The Tax Cuts and Jobs Act of 2017 modified the tax brackets that existed in tax year 2017. In this short essay, I will discuss the new 2018 individual tax rates.
2018 Individual Tax Rates: Historical Background
Tax rates seem to change every time there is a new President. For example, when President Bush got elected in 2000, the Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 creating a new tax bracket and bringing the rest of the tax rates down; the top rate was gradually reduced to 35% from 39.6%.
Then, under the new administration of President Obama, the American Taxpayer Relief Act of 2012 increased the tax rates again with the top rate going back up to 39.6%.
2018 Individual Tax Rates: 2017 Tax Reform
Under President Trump, the Congress passed a major reform of the US tax system through the Tax Cuts and Jobs Act of 2017. The tax rates were among the most important changes with respect to domestic US tax law.
While the tax reform preserves the same seven tax brackets for individual tax payers, it introduces new 2018 individual tax rates for almost each of them. Under the previous law, the tax brackets were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Now, the new rates starting tax year 2018 are much lower: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
It is important to emphasize that these are not permanent changes. The new tax brackets will operate only through tax year 2025; starting January 1, 2026, the tax rates will return to those that existed in 2017.
2018 Individual Tax Rates: Income Thresholds for Tax Brackets Increase
In addition to lower tax rates, the 2017 tax reform also restructured the income thresholds that apply to most tax brackets. Generally, the income thresholds went up.
For example, in order to be subject to 39.6% tax in 2017, taxpayers filing a joint tax return must have had income in excess of $470,700. In 2018, in order to be subject to the top bracket’s tax rate of 37%, the same couple will have to have income in excess $600,000. The income of $470,700 would only trigger the 35% tax rate in 2018.
Sherayzen Law Office has long held the view that the increase in the income thresholds for tax brackets is especially important (perhaps, more so than the decrease in tax rates) to alleviate the tax burden of the middle class. However, we do note with alarm that the benefits might have been spread too widely to include the top 1% of the earners while the 10% bracket was kept essentially the same. We believe that this was one of the reasons why the Congress made the increase in income thresholds for tax brackets a temporary one despite the anticipated inflation pressures in the future.