As tax season rolls around, one of the first things to do is pay attention to changes in tax deductions and tax credits you can claim when filing your income tax return with the Internal Revenue Service. Read on to learn about what did change and how you can take advantage of those changes and tax breaks for 2018.
1. Tax Brackets Get Wider
The federal income tax system uses a progressive tax structure, which means that as you earn more income your tax rate goes up as well. The IRS tax brackets increase each year with inflation, however. For example, the 10 percent tax bracket — the lowest bracket — includes all income up to the following amounts for each tax filing status:
- Married filing jointly: $18,650 — up from $18,550 in 2016
- Married filing separately: $9,325 — up from $9,275
- Head of household: $13,350 — up from $13,250
- Single: $9,325 — up from $9,275
The higher tax brackets also increased proportionally with inflation for the 2017 tax year. These jumps are automatically accounted for when you file your tax return.
IRS Federal Tax Brackets: Frequently Asked Tax Questions and Answers
2. Standard Deduction Increases
It’s not a huge jump, but the standard deduction increased slightly for the 2017 tax year for all filing statuses. The increase could impact whether you claim the standard deduction or itemize. For 2017, the standard deduction for each filing status is as follows:
- Married filing jointly: $12,700 — up from $12,600 in 2016
- Married filing separately: $6,350 — up from $6,300
- Head of household: $9,350 — up from $9,300
- Single: $6,350 — up from $6,300
3. Increased Personal Exemption Phaseout Ranges
As long as no one else claims you as a dependent, you can claim a personal exemption for yourself. You can also claim an exemption for your spouse and for each of your dependent children. For the 2017 tax year, the value of each exemption you claim is unchanged from 2016 at $4,050, but the income level where you begin to phase out personal exemptions is increasing:
- Married filing jointly: Phaseout begins at $313,800, and personal exemptions phase out completely at $436,300 — up from $311,300 and $433,800, respectively, in 2016
- Single filers: Phaseout begins at $261,500, and personal exemptions phase out completely at $384,000 — up from $259,400 and $381,900, respectively
4. Increased Health Savings Account Contribution Limit
HSAs enable you to save pretax dollars in a special account that allows the money to grow without being taxed. If you use the money for qualified medical expenses, any withdrawals, including earnings, come out completely tax-free. For the 2017 tax year, individuals covered by a high-deductible health insurance plan can contribute $3,400 to the plan — up $50 from 2016. The contribution limit for married couples, however, remains the same at $6,750.
5. Earned Income Tax Credit Increases
The earned income tax credit underwent several increases in 2017. First, you can now have up to $3,450 of investment income for the year — up from $3,400 in 2016 — and still qualify for the EITC. Second, the maximum income you can have and still qualify for the EITC also increased for each filing status:
Married Filing Jointly
- No qualifying children: $20,600 — up from $20,430 in 2016
- One qualifying child: $45,207 — up from $44,846
- Two qualifying children: $50,597 — up from $50,198
- Three or more qualifying children: $53,930 — up from $53,505
All Other Filing Statuses
- No qualifying children: $15,010 — up from $14,880 in 2016
- One qualifying child: $39,617 — up from $39,296
- Two qualifying children: $45,007 — up from $44,648
- Three or more qualifying children: $48,340 — up from $47,955
- No qualifying children: $510 — up from $506 in 2016
- One qualifying child: $3,400 — up from $3,373
- Two qualifying children: $5,616 — up from 5,572
- Three qualifying children: $6,318 — up from $6,269
To claim the earned-income tax credit, you must file Schedule EIC with your income tax return.
6. Higher Income Limits for Retirement Savings Credit
The retirement savings credit rewards qualified taxpayers who save for retirement with a tax credit equal to a portion of their contributions to qualified retirement plans including IRAs, 401k and 403b plans.
For the 2017 tax year, you can claim a credit equal to 10 percent of your contribution if your income falls into the following brackets:
- Married filing jointly: $40,001 to $62,000 — up from $40,001 to $61,500 in 2016
- Head of household: $30,001 to $46,500 — up from $30,001 to $46,125
- All others: $20,001 to $31,000 — up from $20,001 to $30,750
For other qualifying income levels, you can claim a saver’s credit of 20 percent or 50 percent of your contribution; these brackets did not change in 2017. All income brackets are scheduled to increase for the 2018 tax year, however.
7. Increased Employer-Paid Parking or Transit Tax Breaks
Income and benefits you receive from your employer are typically included in your taxable income, except for qualified parking or transportation benefits. During the 2017 tax year, your employer can pay more money on your behalf each month: $255 per month, up from $250 per month in 2016. You don’t have to meet any special income limits or report it anywhere on your taxes — it’s already excluded.