Tax brackets determine how your income is taxed at various rates. The House and Senate versions of the Tax Cuts and Jobs Act each proposed different sets of income tax brackets, both of which vary significantly from the current setup. Here’s how those different tax bracket options could play out if one of the two bills becomes law.

2018 tax brackets under the current tax code
Despite the uncertainties about tax reform, the IRS released its numbers for the 2018 tax brackets as they stand under the current tax code. If tax reform doesn’t happen in time for 2018, you’ll use whichever of the below tax brackets applies for your filing status for the year:

2018 tax brackets under the House Tax Act
The House version of the Tax Act, which passed in the House of Representatives on Nov. 16, consolidates the current system of seven tax brackets into a mere four brackets. Here’s how your income taxes will play out if this version of the Tax Act becomes law:

2018 tax brackets under the Senate Tax Act
Here’s how the Senate Tax Act’s bracket system looks:

Comparing the three different systems
All of these tax bracket systems are marginal, meaning that you don’t pay one particular tax rate on all your income; instead, you pay a different rate for each part of your income that falls into a particular bracket. The existing tax code and the Senate Tax Act both have seven different tax brackets; the House Tax Act has only four tax brackets. The tax rates and income ranges for the different types of brackets all vary quite a bit.

How tax brackets work: An example
Let’s say that you’re married and your household income for the year was $117,795 (the average household income in 2014 for married taxpayers filing jointly).

Under the current tax code’s 2018 brackets, you’d pay 10% income tax on your first $19,050 of income, 15% on your next chunk of income up to $77,400, and 25% on the rest of your income.

That means you’d pay a total of $20,756.25 in income taxes for the year.

Using the House Tax Act’s tax bracket system, you’d instead pay a 12% income tax on the first $90,000 of income and 25% on the rest of your income.

This would result in a tax bill of $17,748.75.

Finally, using the Senate Tax Act’s tax bracket system, you’d pay 10% income tax on your first $19,050 of income, 12% on the next chunk of income up to $77,400, and 22.5% on the rest.

The result would be a tax bill of $17,995.88.

What to expect next
With Senate passage of the bill last weekend, the next step is to reconcile the House and Senate versions of the bill. Only after this is done can the final version pass through Congress and go to the president for his approval. The changes to the tax code won’t take effect for the 2017 tax year; when you do your taxes for 2017 in early 2018, you’ll use the current system of tax brackets. Then, in the following year, any changes to the tax bracket system will likely take effect. You can check the IRS website at that point to confirm which tax brackets to use; you definitely don’t want to use the wrong ones when you do your tax return!

— Wendy Connick

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Source: The Motley Fool