2018 Tax Changes And The Middle Class
Posted by Richard on March 8, 2018
The 2018 tax reform stands to make a significant impact on all Americans and provides relief to many middle-class families, according to The Motley Fool. Helpful changes to the tax bracket structure, standard deduction amount, and parent-friendly credits will all likely add money to the bottom line while simplifying tax filing at the same time.
While the original plan for the tax reforms included a reduced number of tax brackets, the original seven remain, albeit with different marginal tax rates and income thresholds. Ultimately, these rates have fallen for all but the lowest income earners and income thresholds rose for the majority of people filing as single, married, or head of household. Notably, the marriage penalty, so-called because it was possible for a married couple with dual incomes to be taxed more than two single filers living together, has been all but eliminated. As an example, two individual earners making $90,000 each per year would each pay 25 percent in taxes, or 28 percent if they got married, under the old tax rules. In 2018, they would pay 24 percent no matter how they filed, highlighting the lower overall rates.
The ‘doubling’ of the standard deduction has been a heavily promoted feature of the new tax bill and while it is technically correct, the math doesn’t end up the same now that the personal exemption has been eliminated. A single filer in 2017 would receive a $6,500 standard deduction along with a $4,150 personal exemption which totals $10,650 – not far off from the new $12,000 standard deduction. In any event, these changes are a net positive for most households and it is estimated that up to 90 percent of all taxpayers will now use the standard deduction over itemized deductions which will simplify tax returns greatly.
Tax breaks for parents, even high-income earners that aren’t eligible for the earned income tax credit, will be getting a boost through the Child Tax Credit. Starting in 2018, the credit will double to $2,000 per child and the refundable portion for each child will increase to $1,400. Also, the phase-out threshold for the credit nearly quadruples from $110,000 to $400,000 for a married couple. Other perks such as the Child and Dependent Care Credit are staying in place and a change to the popular 529 college savings plan means that parents can pay for K-12 students’ private school tuition or tutoring with the tax-free funds.