As the sweeping tax bill has been signed into law, quite a few changes come with it. One of the biggest changes happens to be to standard deductions and personal exemptions – cornerstones of the American tax code for decades.
Every taxpayer takes deductions; while some have the ability to itemize deductions, most Americans (more than 2/3) take what’s known as the standard deduction – which is a standardized amount that all Americans are allowed to use to offset a portion of their taxable income.
The new tax bill effectively doubles the standard deduction for both individuals and families.
The New Standard Deduction
|Married, Filing Jt.||$12,700||$24,000|
On the surface that sounds like a pretty good deal. However, the tax bill also killed the personal exemption. An exemption is another automatic offset to taxable income you and members of your household get just for existing – this past year it was worth $4,050 in taxable income offset per person. Meaning if you were married and had a dependent child, you would have received 3 personal exemptions.
What Does It Mean?
Let’s take a look on the surface about how this might affect your situation assuming you do not itemize your deductions. Bear in mind that there are certain taxpayers who would now qualify for the expanded Child Tax Credit, but for this exercise we are only focusing on the affects of standard deductions and exemptions.
Single with no children – without any dependents, you would have previously received an automatic deduction of $10,550 (standard deduction + 1 personal exemption). Under this new bill you can expect an automatic deduction of $12,000.
Couple with two children – A couple with two children would see their standard taxable benefit drop from $28,200 (standard deduction + 4 personal exemption) to only $24,000, excluding certain child tax credits they may be able to utilize.
The changes to the standard deduction and personal exemptions mean that families with multiple children may need to make a more concerted effort towards tax planning as automatic benefits will be harder to come by – particularly if their income phases them out of being able to use the child tax credits.
Since less than 1/3 of taxpayers currently itemize deductions, I would expect to see that number drop much lower in the coming years as people will find it more difficult to meet the threshold to itemize their deductions. But remember, these changes are only scheduled to last until 2025, when they will revert back to the current code.