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2018 Federal Income Tax Brackets
- by Mehmet E. Akgul
- May 30, 2019
The most comprehensive tax legislation since the Tax Reform Act of 1986 has been adopted on December 22, 2017. The Tax Cuts and Jobs Act of 2017 (TCJA) makes slight decreases on most individual tax brackets for income tax rates. The TCJA notably surges individual alternative minimum tax (AMT) and estate tax exemptions.
The TCJA requires for annual inflation adjustments to be computed based on the chained consumer price index rather than the regular consumer price index. This permanent change may result in rapid higher tax brackets for taxpayers.
2018 IRS Tax Brackets and Rates
(for taxes due in April 2019)
2018 Single Tax Brackets
| Taxable income is: Over - | But not over - | The tax is |
|---|---|---|
| USD 0 | USD 9,525 | 10% |
| USD 9,525 | USD 38,700 | USD 952.50 + 12% |
| USD 38,700 | USD 82,500 | USD 4,453.50 + 22% |
| USD 82,500 | USD 157,500 | USD 14,089.50 + 24% |
| USD 157,500 | USD 200,000 | USD 32,089.50 + 32% |
| USD 200,000 | USD 500,000 | USD 45,689.50 + 35% |
| USD 500,000 | . . . . . . | USD 150,689.50 + 37% |
2018 Married Filing Jointly Tax Brackets
| Taxable income is: Over - | But not over - | The tax is |
|---|---|---|
| USD 0 | USD 19,050 | 10% |
| USD 19,050 | USD 77,400 | USD 1,905.00 + 12% |
| USD 77,400 | USD 165,000 | USD 8,907.00 + 22% |
| USD 165,000 | USD 315,000 | USD 28,179.00 + 24% |
| USD 315,000 | USD 400,000 | USD 64,179.00 + 32% |
| USD 400,000 | USD 600,000 | USD 91,379.00 + 35% |
| USD 600,000 | . . . . . . | USD 161,379.00 + 37% |
2018 Married Filing Separately Tax Brackets
| Taxable income is: Over - | But not over - | The tax is |
|---|---|---|
| USD 0 | USD 9,525 | 10% |
| USD 9,525 | USD 38,700 | USD 952.50 + 12% |
| USD 38,700 | USD 82,500 | USD 4,453.50 + 22% |
| USD 82,500 | USD 157,500 | USD 14,089.50 + 24% |
| USD 157,500 | USD 200,000 | USD 32,089.50 + 32% |
| USD 200,000 | USD 300,000 | USD 45,689.50 + 35% |
| USD 300,000 | . . . . . . | USD 80,689.50 + 37% |
2018 Head of Household Tax Brackets
| Taxable income is: Over - | But not over - | The tax is |
|---|---|---|
| USD 0 | USD 13,600 | 10% |
| USD 13,600 | USD 51,800 | USD 1,360.00 + 12% |
| USD 51,800 | USD 82,500 | USD 5,944.00 + 22% |
| USD 82,500 | USD 157,500 | USD 12,698.00 + 24% |
| USD 157,500 | USD 200,000 | USD 30,698.00 + 32% |
| USD 200,000 | USD 500,000 | USD 44,298.00 + 35% |
| USD 500,000 | . . . . . . | USD 149,298.00 + 37% |
How to Calculate Tax Due and Effective Tax Rate?
Let’s assume that your taxable income (after USD 24,000 standard deduction and consider no credits for simplicity) is USD 81,000 and you are filing as married filing jointly. Your marginal tax rate is 22%. Now we will calculate your effective tax rate and the tax due. We will use the 10% tax rate on your income up to USD 19,050, the 12% tax rate on taxable income between USD 19,050 and USD 77,400, and 22% on the part of your taxable income over USD 77,400.
Here are our calculations;
USD 81,000 – USD 77,400 = USD 3,600
USD 3,600 x 22% = USD 792
USD 8,907 + USD 792 = USD 9,699 → total tax due
USD 9,699 / (USD 81,000 + USD 24,000)= 9,24% → effective tax rate
2018 Standard Deduction
| Filing Status | Deduction Amount |
|---|---|
| Single or Married filing separately | USD 12,000 |
| Married filing jointly or Qualifying widow(er) | USD 24,000 |
| Head of household | USD 18,000 |
The standard deduction for people who are over age 65 is USD 13,600 for single taxpayers, and USD 26,600 for married filing jointly taxpayers.
2018 Alternative Minimum Tax (AMT)
The AMT is an additional income tax under the current tax law. The AMT was created in 1969 to ensure that high-income taxpayers could not avoid taxes by using various tax shelters. The AMT adjusts high taxable income of taxpayers by setting limits on certain tax benefits. The taxpayers calculate the tentative minimum tax and the regular tax and are required to pay the excess amount if any.
2018 Alternative Minimum Tax Exemption
| Filing Status | Exemption Amount |
|---|---|
| Single or Head of household | USD 70,300 |
| Married filing jointly or Qualifying widow(er) | USD 109,400 |
| Married filing separately | USD 54,700 |
2018 Alternative Minimum Tax Brackets
| Filing Status | 26% AMT Tax Rate | 28% AMT Tax Rate |
|---|---|---|
| Married filing separately | AMTI up to USD 95,750 | excess AMTI of USD 95,750 |
| All other filers | AMTI up to USD 191,500 | excess AMTI of USD 191,500 |
To avoid a heavy tax burden for low- and middle-income taxpayers, IRS requires taxpayers to calculate alternative minimum taxable income (AMTI) with additional deductions and exemptions to determine the taxable income.
2018 Alternative Minimum Tax Exemption Phaseout Thresholds
| Filing Status | Threshold |
|---|---|
| Married filing jointly | USD 1,000,000 |
| All other filers | USD 500,000 |
How to Calculate Alternative Minimum Tax?
Using the same facts above for regular tax calculation, we need to add back standard deduction in our AMT calculation. Assume that the married filing jointly couple has an incentive stock option of USD 50,000.
The calculation is as follows;
USD 81,000 + USD 24,000 + USD 50,000 = USD 155,000 → Alternative minimum taxable income
USD 155,000 – USD 109,400 = USD 45,600
USD 45,600 x 26% = USD 11,856 → alternative minimum tax, which is higher than regular tax amount of USD 9,699 (calculated above)
Therefore, the taxpayer needs to pay additional USD 2,157 with alternative minimum tax.
2018 Long-Term Capital Gains Tax Rate
| Long-term capital gains tax rate | Single | Married filing jointly | Married filing separately | Head of household |
|---|---|---|---|---|
| 0% | USD 0 to USD 38,600 | USD 0 to USD 77,200 | USD 0 to USD 38,600 | USD 0 to USD 51,700 |
| 15% | USD 38,601 to USD 425,800 | USD 77,201 to USD 479,000 | USD 38,601 to USD 239,500 | USD 51,701 to USD 452,400 |
| 20% | USD 425,801 or more | USD 479,001 or more | USD 239,501 or more | USD 452,401 or more |
When you hold an asset for one year or less, the capital gain is defined as a short-term capital gain. Short-term capital gains are taxed as ordinary income.
How to Calculate Short- and Long-Term Capital Gains Tax?
Assume that you bought 500 shares of ABC stock at USD 20 per share and sold these shares at USD 25 per share. Your ordinary income is USD 105,000 and filed as married filing jointly.
Note: Ordinary income includes wages, salaries, interests, dividends, bonds (except municipal bonds).
If you hold these stocks less than a year (short-term capital gains tax);
(500 shares x USD 25) – (500 shares x USD 20) = USD 2,500 → capital gain
USD 2,500 x 20% = USD 500 → short-term capital gain tax
If you hold these stocks for more than a year (long-term capital gains tax);
(500 shares x USD 25) – (500 shares x USD 20) = USD 2,500 → capital gain
USD 2,500 x 15% = USD 375 → long-term capital gain tax
2018 Gift Tax Exclusion and Estate Tax Exemption
For 2018, the annual gift tax exclusion to gifts to each donee is USD 15,000.
The estate tax exemption is USD 11.2 million per decedent.
Buttom Line
While we try to simplify federal income tax brackets for individual taxpayers to figure the tax bill, you also need to consider whole tax forms and instructions for tax credits and deductions to lower your tax bracket.
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Mehmet E. Akgul