Taxable income is what you earn from any work: business, rental income, awards, investment income, gambling or other business activities. It does not include educational funds, gifts, inheritances, payments from accidents or worker compensation.
Taxable income for 2017 tax brackets is broken down into seven brackets, each is taxed at a different rate. IRS makes adjustments of over 40 taxes for inflation. Each earning individual is then pushed into a bracket/tax slab that affects him/her, it is also called the “bracket creep.”
This adjustment pushes the people into higher income tax brackets or reduces the value of their credits/deductions due to inflation, instead of any real increase in income.
Choosing 2017 tax brackets
The IRS adjusts tax laws based on the Consumer Price Index (CPI). It is a measure of inflation and the cost of living. Consumer Price Index (CPI) is used by the IRS to calculate last year’s inflation and adjust the income threshold, deduction amounts, and credit values. Changes in the CPI influences 2017 tax brackets, deductions, exemptions and credits and income thresholds.
When CPI increases, the tax brackets move. If your salary stays the same, you can drop into a lower tax bracket (owe less in tax).
2017 Tax Brackets
The income limits are adjusted for inflation for all tax brackets. The Top margin is 39.6%. This will hit the taxpayers with taxable income of $418,400 and higher for single tax filers and $470,700 and higher for married couples.
The standard deduction for single filers will increase by $50. For married couples it is $100 if filing jointly. The personal exemption for 2017 remains the same at $4,050.
PEP and Pease
There are two provisions in the tax code – PEP and Pease. This increases taxable income for high-income earners. PEP phases out of the personal exemption and Pease phases out the most itemized deductions once a taxpayer adjusted gross income reaches a certain amount.
The income threshold for both PEP and Pease will increase from to $261,500 for single filers and $318,800 for married couples filing jointly. PEP will end at $384,000 for singles and $436,300 for married couples. Taxpayers with AGI above these limits will not benefit from personal exemptions.
Alternative Minimum Tax
The Alternative Minimum Tax (AMT) was created in the 1960s to stop high-income taxpayers from avoiding paying the individual income tax. This parallel tax requires that the high-income taxpayers calculate their tax bill twice – once with the ordinary income tax system and then under AMT whichever is higher the taxpayer pays that.
The AMT uses called Alternative Minimum Taxable Income (AMTI) this is to prevent low and middle-income taxpayers from being subjected to the AMT. Taxpayers are can exempt a significant amount of their income from AMTI but it phases out for high-income taxpayers. The AMT is levied at 26 percent and 28 percent. The exemption amount is $54,300 for singles and $84,500 for married couples for 2017.
In 2017, the 28 percent AMT rate is applicable to excess AMTI of $187,800 for all taxpayers ($93,900 for married couples filing joint returns). Under the current law, AMT exemptions phase out at every 25 cents per dollar that is earned, once the taxpayer hits a certain limit. In 2017 the exemption will start phasing out $120,700 in AMTI for single filers and $160,900 for married taxpayers.
Earned Income Tax Credit for singles, heads of households, and joint filers it is $510, if the filer has no children (Table 9). one child – the credit is $3,400, for two -$5,616, and 3 plus – $6,318. These are small increases from 2016.
Two important points
- First – the 2017 tax brackets you are in does not necessarily apply to your entire income. For example, if you’re single and with a taxable income of $40,000, you’re in the 25% bracket. However, you only pay tax at a 25% on the last $2,050 you earn. The rest gets taxed at 10% or 15%.
- Secondly, the starting point for the 2017 tax brackets is taxable income, and this is much different from your gross income. Taxable income takes your personal exemptions into account, standard deduction or itemized deductions. Your 2017 tax brackets may apply to any additional income you earn until you move into the next bracket.
An accountant will try to lower your taxable income by suggesting that you make pre-tax contributions to 401(k) or a flexible spending account or IRA.
Exemptions and deductions
Most US taxpayers receive a personal exemption of $4,050. This exemption phases out as adjusted gross income passes $261,500 ($313,800 for married couples filing jointly). It phases out completely once you are at $384,000 ($436,300 for married couples filing jointly).
You can claim deduction above the exemption. The standard deduction is the simplest to claim, it allows the following standard deduction.
- Married couples – $12,700
- Surviving spouses – $12,700
- Heads of household –$9,350
- All other taxpayers – $6,350
You may get a larger deduction if you choose to itemize your deductible expense. This is useful for people with varied income from investments and real estate and business or medical expenses.
The basic estate tax exclusion will be increasing slightly to $5.49 million and the annual exclusion for gift taxes is projected to be $14,000.
2017 tax brackets and rates keep changing depending on the relationship between your income and CPI. It always pays to think before where the income tax brackets will fall.