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Individual Tax Rates, Brackets and AMT under the 2017 Tax Reform Act

Anchin AlertFebruary 21, 2018
Individual Tax Rates, Brackets and AMT under the 2017 Tax Reform Act

The 2017 Tax Cuts and Jobs Act introduced some significant changes to the individual income tax structure. Individual income tax rate changes, bracket changes, and changes to the Alternative Minimum Tax (AMT) can impact your overall tax profile.

It is important to highlight that while early proposals of the bill were set to repeal the Alternative Minimum Tax, the Act maintains the AMT for individuals and fiduciary income taxpayers. The AMT was only repealed for corporations. The AMT exemption amounts for individuals have been increased to the following - $109,400 for married taxpayers filing jointly or for surviving spouses, $70,300 for single taxpayers and $54,700 for married taxpayers filing separately. The phase-out of exemption amounts are; $1,000,000 for married taxpayers filing jointly and surviving spouses, $500,000 for single taxpayers and married taxpayers filing separately. These amounts will all be indexed for inflation.

The Act retains the current individual marginal tax bracket structure of seven rates but reduces the top rate to 37% from 39.6% under the pre-reform law. The new brackets will be adjusted for inflation. The chart below shows the comparison of rates and brackets for single and married taxpayers filing jointly. The tax rates have decreased and the income amounts at which you would be subject to a higher taxing bracket have increased. For example, taxpayers who are married filing jointly with taxable income of $500,000 would be subject to income tax at the highest rate of 39.6% under 2017 rules. Under the Act, their marginal rate would only be 35%, which is not the highest tax rate. This is further illustrated in Chart #1 below.

Chart  # 1

The scenarios below compare the tax effect of pre-reform rates to the new tax rates for three different levels of income. The amounts computed are for a couple who is married filing jointly with no children, has ordinary income from wages, and is using the standard deduction. As Chart #2 clearly shows, the effective rates are reduced from 2017 to 2018 as a result of the new law.

 Chart # 2

 

$100,000 Income

$200,000 Income

$500,000 Income

2017

2018

2017

2018

2017

2018

AGI

100,000

100,000

200,000

200,000

500,000

500,000

Standard Deduction

12,700

24,000

12,700

24,000

12,700

24,000

Personal Exemption

8,100

0

8,100

0

8,100

0

Taxable Income

         79,200

     76,000

         179,200

   176,000

         487,300

   476,000

Tax

         11,284

        8,739

           37,061

     30,819

         140,452

   120,229

Tax Savings

        2,545

        6,242

     20,223

Effective Tax Rate

14%

11%

21%

18%

29%

25%

There are significant changes in allowable deductions (both for and from adjusted gross income), the repeal of personal exemptions, and increased AMT exemption and phase-out amounts. In most cases, the effect of the new tax rates and income brackets on a taxpayer’s overall tax liability is not as simplistic as the illustrations above.

What does this all mean for you? Planning and projections are even more important as tax reform changes the tax picture for everyone. With proper planning, taxpayers can update their tax strategy and work to minimize unfavorable consequences.

Your Anchin partners are evaluating the impact of these changes. In the meantime, feel free to reach out to your Anchin Relationship Partner. 

 

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