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2018 Tax Changes You Need to Know

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2018 tax documents spread out on a desk.

The Internal Revenue Service (IRS) recently announced several tax changes for 2018. And like most years, these changes include updates to the income tax brackets and standard deduction amounts along with adjustments to the retirement contribution limits and a host of other numbers within the tax code.

Despite the ongoing push for tax reform and speculation around what that might look like, it’s important to understand how the IRS’ updates could impact your tax situation if the reform isn’t finalized by the end of 2017.

Here’s a quick look at the top changes that go into effect at the first of the year. *Note: These are NOT the numbers you should use to prepare your 2017 tax returns during the 2018 tax season.

2018 tax brackets undergo small changes

As long as the tax reform stays at bay, the tax rates for 2018 won’t dramatically change. Depending on your filing status, the income ranges for each bracket increase roughly 2 percent due to inflation. This is how that looks:

Individual Income Tax Bracket 2017

Married Filing Jointly and Surviving Spouses Income 2017 Tax Bracket

Married Filing Separately Income Tax Bracket 2017

Head of Household Income 2017 Tax Bracket

Personal-exemption amount goes up

All taxpayers that itemize their deductions can take advantage of the increased personal-exemption amount in 2018. That number is set to increase to $4,150. Additionally, the income phase-outs also experience a hike in numbers. Next year, phase-outs for single filers begin at an adjusted gross income (AGI) of $266,700 and $320,000 for those married filing jointly. That’s an increase of $5,200 and $6,200 respectively from 2017.

The phase-outs for single filers end completely at $389,200 and $442,500 for married filing jointly.

Standard deductions increase slightly

If you’re someone who doesn’t itemize deductions on your tax return, you’ll like this change. The standard deduction amount is set to increase ever so slightly. That means, if you end up earning the same amount of income in 2018 as you did in 2017, you should pay less in federal income tax when you file your return.

2017 Standard Deduction

401(k) contribution limits rise

For individuals who have the option of putting away retirement savings into an employer-sponsored 401(k) plan, the contribution limit will increase an extra $500 with the 2018 tax changes.  Anyone 50 years and younger can contribute up to $18,500 for the year.

But don’t worry if you’re over the age of 50 – your contribution limit goes up an additional $500 too. You can now sock away $24,500 into a 401(k) throughout the year.

Both Traditional IRA and Roth IRA deduction phase-outs increase

If you contribute to a Traditional IRA and have access to an employer-sponsored retirement plan, pay attention to the phase-out and exemption income limits for 2018. Those numbers are now higher.

  • Single filers and heads of household can earn up to $63,000 with phase-outs between $63,000 and $73,000.
  • Married filing jointly filers can earn up to $101,000 with phase-outs between $101,000 and $121,000.

Contribution income phase-outs also increase for individuals who save money in a Roth IRA. Starting in 2018, phase-outs for single filers begin at a modified adjusted gross income (MAGI) of $120,000 and completely phase out at $135,000. That’s an increase of $2,000.

For those married filing jointly, the amount you can contribute starts phasing out at a MAGI of $189,000 and completely goes away at $199,000.

The annual contribution caps of $5,500 for those under age 50 and $6,500 for those aged 50 and older remain the same.

Inflation impacts the Alternative Minimum Tax (AMT) threshold

The income exemption threshold for single filers will increase to $55,400 at the start of the new year. The income phase-out increases as well to $123,100.

The AMT threshold also rises to $86,200 for those married filing jointly with the income phase-out at $164,100.

Earned Income Tax Credit (EITC) gets a boost

In 2017, the maximum EITC a family with three children could claim was $6,318. Starting in 2018 that number increases to $6,444, making one of the most popular tax credits even more beneficial to qualifying taxpayers.

Remember, this tax credit is available to qualifying individuals even if they aren’t required to file an income tax return for the year.