Senate Proposal: Tax Rates

November 13th, 2017 Posted by Tax Planning No Comment yet

On November 9, 2017, the Senate Finance Committee released its proposal for tax reform.  It varies from the House of Representatives proposal in a number of ways.  We will be discussing those differences over the next several posts, but will be starting with the tax rates.

Ordinary Income

Current Tax Rates

There are currently 7 ordinary income tax brackets.

For single individuals in 2018, your first $9,525 of income is taxed at a 10% rate.  A 15% rate applies to your income over $9,525 to $38,700.  The 25% tax bracket applies to your income over $38,700 to $93,700.  Your income over $93,700 to $195,450 is taxed at a 28% rate.  A 33% rate applies to your income over $195,450 to $424,950.  Your income over $424,950 to $426,700 is taxed at a 35% rate.  All of your income over $426,700 is taxed at a 39.6% rate.

For married couples choosing to file a joint tax return, your first $19,050 is taxed at a 10% rate.  A 15% rate applies to your income over $19,050 to $77,400.  The 25% tax bracket applies to your income over $77,400 to $156,150 is taxed at a 25% rate.  Your income over $156,150 to $237,950 is taxed at a 28% rate.  A 33% rate applies to your income over $237,950 to $424,950 .  Your income over $424,950 to $480,050 is taxed at a 35% rate.  All of your income over $480,050 is taxed at a 39.6% rate.

You may expect that the married filing jointly tax brackets would be exactly double the single tax bracket.  However, once you get to the 28% tax bracket you will notice that is not true.  This is what is known as the marriage penalty.

Senate Tax Rates

There would be 7 ordinary income tax brackets under the Senate proposal.

Tax Rates

Image from www.calnonprofit.com

For single individuals, your first $9,525 of income is taxed at a 10% rate.  A 12% rate applies to your income over $9,525 to $38,700.  From over $38,700 to $60,000 your income is taxed at a 22.5% rate.  The 25% tax bracket applies to your income over $60,000 to $170,000.  A 32.5% rate applies to your income over $170,000 to $200,000.  Your income over $200,000 to $500,000 is taxed at a 35% rate.  At $500,000 and above your income is taxed at a 38.5% rate.

For married couples choosing to file a joint tax return, your first $19,050 of income is taxed at a 10% rate.  A 12% rate applies to your income over $19,050 to $77,400.  From over 77,400 to $120,000 your income is taxed at a 22.5% rate.  The 25% tax bracket applies to your income over $120,000 to $290,000.  A 32.5% rate applies to your income over $290,000 to $390,000.  Your income over $390,000 to $1 million is taxed at a 35% rate.  At $1 million and above your income is taxed at a 38.5% rate.

As you may have noticed, the Senate proposal preserves the marriage penalty, but only for the 32.5% and 35% tax brackets.

House Tax Rates

There would be 4 ordinary income tax brackets under the House of Representatives proposal.

For single individuals, your first $44,999 of income is taxed at a 12% rate.  Your income from $45,000 to $199,999 is taxed at a 25% rate.  A 35% rate applies to your income from $200,000 to $499,999.  At $500,000 and above your income is taxed at 39.6% rate.

For married couples choosing to file a joint tax return, your first $89,999 of income is taxed at a 12% rate.  Your income from $90,000 to $259,999 is taxed at a 25% rate.  A 35% rate applies toy our income from $260,000 to $999,999.  At $1 million and above your income is taxed at a 39.6% rate.

The House of Representatives also maintain the marriage penalty for the 35% tax bracket.

Capital Gains

Current Tax Rates

Currently, there are 3 tax rates that apply to capital gains (0%, 15%, and 20%).

In 2018, the 0% tax rate applies if your taxable income is $38,700 if you are single and $77,400 if you are married filing a joint tax return.

The 15% tax rate applies if your taxable income is between $38,701 and $426,700 if you are single and $77,401 and $480,050 if you are married filing a joint tax return.

The 20% tax rate applies if your taxable income is above those thresholds.

House and Senate Tax Rates

The House and Senate proposals would maintain the same three capital gains rate (0%, 15%, and 20%).  They would also have the rates apply to the same income limits even though they are changing the underlying tax brackets.

In our next post, we will discuss the Senate’s new deduction for business income, as well as their proposed changes to the standard deduction, itemized deductions, and AMT.

 

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