Tax Reform, Deeper Dive into The Standard Deduction and Personal Exemption

This is an extension of the prior blog, Tax Reform, The Basics – Individual.   

What I want to concentrate on are some examples of how this will play out for Regular Joe.  None of these scenarios consider itemized deductions.       

The standard deduction has almost doubled, and the personal exemption is repealed.  What does this mean?  Well, it means that a lot of people who have itemized in the past will not be doing so any longer, at least not until 2025 when these provisions are set to expire. 

The standard deduction has almost doubled.  For Singles, this is now $12,000.  For Heads of Household, the amount is now $18,000 and for Married couples filing a joint tax return, the standard deduction is now $24,000.     

This is disguised as a good thing.  And in some cases, it is.  But with the repeal of the personal exemption, it basically depends on your situation as to if this is good or bad.    

Here are some real-world examples: 

Scenario #1)   

This couple is Married and Filing Jointly.  They have three qualifying dependent children.   

Based on 2017 tax law, this family would have a standard deduction of $12,700 and personal exemptions of $4050 for each member of the family.  $12,700 Standard Deduction plus $20,250 Personal Exemptions ($4050 X 5 members of the family) would equal $32,950 of ordinary income this family could earn before any income tax liability would be incurred.  (Keep in mind that I am referring to wage earners and not the self-employed.)  Based on 2018 tax law, the Standard Deduction is $24,000 and there is no personal exemption.  This family can earn $24,000 before any tax liability is incurred.  Taxable income increases by $8,950.00.  Scenario #1 sucks.  

Scenario #2) 

This couple is also married, but they have no dependents. 

Based on 2017 tax law, this couple would have a standard deduction of $12,700 and a personal exemption of $4050 each.  $12,700 plus $9000 ($4050 X 2) equals $21,700 of income they could have earned in 2017 before incurring a tax liability.  Based on 2018 tax law, the Standard Deduction is $24,000 and there is no personal exemption.  This family can earn $24,000 before any tax liability is incurred.  Scenario #2 reduces the taxable income by $2,300 for this couple.  Good stuff! 

Scenario #3) 

We have a single taxpayer with one qualifying dependent. 

Based on 2017 law, this family would have a standard deduction of $9350 and personal exemptions of $9000 ($4050 X2) totaling $18,350 of income they could have earned in 2017 before incurring a tax liability.  Based on 2018 law, this family is allowed a standard deduction of $18,000 but no exemptions.  One of the rules for claiming a filing status of Head of Household is that you MUST have a qualifying dependent.  This filing status does not come out on top.  In 2018, this family can earn $18,000 before income tax liability is incurred.    Scenario #3 not great, but $350 of additional taxable income is not so bad…   

Scenario #4) 

Here is a Single taxpayer with no dependents. 

Based on 2017 law, this taxpayer would have had a standard deduction of $6350 and a personal exemption of $4050 totaling $10,400.  2018 tax law says this tax payer now has a standard deduction of $12,000.  This Individual can earn up to $12,000 without incurring any tax liability.  Scenario #4 reduces the taxable income by $1,600.  Pretty good deal! 

In these scenarios, I have not considered credits.  Credits reduce tax dollar for dollar.  Meaning that if your taxable income creates an income tax liability, the credit will reduce that liability dollar for dollar.    

Tax Reform has increased the Child Tax Credit and created a new credit, Credit for Other Dependents. 

The Child Tax Credit has been improved. doubling the basic amount and increasing the amount that is refundable.  There are income and age limits.  The income limits have been expanded, a lot more people will qualify for the Child Tax Credit.  Income phase outs begin at $200,000 for individuals and $400,000 for Married Filing Jointly.  Dependents must be under 17 years old on the last day of the year to be qualifying dependents.   

The Credit for Other Dependents of up to $500 is available for each of your dependents who do not qualify for the child tax credit.  This credit begins to phase out at $200,000 ($400,000 if married filing jointly). 

Let’s look at Scenario #1 again.   

Due to Tax Reform, in 2018, this family has $8950.00 more in taxable income than they had in 2017.  If they are in the lowest tax bracket, meaning their taxable income is below $9526.00, tax on the additional $8950 would = $895.  If all three dependents are qualifying children (16 years old or younger on the last day of the year) this family is looking at a potential of $6000 in Child Tax Credit (CTC) which would reduce that $895 dollar for dollar to zero and potentially qualify for a refund of $4200 for the refundable amount.  ($6000 CTC – $895 tax = $5105.  Of $5105, $4200 is refundable {$1400 each qualifying dependent under age 17}).  Maybe scenario 1 doesn’t suck so bad after all. 

Now I’m going to sound like an infomercial.   

EVERYBODY, I know you think we’re done with this topic, BUT WAIT! 

It was great, back in February the IRS updated the withholding tables that your employers use to withhold taxes from your paychecks.  Your paychecks probably got a little larger due to having less tax withheld.    

This seemed great at the time.  But think about Scenario #1 again.  Due to losing the exemption deduction, the family in scenario 1 has more taxable income.  Due to the updated withholding tables, this family had less withheld in federal income tax from their paychecks.   Higher taxable income but lower tax withholding.  Maybe it’ll work itself out…? 

“The IRS encourages several key groups of taxpayers to perform a “paycheck checkup” to check if they are having their employer withhold the right amount of tax for their situation, following recent tax-law changes. It’s especially important for certain people, to check their withholding. They are people who: 

  • Belong to a two-income family. 
  • Work two or more jobs or only work for part of the year. 
  • Have children and claim credits such as the Child Tax Credit. 
  • Have older dependents, including children age 17 or older. 
  • Itemized deductions on their 2017 tax returns. 
  • Earn high incomes and have more complex tax returns. 
  • Received large tax refunds or had large tax bills for 2017.”  personal comment.. Who doesn’t fall into one of these categories?!? 

These links will help you to understand if you have had enough withheld from your paychecks.  

 The YouTube video was published by the IRS to assist taxpayers in using the IRS withholding calculator to make sure taxpayers have enough withholding.  

If this is confusing, or you just don’t want to review these links but think you may be in one of the categories bullet marked above, I am offering a paycheck withholding checkup for $75.   This offer does not include business returns.  There is a separate offer for Business clients, price dependent on the type and complexity of your business returns.   Please contact me or schedule an appointment if you are interested.   


1 thought on “Tax Reform, Deeper Dive into The Standard Deduction and Personal Exemption”

  1. New 2018 tax reform sucks, I have more then $15K taxable income and since we are over $165 annual income, we lost all credits. NO MORE VOTES FOR TRUMP!!!!!


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