2018 is around the corner so now’s a good time to review next year’s federal tax brackets, retirement account contribution limits, and income phaseout thresholds.
But right now is a strange time because, as I write this, Republicans in Congress are trying to pass the most significant new tax legislation in three decades and get it on Trump’s desk for signature before end of 2017.
And based on the outcome of that legislation, a LOT of the tax tables below may change drastically.
So in this post, I’ll first cover key changes being proposed in the new tax legislation. Then, I’ll cover the more modest changes / adjustments that would happen if the legislation does NOT pass.
Key changes being proposed in the new tax legislation
- Draft text for the two bills: House Bill | Senate Bill
- General effective date of proposed changes: December 31, 2017
2018 tax rates and contribution limits if proposed tax legislation does NOT pass
Here’s what’s gonna happen if Congress can’t get their poop together to pass a tax bill. Click the links to quick-jump directly to the section you want.
- Federal income tax rates for 2018
- Standard deduction + personal exemption for 2018
- Phaseouts for 2018
- Alternative Minimum Tax
- Foreign earned income exclusion
- Retirement & tax-advantaged accounts
- Roth IRA Income Limits
- IRA Deduction Phaseouts
Federal income tax rates for 2018
Standard deduction + personal exemption for 2018
Phaseouts for 2018
Personal exemption phaseout
The 2018 personal exemption is $4,150, but it starts phasing out once you begin earning a lot and, if you earn a WHOLE lot, it phases out completely. Here are the 2018 Adjusted Gross Income ranges where the personal exemption phases out:
If you are a high earner who itemizes your deductions, those deductions might get capped or phased out by the Pease phaseout limits, named after former Congressman Don Pease.
The Pease phaseout limits apply to: charitable deductions, home mortgage interest, state and local tax deductions, and other misc itemized deductions. They do not apply to medical expenses, investment expenses, gambling losses, or certain theft and casualty losses.
The 2018 Pease AGI thresholds are:
If Pease limits apply, then the total of all your itemized deductions is reduced by the lesser of:
- 3% of AGI above the applicable threshold; or
- 80% of the amount of itemized deductions otherwise allowable for the tax year.
Alternative Minimum Tax
AMT is a Congress-enacted parallel tax system that is intended to ensure high earners don’t take too many itemized deductions to avoid their fair share of taxes. AMT requires taxpayers to compute their tax bill twice: once using regular tax rates, then again using AMT rates. You pay the higher of the two.
AMT uses a different definition of taxable income called Alternative Minimum Taxable Income (AMTI). As with the standard deduction / personal exemption, AMT lets you exempt a fixed amount from your AMTI. The 2018 exemptions amounts are:
However, the AMT exemption phases out for high earners at a rate of 25 cents per dollar earned after AMTI exceeds a certain threshold. Those thresholds for 2018 are:
AMT is charged at 26% of AMTI. However, once your AMTI exceeds a certain threshold, that rate increases to 28%. In 2018, the 28% rate applies to any AMTI exceeding…
Nope, that’s not a typo. The threshold is $191,500 for EVERYONE except married taxpayers filing separately.
Foreign earned income exclusion
Living abroad? Congratulations, you get a nice fat exclusion. In 2018, the Foreign Earned Income Exclusion is $104,100, up from $102,100 in 2017 and $101,300 in 2016. I’ve written previously about how to take advantage of the Foreign Earned Income Exclusion.
Retirement & tax-advantaged accounts
Also, you should be aware that for HSAs there’s this thing called the “Last Month Rule.” It basically says that, if you’re enrolled in an HSA-eligible high-deductible health plan on December 1 of a given year, you are considered eligible to contribute the full-year maximum into an HSA instead of simply making a 1-month pro rata contribution for December.
However, note that if you take advantage of the “Last Month Rule,” you MUST stay covered by an HDHP through December 1 of the following year, or else risk tax penalties on your prior-year HSA contributions.
Roth IRA Income Limits
Remember that Roth IRAs are subject to contribution limits based on how much income you earn. As your income increases, your max contribution decreases on a sliding scale, and it eventually goes to zero. See how to calculate the exact amount your Roth IRA contribution will be reduced by.
IRA Deduction Phaseouts
IRA contributions are tax-deductible; Roth IRA contributions are not.
IRA income limits may reduce the tax deductibility of your IRA contribution on a sliding scale as your income increases, eventually reducing your deduction to zero.
There are 2 flavors of this deduction phaseout: (1) when you are covered by another retirement plan at work, and (2) when you are not.
If you are already covered by another retirement plan at work (which includes a SEP-IRA, SIMPLE, or Solo 401k), then the income limits governing your IRA tax deductibility are:
On the other hand, if you are NOT covered by an existing retirement plan, then the income limits governing your IRA tax deductibility are: