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Are You Taking Full Advantage of the Tax Code While it’s on “Sale”?

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Yes, I did it! I used the words tax and sale in the same sentence.  Now this is not an advertised sale like you might see online or in retail, but rather the byproduct of the Tax Cuts and Jobs Act of 2017.  The legislation changed both the personal rates and brackets for the individual and joint taxpayers.  In most cases, the change is a net positive for the taxpayer.  The following chart outlines the changes in the rates and brackets.  

Single

Rate
2017 Taxable income

Rate
2019 Taxable income
10% $0-$9,325
10% $0-$9,700
15% $9,326-$37,950
12% $9,701-$39,475
25% $37,951-$91,900
22% $39,476-$84,200
28% $91,901-$191,650
24% $84,201-$160,725
33% $191,651-$416,700
32% $160,726-$204,100
35% $416,700-$418,400
35% $204,101-$510,300
39.6% Over $418,400
37% Over $510,300


Married Filing Jointly

Rate
2017 Taxable income

Rate
2019 Taxable income
10% $0-$18,650
10% $0-$19,400
15% $18,651-$75,900
12% $19,401-$78,950
25% $75,901-$153,100
22% $78,951-$168,400
28% $153,101-$233,350

24% $168,401-$321,450
33% $233,351-$416,700
32% $321,451-$408,200
35% $416,701-$470,700
35% $408,201-$612,350
39.6% Over $470,700
37% Over $612,350


Individual changes

The individual taxpayer saw the creation of six new tax brackets.  The 10% percent bracket remains the same, but the next six brackets reduced the rate an individual pays between 1 and 4%.  While this may not sound like a large move, the change in your marginal tax rate (the amount you pay on your last dollar earned) can be significant.  For example, an individual taxpayer earning $100,000 per year would see a 4% change in the rate he pays on the last dollar of earned income.  That’s about a 15% discount on the last tax dollar paid. 

The other thing that’s happened is a change in the range where each rate applies.  While the first $100,000 of earnings is generally beneficial to the taxpayer, the range of the lower brackets shrinks in the 22 to 32% range.  Income falling in these middle brackets could end up being taxed at a lower rate but still pay more because your income “bumped” up to the next tax bracket.  With all the changes in the ranges and brackets the best thing to do is to know your annual income in December and make appropriate adjustments before the tax year closes.  Small moves can make a big difference in either your total tax liability or available planning opportunities.

Married filing jointly changes

Married filing jointly filers also benefit from the new lower tax brackets and in many cases have enhanced planning opportunities by paying less marginal tax in their overall brackets.  They also experience similar discounts on their rates at each bracket.

One noticeable difference in the married filing jointly ranges is that benefits have been equalized in the 10-32% brackets.  Under the old code joint filers did not receive the same benefits at the 25% bracket and higher in terms of the range.  This lack of bracket equality created a penalty for filing married filing and having two working households.   Now this inequality has been reduced and only applies after $408,200 of joint earnings.  

How to take advantage of this tax “sale”?

Lower rates or expanded brackets should cause you to reevaluate the “benefits” of tax deferral in your IRA’s and other qualified plans.  If you believe tax rates could increase in the future it would be worthwhile to evaluate paying taxes now through Roth conversions or after-tax contributions to either Roth IRA’s or other qualified plans.   

Each situation is unique and in some cases taxes could be higher, but by being informed of your own tax liability and working with a qualified professional you might put yourself in a position to optimize the tax “sale” and take advantage of available planning opportunities.