Tax Planning with the Tax Cuts and Jobs Act

You’ve filed your 2017 tax returns and you feel great. You understand how your tax bill is calculated and it is no longer a mystery. Now it is time to start taking some control and planning for future tax filings. Tax planning is your next step and this year you get to double your fun! The tax brackets have changed, which I know you know. But do you know how it affects you personally?

At this moment, I am going to keep it simple to cover the average millennial I know (that is, not a home owner). In the future I will cover some more complex tax situations, like my own. For most of you, the Tax Cuts and Jobs Act will lower the amount you have to pay in federal taxes and below I show that calculation. This is good news. You need to go on to plan what you’ll do with that savings. Planning is key in controlling your finances. For the millennial homeowners, depending on your location, you might not benefit so much from the new tax laws. But we’ll dive into that later as it involves more cumbersome comparisons.

Recap: Calculating your federal taxes in 2017

Let’s recall Single Sam from the federal tax article. Sam grossed $40,000 and he had no adjustments to his income. He claimed the standard deduction worth $6,350 and the personal exemption worth $4,050. We calculated his taxable income to be

40000

-6350

-4050

29600

$29,600 which placed him in the 15% tax bracket.

Which yields a tax liability of about $3,974.

How to calculate your 2018 tax bill

Now, it’s time to look at our current year and calculate what Sam should owe over the course of the year. Of course Sam could earn additional income or encounter an unfortunate time and earn less. But let’s assume that doesn’t happen and he doesn’t get any raise. Sam projects that he will still gross $40,000 and he hasn’t wised up and started contributing to any retirement fund. How much will Sam have to pay the federal government in 2018?

For Sam, the only changes that matter is that the standard deduction nearly doubles and the personal exemption is gone. Sam will claim a standard deduction worth $12,000 and that is all he needs to know to calculate his taxable income. And his tax bracket changes because they were all reorganized. Sam’s taxable income is

40000

-12000

28000

$28,000 which is lower than it was last year by $1,600. We can already see that the change to no exemption but the higher standard deduction works in Sam’s favor. It lowers his taxable income. Because the tax brackets have changed, Sam gets an additional perk in his taxes. Since Sam’s taxable income is $28,000, he looks in the table and sees that he is in the second row.

Rate Taxable Income Tax owed
10% $0 to $9,525 10% of taxable income
12% $9,525 to $82,500 $952.50 plus 12% of the excess over $9,525
22% $38,700 to $157,500 $4,453.50 plus 22% of the excess over $82,500
32% $157,500 to  $200,000 $32,089.50 plus 32% of the excess over $157,500
35% $200,000 to $500,000 $45,689.50 plus 35% of the excess over $200,000
37% $500,000 + $150,689.50 plus 37% of the excess over $500,000

 

In the past, Sam was in the 15% tax bracket and now he is in the very near by 12% tax bracket. The calculation process stays the same. He will break his income into $9525 and the excess. Then he will calculate 12% on the excess and add it to $952.50

For 2018, Sam will owe $3170 in federal taxes. Compared to 2017, he owes $804 less. That’s $804 in Sam’s pockets instead of the federal government’s. If Sam gets paid biweekly, that’s just under $31 extra dollars per paycheck. Not bad. If Sam is smart with his money, he will take that extra $31 per check, or $62 per month and pay down debt or build up his savings somehow.

In the next article we are going to figure out how Sam can save even more money on taxes by planning for his future and taking advantage of the tax code.

 

 

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