The Seesaw: Standard Deduction & Child Tax Credit Doubles, Personal Exemptions Vanish – What it All Means

The Seesaw Standard Deductions and Child Tax Credits Double, Personal Exemptions Vanish, What it All Means, SFS Tax Problem Solutions, Family of Four, Tropical Location, Beach Background

Part Two of What did the Tax Cuts & Jobs Act Do to My Income Tax? 

In part one of this series, we covered the changes to the ordinary income tax brackets and rates. Your income is only part of the story in determining how much tax you will pay. Also factoring into the equation is the standard deduction amount, which has nearly doubled, as well as the personal exemption, which has vanished.

This is good news for single filers and married filing jointly with no dependents.

For those with children, there’s even better news.

The child tax credit has doubled to $2,000 in 2018. Also, it is refundable up to $1,400 so that some families may be receiving a refund on their 2018 taxes.

Let’s look at each of these three elements and how they affect your taxes.

The Seesaw Standard Deductions and Child Tax Credits Double, Personal Exemptions Vanish, What It All Means, SFS Tax Problem Solutions, Chalk Board, Chalk Board with Question Mark, Question Mark, Wood TableStandard Deduction Increases, SALT Capped 

About 30% of taxpayers itemize their deductions, according to the Urban-Brookings Tax Policy Center.

That number may drop significantly due to the standard deduction increase for 2018.

If you don’t itemize, you can take a standard deduction. Here are those amounts in 2018 versus 2017:

  • Individuals & Married Filing Separately – $12,000 ($6,350 in 2017)
  • Head of Household – $18,000 ($9,350 in 2017)
  • Married Filing Jointly – $24,000 ($12,700 in 2017)

On top of that, the Tax Cuts & Jobs Act capped the state and local tax (SALT) deduction at $10,000.

What does this mean to you?

If you itemized deductions in 2017, you may not need to do it this year.

It all depends on your unique tax situation.

Personal Exemption Vanishes

In 2017 (and previous years) you could also take a personal exemption as well as the standard deduction. These were also available to you even if you itemized your deductions.

You could take one for yourself, one for your spouse if you were filing jointly and one for each dependent child. If you had dependent elderly parents, you could take that as well.

Each of these personal exemptions reduced your taxable income by $4,050 in 2017.

In 2018, the personal exemption disappears.

  • Personal Exemptions $0 in 2018, $4,050 per person (spouses or dependent children in 2017)

Is it a trick of the eye here?

Double this, take away that?

We have to do the math to find out.

Example #1

Here’s what a single filer could take off of their taxable income in 2017 versus 2018:

                                    Single Filer

       2017                                                   2018

$6,350 standard deduction            $12,000 standard deduction

$4,050 personal exemption           $         0 personal exemption

$10,400 TOTAL                                $12,000 TOTAL

So when you look at these two together, the net increase that can be excluded from ordinary income is 15.4%. Not bad, but not nearly as good it first appears.

However, combined with the drops in the tax rates, our single filers are going to come out even farther ahead.

Example #2

Now let’s look at our family of four.

              Married Filing Jointly with Two Dependents

       2017                                                                           2018

$12,700 standard deduction                              $24,700 standard deduction

$16,200 personal exemptions                                        0 personal exemptions

$28,900 TOTAL                                             $24,700 TOTAL

Just looking at standard deductions and personal exemptions, this family is losing $4,200 in deductions off of their taxable income. That’s a 14.5% increase in taxable income for 2018.

We’re still not at the end of the story, however. There have also been changes to the child tax credit.

This may save our family of four yet!

The Seesaw Standard Deductions and Child Tax Credits Double, Personal Exemptions Vanish, What It All Means, SFS Tax Problem Solutions, Gold Dollar Sign with Envelope, Coming Up a Winner, Money for YouChild Tax Credit Doubles; A Portion is Refundable

The child tax credit is for each qualifying dependent child who is under the age of 17 at the end of the tax year.

Instead of lowering your taxable income, it is subtracted from the amount of tax you owe.

The Tax Cuts & Jobs Act doubled the credit to $2,000 per child. Now, it’s also refundable up to $1,400. There is also a $500 credit for “other qualifying dependents.”

A Fuller Picture

In part one of this series, we mentioned that the median household income was $59,000 in 2016.

Assuming that is still valid, let’s look at a family of four’s new income tax rate along with the changes to the standard deductions, personal exemptions, and child tax credits.

Because the child tax credit is doubling, and is taken dollar for dollar off of the tax due, or family of four is experiencing quite a tax savings.

Example #3

                    A Family of Four (filing jointly)

        2017                                                                   2018

$ 59,000 income                                            $59,000 income

-$ 6,350 standard deduction                      -$24,000 standard deduction

-$16,200 personal exemptions                    $          0 personal exemptions

$36,450 adjusted gross income                  $35,000 adjusted gross income

$  4,535 income tax                                       $  3,800 income tax

-$ 2,000 child tax credit                            – $ 4,000 child tax credit

 $ 2,535 tax due                                          – $   200 tax due

That’s a $2,735 difference in their tax bill!

The Bottom Line

Because the new tax law is complex, with many moving parts, seeing a tax professional is a good idea.

An experienced tax professional can help you assess your situation and find ways to (legally) reduce your tax bill.

For a tax planning consultation, call our offices at (772) 337-1040 or make an appointment online now. We have over 35 years of experience helping taxpayers just like you.

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Jeffrey Schneider, EA, CTRS, NTPI Fellow has the knowledge and expertise to help you reach a favorable outcome with the IRS. He is the head honcho at SFS Tax & Accounting Services as well as the Enrolled Agent and Certified Tax Resolution Specialist for SFS Tax Problem Solutions.
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For more on SFS Tax Problem Solutions, visit: http://sfstaxproblemsolutions.com/
For more on SFS Tax & Accounting Services, visit http://sfstaxacct.com/
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738 Colorado Avenue Stuart, FL 34994
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