The tax reform bill, formally known as the Tax Cuts and Jobs Act of 2017, affects the taxes of Americans for the 2018 tax year. Some of you may have noticed more money in your paychecks as a result of it. How else will this bill impact you? I want you to feel confident about completing your taxes this season. Therefore, over the next month, I will be writing blog posts to help educate you about the tax reform bill and how the changes will impact you and your family.

This post will focus on the updates to the marginal tax rates and income brackets. The law created new income tax brackets and lowered the marginal tax rates.

Tax Basics

Before we get into the details of the new tax reform law, I want to ensure that you understand the fundamentals of the American income tax system. The income tax system in the United States is considered a progressive system. A progressive tax imposes a lower tax rate on low-income earners than it does on those with a higher income, taking into account the taxpayer's presumed ability to pay. The rationale is that people with a lower income will usually spend a greater percentage of their income on their cost of living (i.e., how much they pay for housing, food, clothing, and other necessary items). Those who are richer can typically more easily afford these basic necessities.

Marginal Tax Rates and Income Brackets

So, what are marginal tax rates? They are the percentage of tax applied to your income for each tax bracket for which you qualify. What does this mean for you? Your income is not taxed at one rate but at various different rates, depending on how much you earn.

Your tax rates depend on your tax brackets. Tax brackets are simply income ranges. Each tax bracket corresponds to a tax rate (see the chart below for 2018 tax rates and income brackets).

For example, if your income is $82,000, your tax rate isn’t a flat 22%. Instead, a portion of your income is taxed at 10%, a portion at 12%, and a portion at 22%. (See the chart below for each tax bracket and its corresponding tax rate.)

Let’s look at an example of how these changes may affect you.

In 2017, a single individual with a taxable income of $82,000 paid $16,238.85 in taxes: ($9,325 x 0.10) + ($28,624 x 0.15) + ($44,051 x 0.25).

In 2018, that same individual with the same income will pay $13,959.50 in taxes: ($9,525 x 0.10) + ($29,175 x 0.12) + ($43,300 x 0.22).

Additional Updates to Married Filers Filing Jointly

In addition to the above changes, the process for married couples was simplified. The change in tax brackets also eliminates the unintentional tax penalty for filers who are married. Under the pre-2018 tax law, some married filers were pushed into a higher income bracket when they combined their income with their spouse’s. The new income brackets are simply doubled for married couples filing jointly.

Stay tuned for more information on the tax reform law and how it will impact you.

Tax Reform Series Part 1- Marginal Tax Rates and Income Brackets