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Trump’s new tax reform has changed many things – including your tax bracket. And many of those changes will be in place starting in 2018 until 2025 for individuals, unless Congress says otherwise.
There are still seven federal income tax brackets but you’ll notice that the rates and thresholds have changed.
Let’s see how your tax bracket will change from 2017 to 2018.
New Tax Rates
The brackets for individuals in 2017 were 10%,15%, 25%, 28%, 32%, 35%, and 39.6%.
Under Trump’s plan, tax brackets were cut to 10%, 12%, 22%, 24%, 32%, 35%, and 37% [Internal Revenue Code (IRC) section 1].
The top tax rate of 37% applies to single filers who have taxable income over $500,000 and joint filers with taxable income over $600,000.
2017 Tax Brackets
2018 Tax Brackets
Effective vs. Marginal Tax Rate
The United States has a progress tax system. This means you are a taxed at a higher rate when you make more money. But the tax rates you see in the chart are not the actual tax rates that you pay on your entire amount of taxable income.
For Example: For someone filing taxes as a single person in 2017, their first $9,325 of income is taxed at 10%. Earnings over $9,325 up to $37,950 are taxed at 15%, and so on. When people look at where their income falls on the bracket system, they are led to believe they are in “X percent tax bracket”.
Another Example: If Ashley files as head of household in 2018 and earns a salary of $60,000, she might tell her friends that she’s “in the 22% tax bracket.” But this does not mean that all of Lindsay’s income is going to be taxed at 22%. It just means that her marginal tax rate is 22%.
Marginal tax rate is the amount you pay on each additional dollar of income and is determined by the tax bracket you fall in. It’s the tax rate applied to the last dollar you earn. So if you make $40,000 as a single filer, you are in the 22% marginal tax rate.
The marginal tax rates for 2018 are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. For 2018, the lowest income earners are taxed at 10% while the highest income earners are taxed at 37%. As income increases, you will be taxed at a higher rate in a progressive tax system.
The effective tax rate represents the average rate at which your income is taxed. It’s your total tax expense divided by your total taxable income.
You can use your tax returns to calculate your effective tax rate. Your effective tax rate is typically much lower than your marginal tax rate.
Find your total income amount on your Form 1040 tax return. Let’s assume your total income is $100,000 before deductions, exemptions, and other adjustments.
Now find your total tax amount. Let’s say it’s $21,000.
Divide your total tax by your total income. In this example, divide $21,000 by $100,000 to get 0.21. Multiple that number by 100 to get your effective tax rate as a %. Your effective tax rate in this example is 21%.
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