Belated Merry Christmas and Happy 2018 Tax Planning to all my millionaire readers. Well, it finally happened–on December 22rd, 2017 President Trump signed the Tax Cuts and Jobs Act of 2017 setting off a number of changes to the U.S. tax code. This means that we now have new tax laws for 2018, and we can finalize our tax plan for next year. Since tax planning is a vital component to our overall wealth plan, I am eager to dig into our tax numbers.
In our case, it appears that we will receive a nice tax cut in 2018. In this post, I’ll look at three main tax numbers:
- Free Money! — the standard deduction + personal exemptions + tax credits
- $44,500 — the Free Money + 10% amount under the old tax law
- $905 Tax Bill — the taxes owed under the Free Money + 10% amount under the old tax law
Before I crank out our 2018 Free Money! numbers, be aware that the numbers presented here will be OUR 2018 tax-planning numbers. This post is not an attempt to critique the new tax plan. Instead, this post will illustrate our tax numbers for the upcoming year.
I mention this because this tax plan seems to get people FIRE’d up (and not in a good way). After my previous Free Money! posts (#1, #2) I got emails complaining that a.) I hated Trump and should shut up, and b.) I loved the G.O.P. and wished death on all children and puppies. Everyone should step away from the ledge and just enjoy these awesome and sexy tax numbers.
New (and Improved) Free Money! Amount
The first piece of good news is that our Free Money! amount will increase by over $8k in 2018. The new tax law will lead to three main changes. First, our standard deduction will go from $13k to $24k; second, our personal exemptions will be phased out; and third, our child tax credit will double from $1k to $2k. Here is how our Free Money! amount compares under the old tax law vs. the new tax law:
I can’t lie, I’m glad to see that we’ll be able to earn an additional $8,392 of Free Money. Next, let’s see how much tax we’ll owe…
At an Income of $44,500
My readers will recall that $44.5k represents the “Free Money + 10%” amount under previous tax law. That income amount had a tax obligation of $905. Under the new law, the child tax credit of $2k will eliminate all tax obligations in the 10% bracket (and even a little in the 12% bracket).
If we decide to take $44,500 of income in 2018, we’ll have to pay 12% tax on $658 of income ($44,500 – $43,842) with a tax obligation of $79. Under the previous tax law, $44.5k of income generated a tax bill of $905, so the new tax law provides us with a tax savings of $826 ($905 -$79).
Here’s how an income of $44,500 compares under the new tax law:
Once again, the new tax law looks favorable to our tax situation. Now, let’s see how much income we could take….
With a Tax Obligation of $905
If you’ll recall, under previous tax law $905 represented our tax obligation at the end of the 10% tax bracket. As a general rule, I considered $905 in taxes as my “tax-pain threshold” since all income beyond that amount entered into the 15% tax bracket (OUCH!).
Under the new tax law, any income we take beyond our Free Money amount will be taxed at 12%. This means we can earn an additional $7,541 ($905 / .12) on top of our Free Money.
Strike three old tax law…you’re out! Now let’s take a look at our…
2018 Income Options
If we decide to go beyond our Free Money! amount and pay $905 in taxes:
After Paying $905 of Taxes
Is it me, or does it look like we’re going to keep more of our money in 2018?
Other Opportunities in 2018
There are a number of changes in the new tax law that could help you build wealth:
- There is a second “low-tax” tax bracket beginning in 2018. Not only did the new law keep the 10% tax bracket, but it also added a 12% tax bracket (in place of the old 15% tax bracket). In my mind 12% is a better rate than 15%. So much better that I might even consider a Roth IRA conversion deep into the 12% bracket (but there’s no way in Hades I’m going into that nasty 22% bracket!).
- Do you remember all that talk of reducing retirement plan contribution amounts from $18,000 to $2,400? Well, that didn’t happen thank goodness. Actually, 401k, 403b, and 457 contribution limits were increased to $18.5k with $6k catch-up contributions for individuals 50 and older.
- Before the bill was passed, there was also talk of coordinating 457 contributions with 401k and 403b contributions. That would have ended the double retirement plan option (457 + 403b or 457 + 401k) used by some teachers (and other public servants). Well guess what, that didn’t happen either. Teachers, you can still work your unfair teacher’s advantage.
Okay tax nerds, I hope this post helps you to perfect your own tax plan. If taxes are not your thing and confuse the heck out of you, don’t despair because I updated the 2018 Free Money! Tax Tables just for YOU. Check it out and see if my numbers agree with yours. (That page also has a link to a useful income tax calculator.) Happy New Year to all my readers!
Yours with a tax goal of $905,
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