Tax Update - Standardized Deductions and Personal Exemptions

Out with the old and in with the new is the theme for this years tax season. With the overhaul of the tax code this year more than one change will impact your tax return. One of the major changes is the change to the standardized deductions and loss of the personal exemption amounts. 

To make this easy let's compare numbers from 2017 to 2018 as we go along. Last year you as the taxpayer could take the higher of the two options, standardized deduction or itemized deductions (schedule A). That hasn't changed this year, however the amounts did. In 2017 the standardized deduction for Married Filing single/Single was $6,350, for 2018 it is now $12,000.00. Married filing joint increased from $12,700.00 to $24,000.00. And last for Head of Household was $9,350.00 and is now $18,000.00. Well with numbers almost doubling this should be a win win for everyone right? As always with taxes, it depends. One of the catches of raising the standardized deductions is there are no longer any personal exemptions.

In 2017 each taxpayer on the return and each qualified dependent on the return received a personal exemption of $4,050.00. For example a married couple with two children would receive personal exemptions in the amount of $16,200.00 for 2017. This exemption is now obsolete. Meaning they would gain $11,300.00 in the extra standardized deduction but lose $16,200.00 in personal exemptions, creating an ultimate loss of deduction of $4,900.00. This is not gain for anyone with multiple dependents then, right? Well our favorite phrase is back again, it depends.

The child tax credit increased from $1,000.00 to $2,000.00 for each qualifying child under the age of 17, so that would make up part of the difference. And then you would consider the drop in the tax brackets creating a lower tax liability as well. Let's not forget in 2017 the Child Tax Credit (CTC) phased out at MFJ (married filing joint) $110,000.00, $55,000.00 MFS (married filing separate) or $75,000.00 (Single of Head of Household (HOH)). This year we have some good news if your income was higher than that, the phase outs increased to MFJ $400,000.00 and all others $200,000.00. This means for many families making over $110,000.00 in the past you've not been getting any CTC for some years now. You will this year. 

What about those dependents that aren't qualifying children? Parents living at home, older children out of school still at home, before you would receive the $4,050 personal exemption. Not anymore. You will still however, get a $500.00 non-refundable credit for them. So, it isn't a complete lost there. 

So all of these numbers may have your head spinning and rightfully so, everything has changed. It's hard to say whether this is going to have a positive or negative effect on your tax return through a blog. We suggest calling early for an appointment so you can be aware of all the changing factors and be ready just in case you have different outcome this year.