal rate, however, this is typically not the actual amount paid due to deductions that are allowed. Since deductions reduce the amount of money taxed (the taxable income), the tax liability if often a lesser amount. That lesser percentage can be calculated for each taxpayer and represents the taxpayer’s effective tax rate. To calculate your effective tax rate divide the tax you owe by your taxable income.

IMPACT OF NEW LAW ON YOUR INCOME TAX

In order to get an estimate of the effect of the new law on your tax liability, assuming the same income in 2018 as 2017, first look to see if your bracket changed? Millions of Americans are doing this comparison to determine if they are on the winning end or losing end of the new legislation.

For example, a married couple making $225,000 under the old law would be in the 28% bracket and under the new law would be in the 24% bracket. A single filer making $100,000 under the old law would be in the 28% bracket 24% under the new law. A married couple making $450,000 would stay in the 35% bracket under the new law.

Of course, determining the amount of tax due at the end of the year is not as simple as looking at the brackets. The amount of income that is taxed is determined after additional calculations are done, including what deductions are allowed from the total income. Congress made some changes here also so it is best to check with a professional tax preparer to understand how these changes will affect your return.

EFFECT ON YOUR PAYCHECK

The new law went into effect on January 1, 2018 so the impact will likely not be felt until tax returns are filed in 2019 for income earned in 2018. Some changes might affect your paycheck in 2018 but that is partly determined by how and when your employer calculates tax withholdings. The New York Times reported that the Internal Revenue Service plans to release new withholding tables in January 2018, so taxpayers can expect to see changes in their paychecks as soon as February.5.

BOTTOM LINE

Understanding how the tax code affects you and your family’s bottom line is a crucial step in overall financial planning. Since income taxes will continue to change, a key component to a long term financial strategy is to understand taxation and how it will affect you now, and generations later. The key is utilizing strategies that focus on diversifying your tax risk. Planning for this risk and others will help protect your wealth now and in the future.

  1. Death and Taxes (Idiom), Wikipedia
  2. https://bftaxhelp.wordpress.com/about-property-taxes/history-of-property-taxes/ancient-mesopotamia/
  3. irs.com/articles/the-history-of-income-taxes
  4. http://www.washingtonexaminer.com/republicans-forced-to-give-tax-bill-outrageous-new-name-after-running-afoul-of-senate-rules/article/2643970
  5. nytimes.com/interactive/2017/12/21/us/politics/will-tax-plan-affect-my-2017-taxes.html

Asalyn Coachman is a Registered Representative of and offers Securities through The O.N. Equity Sales Company, Member FINRA/SIPC, 39395 W Twelve Mile Road, Ste. 102 Farmington Hills, MI 48331 (248) 482-3600. Investment Advisory Services offered through O.N. Investment Management Company. Financial Architects, Inc. is not affiliated with The O.N. Equity Sales Company or O.N. Investment Management Company. Tax and/or legal advice is not offered by Asalyn Coachman. Please consult with your tax professional for additional guidance regarding tax-related matters.

Asalyn Coachman is a Registered Representative of and offers Securities through The O.N. Equity Sales Company, Member FINRA/SIPC, 39395 W Twelve Mile Road, Ste. 102 Farmington Hills, MI 48331 (248) 482-3600. Investment Advisory Services offered through O.N. Investment Management Company. Financial Architects, Inc. is not affiliated with The O.N. Equity Sales Company or O.N. Investment Management Company.

Asalyn earned a degree in Economics from Harvard University and a law degree from the State University of New York at Buffalo. She lives in Lake Orion with her husband and two children where she is active in organizations such as the Harvard Club of Eastern Michigan, Lake Orion Schools, and the Baldwin Center of Pontiac, Michigan, where she serves as board president.

You must be logged in to post a comment Login

Leave a Reply