The Internal Revenue Service (IRS) has made annual inflation adjustments for over 50 tax provisions in 2018. These modifications include tax rate schedule changes, and in addition, many changes to taxable income have come into effect, thereby increasing exemptions for many taxpayers. How this could affect you depends on your tax bracket. Also,if you moved up or down a tax bracket this year, be sure your taxes are 100% perfect so you can maximize your refund.
What Are Tax Brackets?
In the United States, federal tax brackets make up the basis of the progressive tax system and represent the tax rate that you pay on each part of your income. In 2018,federal income taxes have seven different rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%. What you owe in taxes depends on your level of income and your filing status. These new tax rates came into effect after President Trump signed the Tax Jobs and Cuts Act of 2017 on December 22, 2017. The changes took effect on January 1, 2018. Overall, rates for the seven tax brackets were reduced. For example, the top rate was 39.6% and was reduced to 37% after the changes. The bottom rate continues to be 10%, but it now covers more income. Note that moving into a higher tax bracket does not necessarily mean that your entire income will get taxed at the higher rate. Only money that you earn within a particular tax bracket will become subject to that bracket’s tax rate.
The table below shows which of the various tax brackets apply to each of the filing status types. It also shows what standard deduction amount applies to each filing status. Note that you can choose to either take the appropriate standard deduction or itemize your deductions in order to pay the lowest tax amount. The relevant standard deduction amount gets subtracted from your adjusted gross income (AGI) to reduce your income subject to taxation.
Compare Taxable Income Range
| Filing Status | Taxation Rate | Low End of Income Range | High End of Income Range |
| SingleStandard deduction = $12,000 | 10% of taxable income | $0 | 10% of taxable income |
| $952.50 + 12% over $9,525 | $9,526 | $38,700 | |
| $4,453.50 + 22% over $38,700 | $38,701 | $82,500 | |
| $14,089.50 + 24% over $82,500 | $82,501 | $157,500 | |
| $32,089.50 + 32% over $157,500 | $157,501 | $200,000 | |
| $45,689.50 + 35% over $200,000 | $200,001 | $500,000 | |
| $150,689.50 + 37% over $500,000 | $500,001 | upwards | |
| Married Filing Jointly or Qualifying Widow(er)Standard deduction = $24,000 | 10% of taxable income | $0 | $19,500 |
| $1,905 + 12% over $19,050 | $19,051 | $77,400 | |
| $8,907 + 22% over $77,400 | $77,401 | $165,000 | |
| $28,179 + 24% over $165,000 | $165,001 | $315,000 | |
| $64,179 + 32% over $315,000 | $315,001 | $400,000 | |
| $91,379 + 35% over $400,000 | $400,001 | $600,000 | |
| $161,379 + 37% over $600,000 | $600,001 | upwards | |
| Married Filing Separately Standard deduction = $12,000 | 10% of taxable income | $0 | $9,525 |
| $952.50 + 12% over $9,525 | $9,526 | $38,700 | |
| $4,453.50 + 22% over $38,700 | $38,701 | $82,500 | |
| $14,089.50 + 24% over $82,500 | $82,501 | $157,500 | |
| $32,089.50 + 32% over $157,500 | $157,501 | $200,000 | |
| $45,689.50 + 35% over $200,000 | $200,001 | $300,000 | |
| $80,689.50 + 37% over $300,000 | $300,001 | upwards | |
| Head of HouseholdStandard deduction = $18,000 | 10% of taxable income | $0 | $13,601 |
| $1,360 + 12% over $13,600 | $13,601 | $51,800 | |
| $5,944 + 22% over $51,800 | $51,801 | $82,500 | |
| $12,698 + 24% over $82,500 | $82,501 | $157,500 | |
| $30,698 + 32% over $157,500 | $157,501 | $200,000 | |
| $44,298 + 35% over $200,000 | $200,001 | $500,000 | |
| $149,298 + 37% over $500,000 | $500,001 | upwards |
Progressive Taxes Explained with Examples
As it applies to taxes, the term “progressive” means that different parts of your income are taxed at different rates. Understanding the progressive tax system used in the United States can be an important part of implementing an effective investment strategy. The way progressive taxes work is that your income gets taxed in portions.For example, if half of your income gets taxed at 10%, while the tax rate on the other half comes in at 12%, then your effective tax rate would be 11%. This means that for every $1 you receive in income, $0.11 of that $1 goes to the IRS.Another example: An income of $30,000 would be taxed in the 12% tax bracket. Nevertheless, you would pay 10% tax on the first $9,526 and the remaining $20,474 would be taxed at the 12% rate. When averaging the amounts, you would pay closer to an 11% overall rate.On higher income, the portions getseparated by the different amounts that result from subtracting the deductions: On $50,000 of taxable income, you would pay 10% on the first $9,525 and 12% on the portion of income between the $9,526 deduction and $38,700. You would then pay 22% on the rest; however, the portion of income between $9,526 and $38,700 gets taxed at a 12% rate. This effectively lowers the total tax bill to $6,900, which represents a real tax rate of about 14% despite that income being in the 22% tax bracket.
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Final Thoughts
Significant changes have taken place with tax laws since the signing of tax reform by President Trump in December of 2017. To take advantage of the 2017 tax law changes, make yourself aware of the deductions you are entitled to and how those deductions apply to your final tax bill. Since these recent changes can significantly affect your tax liability, it makes sense to consult with a tax professional if you have any doubts or need to file a complex return. Finally, in addition to income taxes, you may also need to pay capital gains taxes, investment taxes and/or brokerage taxes
About Jay and Julie Hawk
About Julie:
Julie Hawk earned her honors undergraduate degree from the University of Michigan before pursuing post-graduate scientific research at Cambridge University. She then started work in the private sector as a business systems analyst for a major investment bank, where she qualified as a Series 7 Registered Representative and received comprehensive training in various financial products. Further honing her skills, she attended the prestigious O’Connell and Piper options training course in Chicago, mastering professional option risk management techniques.
Julie then transitioned into the role of a professional Interbank forex trader, currency derivative risk manager and technical analyst, ascending to the position of vice president over a 12-year career in the financial markets. Julie’s illustrious banking career spanned working for major international banks in New York City, London, and San Francisco, where she served as an Interbank dealer, technical analyst, derivative specialist and risk manager. Her responsibilities included educating, devising customized foreign exchange hedging and risk-taking strategies, and overseeing large-scale transactions for esteemed banking clients, including corporations, fund managers and high-net-worth individuals. As part of her responsibilities, Julie managed substantial portfolios of forex options, spot, and futures positions as a currency options risk manager, earning recognition for executing innovative and highly profitable forex derivative transactions. Julie also spearheaded educational conferences on currency derivatives.
During her banking career, Julie attained world-class expertise in technical analysis, including Elliott Wave Theory, and pioneered research into automated trading and trading signal systems. An active member of the San Francisco Writers’ Guild, Julie also authored trade strategies, educational material, market commentary, newsletters, reports, articles, and press releases. She became a sought-after market expert who was frequently interviewed by financial magazines and news wires such as REUTERS.
Following her retirement from the banking sector, she dedicated 15 years to online forex trading, mentoring and freelance writing for TheFXperts, which she co-founded with her husband Jay. Julie is the co-author of “Forex Trading: A Beginner’s Guide” and “Technical Analysis for Financial Markets Traders,” in addition to five other books on financial markets trading and personal finance. She now focuses on writing articles on financial markets for platforms like Benzinga, although she continues to trade forex online and mentor fellow traders as part of TheFXperts’ financial team.
About Jay:
Jay Hawk grew up in Chicago and Mexico City where he became bilingual in English and Spanish. After taking formal training as a classical guitarist at prestigious music conservatories in Europe, Jay then embarked on a remarkable journey into the financial markets, cultivating his notable expertise through hands-on experience that began on the Midwest Stock Exchange.
His financial career progressed as he started actively participating in various exchange floor trading activities in the Chicago futures and options pits, where he worked his way up the ladder, serving as a clerk, trader, broker, investor and fund manager. Jay then ran a retail stock brokerage desk and managed funds for large institutional investors, leveraging his discretionary trading skills to yield profitable results for clients.
This ultimately led to Jay holding exchange seats and operating as a market maker on options exchanges in Chicago and San Francisco, initially on the Chicago Board Options Exchange. Jay also played a significant role in the Chicago Mercantile Exchange’s evolution, where he contributed to launching and actively trading the first listed currency futures options. After transitioning to the West Coast, Jay then held a seat and ventured into trading stock options and their underlying stocks on the Pacific Options Exchange.
Jay’s comprehensive understanding of fundamental economic and corporate analysis continues to inform his trading and investment activities and has led to his subsequent success as an expert financial writer. Together with his wife Julie, he co-authored “Stock Trading: A Beginner’s Guide”, “Commodity Trading: A Beginner’s Guide” and “Fundamental Analysis for Financial Markets Traders,” among their published books focusing on financial markets trading, market analysis, and personal finance.
As an integral member of TheFXperts’ team, Jay now excels in trading forex online for his personal account, mentoring aspiring traders and writing for financial platforms like Benzinga where he specializes in covering topics related to the stock and commodity markets, as well as investing, trading and reviewing online brokers.