The new federal income tax brackets are now in place for 2018 and going forward.

The new federal income tax rate have been called the most significant changes since the Reagan tax cuts back in 1981. And of course there will be the back and forth from both sides of the aisle if the new federal income tax cuts are good or bad and there are plenty of examples on either side to make a case. One argument is the new federal income tax laws only truly affect the very wealthy. And that argument does make sense because even just a small reduction in a income tax rate of a wealthy couple means in terms of dollars saved, the amounts are much higher compared to the same amount of reduction making much less income. 2.00% of $500,000 is $10,000 while that same 2.00% on $50,000 is just $1,000. That’s a big difference, right?
There are still seven tax brackets and here are the rates for 2017 and rates for the coming year:
2017 2018-2025
10% 10%
15% 12%
28% 24%
33% 32%
39.6% 37%
The reductions seem small at first glance but when it comes to tax time there will be a much lower tax bite. But there’s another across the board change as it relates to the standard deduction and exemptions. For individual filers, the personal exemption jumps from $6,500 to $12,000 for example. This deduction phases out for higher income taxpayers. The revered mortgage interest deduction remained in spite of some predictions it would be eliminated. The limit for mortgage interest is $750,000, down from $1 million. The very wealthy who have mortgages more than $750,000 will lose the deductions. The average first lien mortgage today is somewhere around $240,000 so most borrowers will see no impact regarding this itemized deduction.
Tax planning is an important piece of an individual’s financial profile but the average income borrower will see their tax rates fall and less taken out of their pay checks every month. The theory, and this is a theory, that more money in consumers’ pockets means more spending. More spending equates to more jobs which creates more taxes and on it goes. We’ll soon see if that holds true. The first pay checks in January will have a bit more money in them compared to the previous month. What the consumers do with that money remains to be seen. But for those in the higher income tax bracket, there will be more decisions that have to be made.

Theodore J. Zurla
Nationwide Home Loans – Loan Officer
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