L&H Insights

Tax Reform: Simplified Standard Deductions and Personal Exemption

Posted by L&H CPAs on Mar 22, 2018 10:48:53 AM

tax reform deduction exemption

One of legislators’ stated aims with recent tax reform, formally known as The Tax Cuts and Jobs Act (TCJA), was to simplify the way Americans do their taxes. While the end result wasn’t the ability for taxpayers to file their taxes on a postcard, there are some provisions that will likely make the process of doing taxes easier for millions of Americans.

Changes to the Standard Deduction

Under the previous income tax framework (still in effect for 2017, if you haven’t filed last year’s taxes yet), individual taxpayers had a $6,500 standard deduction, while married couples filing joint returns had a $13,000 standard deduction. The standard deduction allows taxpayers to subtract the applicable amount from their taxable income before applying income tax rates to determine what they owe.

An estimated 70% of households used that standard deduction when filing their taxes in 2017 and previous years; the other 30% chose to itemize deductions such as mortgage interest, charitable contributions, medical expenses and more, in order to receive a higher deduction amount.

Under the new tax law effective starting in 2018, those standard deduction amounts have nearly doubled. Individual taxpayers can take a $12,000 standard deduction, while married taxpayers filing jointly will enjoy a $24,000 standard deduction.

While taxpayers may still choose to itemize their deductions, the reality is that it simply will not be worth it for many people. It is estimated that 94% of households will forego itemizing in favor of the new standard deduction amounts in 2018 – a sizable shift.

Personal Exemption Eliminated

Another notable change to income tax laws was the elimination of the personal exemption which served to lower taxable income by exempting a certain amount from taxation. In 2017, taxpayers could claim a $4,050 exemption for themselves, their spouses and each dependent in the household, including minor children.

In 2018, taxpayers cannot claim personal exemptions – for anyone. While standard deduction amounts have nearly doubled, as discussed more fully above, that increase will be offset for many taxpayers by the loss of the personal exemption.

Examples

Looking at a few examples may help illustrate this change.

  • Example 1: Single taxpayer with no children

2017 standard deduction: $6,350

2017 personal exemption: $4,050

Total 2017 tax break: $10,400

2018 standard deduction: $12,000

2018 personal exemption: $0

Total 2018 tax break: $12,000

This taxpayer is better off under the 2018 tax law, without factoring in other variables and changes.

  • Example 2: Married taxpayers filing joint returns, no children

2017 standard deduction: $12,700

2017 personal exemption: $8,100

Total 2017 tax break: $20,800

2018 standard deduction: $24,000

2018 personal exemption: $0

Total 2018 tax break: $24,000

Assuming this couple didn’t itemize their taxes, they are also better off under the new tax rules. Unless they have more than $24,000 in itemizable deductions for 2018, it will not make sense to itemize when filing this year’s taxes.

  • Example 3: Married taxpayers filing joint returns, two children under 17

2017 standard deduction: $12,700

2017 personal exemption: $16,200

Child tax credits: $2,000

Total 2017 tax break: $30,900

2018 standard deduction: $24,000

2018 personal exemption: $0

Child tax credits: $4,000

Total 2018 tax break: $28,000

This couple would need more than $24,000 in deductions if they chose to itemize. Regardless of whether or not they could take the maximum $2,000 child tax credits in 2017, they are worse off under the new tax laws, before factoring in any other changes.

How Will These Changes Impact Your Taxes?

Every taxpayer’s situation is unique. For more information get your guide to tax reform or contact us to determine how the larger standard deduction and the loss of the personal exemption will impact your bottom line in 2018.

 

Tags: Tax Reform

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