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Who are the big (tax) winners ahead of the 2018 filing year?

Who are the big (tax) winners ahead of the 2018 filing year?
Ines Zemelman, EA
15-Nov-18

US Government wins

The majority of individuals filing US tax returns will pay more tax after the Tax Reform. The tax increase will affect US citizens, green card holders, as well as non-resident aliens with income from US sources. However, certain categories of individual taxpayers will see a reduction in tax.

And the winners are...

Very low-income taxpayers come out on top

  Example  
  • Married couple
  • No children
  • Combined income of $43K. 

In 2017, the couple would have paid $2,400 tax on this income. In 2018, they will pay zero tax.

Before the reform, a 10% tax was assessed on taxable income from the first dollar. Under the new rules, the 10% bracket was eliminated. The 12% tax bracket starts from taxable income of $19,050. As a result, this couple will pay no federal tax at all. After the standard deduction of $24K, their taxable income will be $19K, which is below the lowest tax bracket.

If they have children they will receive $2K credit per child instead of $1K they would have received before the reform and they are eligible for the Earned Income Credit (EIC) on top of that.

Don't Forget Very High-income Taxpayers 

 

  • The highest tax rate in 2017 was  39.6% for income over $470,700 (Married couple filing jointly).

  • The highest tax rate for 2018 is 37% for income over $600,000 (Married couple filing jointly)

The tax reduction for the most affluent taxpayers is meant to compensate for their inability to deduct state and local taxes, mortgage interest on a second home, and various itemized deductions previously claimed by high-income taxpayers. For some households, the tax rate reduction will mitigate the impact of losing prior utilized itemized deductions.

Spouse Who Receives Alimony Payments

Under the new law, alimony and separate maintenance payments are not deductible by the payor spouse and most importantly, not includible in the income of the payee spouse. The effective date of this provision is delayed by one year. It is effective for any divorce or separation agreement executed after December 31, 2018.

 

  Example 
  • Spouse receiving annual alimony payment of $30,000

  • Divorce agreement excuted before Dec 2018 taxed at his/her ordinary tax rate

  • Divorce agreement executed after December 2018 will have $30,000 tax-free income

Taxpayers residing abroad, with relatives who lack a Social Security number

Such taxpayers will acquire the ability to receive a $500 non-refundable “family credit” for dependents without a Social Security number (i.e. elderly parents or children without a Social Security number). A taxpayer ineligible to receive the child tax credit for the child without a Social Security Number will be eligible for the credit. Note, an ITIN (Individual Taxpayer Identification Number) for the family member is required to claim the credit.

Ines Zemelman, EA
Ines Zemelman, EA
founder of Taxes for Expats