New Tax Rates
While the new federal income tax rules still retain the seven income tax brackets, the thresholds and tax rates have now been altered. The current year (2018) has 7 brackets of federal tax. These are as follows:
- 10 percent
- 12 percent
- 22 percent
- 24 percent
- 32 percent
- 35 percent
- 37 percent
These tax brackets are based on the filing status and the taxable income. The tax changes have come into effect from January 1, 2018. As you can see from above, though the seven tax brackets are retained, there has been a decrease in the rates overall. In fact, the top rate has been lowered from 39.6 percent to 37 percent. While the lowest rate is still the same (10 percent), it covers more income at present.
It is imperative to note that when you move to a higher income tax bracket, it does not signify that your entire income will be taxable at an increased rate. Rather, only the sum earned by you within a specific bracket will be taxable according to that tax rate.
Check out these new tax rates for 2018 along with the income brackets that have been arranged according to their filing status.
- $0 to $9,525 - 10 percent of taxable income
- $9,526 to $38,700- $952.50 + 12 percent of the amount more than $9,525
- $38,701 to $82,500- $4,453.50 + 22 percent of the amount more than $38,700
- $82,501 to $157,500- $14,089.50 + 24 percent of the amount more than $82,500
- $157,501 to $200,000- $32,089.50 + 32 percent of the amount more than $157,500
- $200,001 to $500,000- $45,689.50 + 35 percent of the amount more than $200,000
- >=$500,001- $150,689.50 + 37 percent of the amount more than $500,000
Know how tax brackets function
The tax system followed by the United States of America is a progressive one. It means that residents who have higher taxable incomes need to pay higher rates of income tax. Here are two important points to remember in this context:
- It is the decision of the federal government to ascertain the tax amount you need to pay by breaking down your taxable income into brackets or chunks.
- When you fall within a particular tax bracket, it does not signify that you have to pay the federal rate of tax on whatever you make.
Ways of falling into a lower income tax chunk to pay a lower rate of income tax
There are 2 common means to reduce your federal income tax bills. These are deductions and tax credits.
- Tax deductions bring down the amount of your income that will be taxable. Deductions can reduce a person’s taxable income via the specific percentage of their maximum income tax bracket. To simplify this further, you should accept all such tax deductions, which you can claim. These deductions can bring down your taxable income so that you can shift to a lower tax bracket, eventually meaning that you pay a lower rate of income tax.
- Tax credits can directly lower the tax amount you owe. However, they do not have an effect on the specific bracket you fall into.
Standard tax deduction amounts-2018
In fact, there are two major kinds of tax deductions in the federal system. These are the itemized deductions and the standard deduction. A taxpayer is permitted to claim one single deduction type on their tax return; they cannot claim both types of deductions.
When the standard deduction is cut off from a person’s AGI or Adjusted Gross Income, it reduces the person’s taxable income.