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Ordinary income includes your salary and wages, interest income, and dividend income. It also includes income that business owners receive from partnerships and sole proprietorships (i.e., unincorporated small businesses).
The following table shows the favorable decrease in tax rates for individuals.
Old Rates |
New Rates |
Brackets for Singles |
Bracket for Couples |
10% |
10% |
- |
to |
$7,000 |
- |
to |
$14,000 |
15% |
15% |
$7,000 |
to |
$28,400 |
$14,000 |
to |
$56,800 |
27% |
25% |
$28,400 |
to |
$68,800 |
$56,800 |
to |
$122,950 |
30% |
28% |
$68,800 |
to |
$143,500 |
$122,950 |
to |
$174,700 |
35% |
33% |
$143,500 |
to |
$311,950 |
$174,700 |
to |
$311,950 |
38.6% |
35% |
$311,950 |
and |
above |
$311,950 |
and |
above |
In addition, the size of the 10% bracket has increased from $6,000 to $7,000 for singles, and from $12,000 to $14,000 for married couples. This means that that more income will be taxed at 10%, instead of at one of the higher rates.
Planning Opportunities: You may want to take advantage of several planning opportunities.
- Bigger Paychecks: Instead of waiting for bigger tax refunds at the end of the year, maybe you want to reduce the amount that is withheld as federal income taxes from your regular paycheck. Contact your tax return preparer to help you decide how much would be appropriate.
The answer depends on how much taxable income you have in which brackets. If you are paying taxes at all, you first have income in the 10% and 15% brackets. The higher your income, the more likely it is that you have income in the higher brackets.
Example - Individual. A single individual may have $60,000 of income consisting of $58,000 in salary and $2,000 of interest income. Using a standard deduction and one personal exemption, this individual’s income would have been subject to federal income taxes of $10,400. However, using the new rates, the income taxes are lowered by $477 to $9,923. This individual’s top tax bracket is the 25% bracket (was 27%).
This amount is further reduced by $150 to $9,773 because of the increase in the size of the 10% bracket. Why? Because increasing the size of the 10% bracket caused $1,000 of income in this example to be taxed at 10%, instead of 25%.
The total tax savings in this example is $627.
Example – Married Couple. A married couple may have combined income of $120,000 consisting of $115,000 in salary and $5,000 of interest income. Using a standard deduction and two personal exemptions, this couple’s income would have been subject to federal income taxes of $22,340. However, using the new rates, the income taxes are lowered by $1,172 to $21,168. This couple’s top tax bracket is the 25% bracket (was 27%).
This amount is further reduced by $300 to $20,868 because of the increase in the 10% bracket. Why? Because increasing the size of the 10% bracket caused $2,000 of income in this example to be taxed at 10%, instead of 25%.
The total tax savings in this example is $1,472. Note: this example does not show the further reduction in taxes that results from the “marriage penalty” relief that is included in the new tax law.
- Bigger Retirement Savings: Instead of spending your tax savings (which is what the federal government is hoping you will do to help stimulate the economy), you might wish to double your tax benefits by using the tax savings to increase your retirement savings.
For example, you could use your tax savings to increase your contribution to your 401k account. Your first tax benefit is the fact that you are paying income taxes at a lower rate. Your second benefit, the one received from this suggestion, is that the increased 401k contribution reduces the amount of your wages or salary that is subject to tax.
Similarly, you could use your tax savings to increase a contribution to an IRA or a SEP (special retirement plan account for small business owners).
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