The Tax Cuts and Jobs Act (TCJA) changed up the personal income tax brackets, exemptions, and deductions. Here is an updated graphical breakdown of a simple scenario for a single filer with no dependents in Tax Year 2018. I’ll try to illustrate the relationship between gross income, taxable income, marginal tax rate, and effective tax rates. See also my previous post 2018 Income Tax Breakdown (Married w/ 1 Child).

2018 federal income tax rates for single filers. Taken from the official IRS tax tables (source):

The following changes also apply for Tax Year 2018:

• The personal exemption deduction is now gone ($0), from $4,050 in 2017.
• The standard deduction for single taxpayers and married taxpayers filing separately rises to $12,000 from $6,350.
• The standard deduction for married taxpayers filing joint returns rises to $24,000 from $12,700.
• The standard deduction for heads of household rises to $18,000 from $9,350.
• The Child Tax Credit was expanded with higher income phaseout limits and is now worth up to $2,000 per qualifying child.

Let’s say your individual gross income is $60,000 a year. You are single with no dependents, aged 64 and under. You are an employee that receives W-2 income only (i.e. you are not self-employed). You don’t have any additional income sources like interest, capital gains, rents, etc. You don’t have any extra deductions like IRA/401k contributions or mortgage interest. You live in a state with no state income tax. We will ignore any state or local income taxes.

Gross income. Let’s start with your annual $60,000 gross income. There are no personal exemptions anymore. You do get the larger standard deduction which is $12,000 for single filers in 2018. Since you don’t have a lot of itemized deductions, you fall back onto the standard deduction.

The first 12,000 of your gross income is not taxable. Without doing anything special at all, your $60,000 in gross income is now only $48,000 in taxable income after personal exemptions and the standard deductions.

The first $9,525 of taxable income is subject to a 10% tax rate. Shave off 10% of $9,525 and put that on your tax bill ($952.50). The remaining $38,475 of taxable income is moved onto the next tax bracket.

The next $29,175 in taxable income is subject to a 12% tax rate. So we take 12% of $29,175 ($3,501) and add that to the existing $952.50. The tax bill is now $4,453.50. The remaining $9,300 of taxable is moved onto the next tax bracket.

The next $43,800 in taxable income is subject to a 22% tax rate. However, we only have $9,300 left. So we take 22% of $9,300 ($2,046) and add that to the existing $4,454 (let’s round up that dollar). The total tax bill is now $6500.

In this example, this 22% is your marginal tax bracket. If you earned another $1, it would be taxed at this marginal rate of 22%.

Payroll taxes. These aren’t technically federal income taxes, but you must pay a Social Security tax (OASDI) of 6.2% and Medicare payroll tax (HI) of 1.45% of your gross income. That’s $3,720 a year for Social Security and $870 a year for Medicare. (Your employer pays the same amount.)

Overall effective tax rate. You paid $6,500 in federal income taxes on $60,000 of gross income, for an overall effective tax rate of 10.8%. You also paid 7.65% in payroll taxes.

The same single filer in 2017 would have paid $8,139 in federal income taxes on $60,000 of income, for an average or overall effective tax rate of 13.6%.

The Tax Cuts and Jobs Act (TCJA) changed up the personal income tax brackets, exemptions, and deductions. Here is an updated graphical breakdown of a simple scenario for a married filing joint couple with 1 dependent in Tax Year 2018. I’ll also try to illustrate the relationship between gross income, taxable income, marginal tax rate, and effective tax rates. In future posts, I will also run 2018 examples for single filers and married joint filers without kids.

2018 federal income tax rates for married joint filers. Taken from the official IRS tax tables (source):

The following changes also apply for Tax Year 2018:

• The personal exemption deduction is now gone ($0), from $4,050 in 2017.
• The standard deduction for single taxpayers and married taxpayers filing separately rises to $12,000 from $6,350.
• The standard deduction for married taxpayers filing joint returns rises to $24,000 from $12,700.
• The standard deduction for heads of household rises to $18,000 from $9,350.
• The Child Tax Credit was expanded with higher income phaseout limits and is now worth up to $2,000 per qualifying child.

Let’s say your household combined gross income is $100,000 a year. You are a married couple with one child 16 or under, and both earn $50,000 gross income. You are both employees that receive W-2 income only (i.e. neither are self-employed). You don’t have any additional income sources like interest, capital gains, rents, etc. You don’t have any deductions like IRA/401k contributions or mortgage interest that will allow you to itemize deductions. We will ignore any state or local income taxes.

Gross income. Let’s start with your annual $100,000 gross household income. There are no personal exemptions for you and your dependents any more. You do get the larger standard deduction which is $24,000 for married filing joint in 2018. Since you don’t have a lot of itemized deductions, you fall back onto the standard deduction.

The first 24,000 of your gross income is not taxable. Without doing anything special at all, your $100,000 in gross income is now only $76,000 in taxable income after personal exemptions and the standard deductions.

The first $19,050 of taxable income is subject to a 10% tax rate. Shave off 10% of $19,050 and put that on your tax bill ($1,905). The remaining $56,950 of taxable income is moved onto the next tax bracket.

The next $58,350 in taxable income is subject to a 12% tax rate. However, we only have $56,950 left. So we shave off 12% of $56,950 ($6,834) and add that to the existing $1,905. The total tax bill is now $8,739.

In this example, this 12% is your marginal tax bracket. If you earned another $1, it would be taxed at this marginal rate of 12%. Even with a six-figure income, a married couple can still land in the 12% marginal tax bracket (pre-tax 401k or IRA contributions would reduce taxable income even more).

Federal Child Tax Credit. As this income doesn’t exceed the phaseout limits and your child is 16 or under, you also get the full $2,000 Child Tax Credit. A tax credit lowers your tax bill dollar-for-dollar as opposed to a deduction that only lowers your taxable income. Thus, your tax bill is reduced from $8,739 to $6,739. (If you had additional children, each one would reduce your tax bill by another $2,000. Note that there is a limit to the refund-ability of the credit if it makes your tax bill negative.)

Payroll taxes. These aren’t technically federal income taxes, but you must each pay a Social Security tax (OASDI) of 6.2% and Medicare payroll tax (HI) of 1.45% of your gross income. That’s $3,100 a year for Social Security and $725 a year for Medicare. You both earn $50,000 gross and don’t exceed the income caps. (Your respective employers pay the same amount.)

Overall effective tax rate. You paid $6,739 in federal income taxes on $100,000 of gross income, for an overall effective tax rate of 6.74%. Again, you also paid 7.65% in payroll taxes. Your average tax rate is lower than a couple without kids due to the child tax credit. In this case, having a kid reduced your tax bill by $2,000.

The same married couple with one child in 2017 would have paid $9,340 in federal income taxes on $100,000 of gross income, for an overall effective tax rate of 9.34%.

The new tax bill that takes effect in 2018 raises the standard deduction and caps certain itemized deductions. Therefore, if you will itemize your deduction in 2017, you may want to grab whatever you can this year to get the full value of those deductions. (This assumes you are not subject to AMT.) Here’s a brief summary of your options.

• State and Local Income Taxes. You can’t prepay 2018 state taxes in 2017. However, you should pay all your 2017 taxes in 2017. Specifically, if you make estimated quarterly tax payments, you should makes your 4th Quarter state/local payment by December 31, 2017 rather than wait until the deadline which is usually close to the federal deadline of January 18, 2018.
• Property Taxes. You can’t prepay 2018 property taxes in 2017. However, if you have property taxes based on 2017 assessments (partial or whole), you should make those payments by December 31, 2017. Basically, have you received a bill already? Pay it now. Some counties are actually trying to make things easier for you. See these NYT and WaPo articles for details. Things can get complicated if you usually pay via mortgage escrow.
• Charitable contributions. On a related note, you may want to make your charitable contributions by the end of 2017, as you may not be able to deduct your donations if you will fall under the standard deduction in 2018.

More: IRS Advisory, NY Times, National Law Review