As we arrive at the end of March, many of you have finalized, or are at least closer to finalizing your 2018 income tax return.
As I’ve discussed often, and as there has been much discussion in the media, this will be an interesting year under a new tax code.
Many people are discovering that they have tax due, or those with children at home may be surprised at the amount of credit they are now receiving against their tax due.
Regardless of whether you have tax due or a tax refund, all that figure really represents was whether you had enough or too much money sent to the IRS throughout the year.
What really matters is the “Total Tax” figure, which is line 15 of the new form 1040.
From there, I would encourage you to compare that figure to the “Adjusted Gross Income” figure on line 7.
While this number is reduced from your actual gross income because of adjustments an employer might make, this is the easiest figure to look at to quantify what your total income was for the calendar year.
If you divide your “Total Tax” figure by your “Adjusted Gross Income” Figure, you can determine your “effective tax rate,” in other words; what percentage of your income went to Federal Tax for the year.
What’s more meaningful, however, is to look at where you may have fallen under the new tax brackets. Keep in mind that everyone pays the same tax rate on the dollars in each individual bracket. As your income goes higher, you pay tax at higher rates on those dollars in the higher brackets.
While the adjustments to deductions and tax rates were the most talked about topic regarding the 2018 tax law, what many don’t realize is how much farther the lower income brackets run now.
In other words, the 24% Federal bracket runs until $165,000 of taxable income in 2018, while in 2017 the 25% bracket STARTED at taxable income of $75,000. That is significant!
Also, as a reminder, these tax rates were passed as temporary law, as tax legislation often is (remember the fiscal cliff??). As of now, these rates are scheduled to expire completely on December 31, 2025. Be prepared for another media event around that legislative battle!
While I will never try to predict political outcomes, past experience has shown that legislators have a tendency to preserve tax rates at lower levels, while letting reductions expire at higher income levels.
Where “higher” is of course, is always a topic of debate in Washington. In addition to the likelihood that these tax rates may expire, more importantly will be whether or not the variety of deduction changes and simplifications remain the same, or evolve over time.
The main takeaway?
Enjoy the predictability while we have it, and where appropriate, consider opportunities to take advantage of lower income tax rates.
I have spoken with many of you about this, and will continue to review income tax returns and look for areas of opportunity to provide a long-term net benefit through what may be simple moves today.