The U.S. Bureau of Labor Statistics reported today that the consumer price index (CPI) has increased by .4% for August. The CPI measures the cost of goods and services – in other words, your cost of living. When the CPI doesn’t change much, it tends to signal that interest rates will stay put. This is important information for taxpayers because the Tax Code provides for mandatory annual adjustments to certain tax items based on inflation.
Federal income tax brackets tend to get the most attention since they have been subject to adjustment for nearly 30 years. However, inflation adjustments are now routinely included in tax legislation which can be confusing for taxpayers. Luckily, there are tax professionals who can sort it out for you – like Bloomberg BNA. Today, Bloomberg BNA released their predictions for the coming tax year – and it looks like good news.
“While the IRS won’t announce the inflation adjustments for next year for some time, our projections help taxpayers and tax planners get a jump start on the 2018 tax planning season by allowing them to more accurately estimate their tax liabilities for the upcoming year,” said George Farrah, Bloomberg BNA Tax & Accounting Editorial Director. “As part of their 2017 year-end review, taxpayers should evaluate their wealth transfer strategies to fully utilize the higher exclusion in 2018. Many taxpayers will slip into a lower tax rate in 2018 because of increases in the tax brackets. The standard deduction and personal exemption amounts will also increase, offering tax relief to many taxpayers due to inflation.”
How does that translate into dollars? Follows are some of the projected numbers for the tax year 2018, beginning January 1, 2018. These are not the tax rates and other numbers for 2017.
Tax Brackets
Because a higher CPI pushes the brackets upward and increases the standard deduction and exemption amounts, the taxes due on the same income will decrease. For example, suppose married taxpayers filing jointly compute tax on $237,000. In 2017, they were in the 33% bracket and paid $53,427 in tax. Bloomberg BNA predicts that in 2018, the same taxpayers are now in the lower 28% bracket and will pay $52,983 in tax, “saving” $444 compared to 2017.
High-income taxpayers will also see better numbers in 2018 because Bloomberg BNA projects that the top 39.6% tax bracket will begin at $480,050 for married taxpayers and $426,700 for single taxpayers. This represents an increase from $470,700 and $418,400, respectively in 2017.
Here are what the rates are expected to look like:
Personal Exemption
For 2018, the personal exemption amount is projected to increase slightly to $4,150, up from $4,050 in 2017.
Standard Deduction
The amount of the standard deduction is projected to edge up slightly in 2018. About 2/3 of all taxpayers will file using the standard deduction: those taxpayers who have more in itemized deductions than the standard deduction amount will file a Schedule A. Here are the projected standard deduction amounts for 2018:
The boost in the standard deduction amount also means that filing thresholds will be bumped a little. For most taxpayers, the quick “cheat sheet” formula is this: find your standard deduction and add your personal exemption to that number (remember to consider the additional standard deduction, if it applies). That means, for example, for a single person under the age of 65 who is not blind, the filing threshold for 2018 should be $10,650.
For those high-income taxpayers who itemize their deductions, the Pease limitations, named after former Rep. Don Pease (D-OH) may cap or phase out certain deductions. The Pease thresholds for 2018 are projected to be:
Pease limitations apply to charitable donations, the home mortgage interest deduction, state and local tax deductions and miscellaneous itemized deductions. They do not apply to medical expenses, investment expenses, gambling losses and certain theft and casualty losses.
Alternative Minimum Tax (AMT)
The AMT exemption rate is also subject to inflation. Bloomberg BNA anticipates that the exemption amounts will look like this in 2018:
Retirement Savings Accounts
For 2018, Bloomberg BNA projects the maximum contribution limit for traditional and Roth IRAs will remain at $5,500 for individuals under age 50 with catch-up contribution totals holding steady at $6,500 for individuals age 50 and above.
Federal Estate Tax Exclusion
The federal estate tax exclusion for decedents dying in 2017 was $5.49 million each or $10.98 million per married couple. BNA projects this amount will edge up to $5.6 million per person in 2018, making the total for a married couple a whopping $11.2 million.
Gift Tax Exclusion
While the annual exclusion for federal gift tax purposes remained the same, at $14,000 from 2013 to 2017, Bloomberg predicts that it will increase to $15,000 in 2018. That means that you can gift $15,000 per person to as many people as you want with no federal gift tax consequences in 2018; if you split gifts with your spouse, that total is $30,000 per person.
Remember that these are just projections. The Internal Revenue Service (IRS) will publish the official tax brackets and other tax numbers for 2018 later this year (typically in October). Additionally, these numbers and brackets assume there won’t be any movement on tax reform. Some tax cuts are expected, assuming that Republicans and Democrats can agree.
The 2018 tax projections are just one of the features from Bloomberg BNA. The full report is available for free here (downloads as a pdf).
Bloomberg BNA provides legal, tax and compliance professionals with critical information, practical guidance, and workflow solutions. Bloomberg BNA is an affiliate of Bloomberg L.P., the global business, financial information and news leader.