Adobe Stock, Lane Erickson
January 2, 2018

2018 Tax Brackets

Amir El-Sibaie

Amir El-Sibaie

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With the passage of the Tax Cuts and Jobs Act (TCJA), many tax brackets, thresholds, and rates will change in 2018. Noticeable changes to the structure of the individual tax code include the elimination of personal exemptions, the elimination of the Pease limitation on itemized deductions, and the expansion of the Child Tax Credit.

Additionally, on a yearly basis the IRS adjusts more than 40 tax provisions for inflation. This is done to prevent what is called “bracket creep,” when people are pushed into higher income tax brackets or have reduced value from credits or deductions due to inflation, instead of any increase in real income.

The IRS used to use the Consumer Price Index (CPI) to calculate the past year’s inflation. However, with the TCJA, the IRS will now use the Chained Consumer Price Index (C-CPI) to adjust income thresholds, deduction amounts, and credit values accordingly. [1]

Income Tax Brackets and Rates

In 2018, the income limits for all tax brackets and all filers will be adjusted for inflation and will be as follows (Tables 1 and 2). The top marginal income tax rate of 37 percent will hit taxpayers with taxable income of $500,000 and higher for single filers and $600,000 and higher for married couples filing jointly.

Table 1. Tax Brackets and Rates, 2018
Rate For Unmarried Individuals, Taxable Income Over For Married Individuals Filing Joint Returns, Taxable Income Over For Heads of Households, Taxable Income Over
10% $0 $0 $0
12% $9,525 $19,050 $13,600
22% $38,700 $77,400 $51,800
24% $82,500 $165,000 $82,500
32% $157,500 $315,000 $157,500
35% $200,000 $400,000 $200,000
37% $500,000 $600,000 $500,000

Standard Deduction and Personal Exemption

The standard deduction for single filers will increase by $5,500 and by $11,000 for married couples filing jointly (Table 2).

The personal exemption for 2018 is eliminated.

Table 2. 2018 Standard Deduction and Personal Exemption
Filing Status Deduction Amount
Single $12,000
Married Filing Jointly $24,000
Head of Household $18,000

Alternative Minimum Tax

The Alternative Minimum Tax (AMT) was created in the 1960s to prevent high-income taxpayers from avoiding the individual income tax. This parallel tax income system requires high-income taxpayers to calculate their tax bill twice: once under the ordinary income tax system and again under the AMT. The taxpayer then needs to pay the higher of the two.

The AMT uses an alternative definition of taxable income called Alternative Minimum Taxable Income (AMTI). To prevent low- and middle-income taxpayers from being subject to the AMT, taxpayers are allowed to exempt a significant amount of their income from AMTI. However, this exemption phases out for high-income taxpayers. The AMT is levied at two rates: 26 percent and 28 percent.

The AMT exemption amount for 2018 is $70,300 for singles and $109,400 for married couples filing jointly (Table 7).

Table 3. 2018 Alternative Minimum Tax Exemptions
Filing Status Exemption Amount
Unmarried Individuals $70,300
Married Filing Jointly $109,400

In 2018, the 28 percent AMT rate applies to excess AMTI of $191,500 for all married taxpayers ($95,750 for unmarried individuals).

Under the TCJA, AMT exemptions phase out at 25 cents per dollar earned once taxpayer AMTI hits a certain threshold. In 2018, the exemption will start phasing out at $500,000 in AMTI for single filers and $1 million for married taxpayers filing jointly (Table 8.)

Table 4. 2018 Alternative Minimum Tax Exemption Phaseout Thresholds
Filing Status Threshold
Unmarried Individuals $500,000
Married Filing Jointly $1,000,000

 

Earned Income Tax Credit

The maximum Earned Income Tax Credit in 2018 for single and joint filers is $520, if the filer has no children (Table 9). The credit is $3,468 for one child, $5,728 for two children, and $6,444 for three or more children. All of these are relatively small increases from 2017.

Table 5. 2018 Earned Income Tax Credit Parameters
Filing Status   No Children One Child Two Children Three or More Children

Single or Head of Household

 Income at Max Credit $6,800.00 $10,200.00 $14,320.00 $14,320.00
Maximum Credit $520.00 $3,468.00 $5,728.00 $6,444.00
Phaseout Begins $8,510.00 $18,700.00 $18,700.00 $18,700.00
Phaseout Ends (Credit Equals Zero) $15,310.00 $40,402.00 $45,898.00 $49,298.00
           

Married Filing Jointly

 Income at Max Credit $6,800.00 $10,200.00 $14,320.00 $14,320.00
Maximum Credit $520.00 $3,468.00 $5,728.00 $6,444.00
Phaseout Begins $14,200.00 $24,400.00 $24,400.00 $24,400.00
Phaseout Ends (Credit Equals Zero) $21,000.00 $46,102.00 $51,598.00 $54,998.00

[1] https://www.irs.gov/pub/irs-drop/rp-17-58.pdf

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Amir El-Sibaie

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A tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat.

A tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax.

The standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.

Itemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. 

An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.

Bracket creep occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, deductions, and exemptions. Bracket creep results in an increase in income taxes without an increase in real income. Many tax provisions—both at the federal and state level—are adjusted for inflation.

A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.

Taxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.