Standard deduction, personal exemptions, new tax law
One of the major changes in the tax reform bill is the changes made to the standard deduction and personal exemptions. This will affect a vast majority of taxpayers, some in a positive way, others not so much.
The final version of the GOP Tax bill retains a proposed standard deduction and personal exemption into one consolidated deduction. This is happening by repealing personal exemptions and increasing the standard deduction. Below is a chart that shows what the old rules are and what the new rules will be.
| Old Rules | New Rules | |||
|---|---|---|---|---|
| Single | Married Filing Joint | Single | Married Filing Joint | |
| Standard Deduction | $6,300 | $12,600 | $12,000 | $24,000 |
| Personal Exemption | $4,050 | $8,100 | - | - |
NOTE: The “additional standard deduction” (an extra $1,250 for a blind individual, or one over age 65) will continue to apply under the new bill.
Let’s break this down a little more. In the chart below, you can see you are getting a little bit higher of a break, but not by much. If you took advantage of itemizing your deductions in prior years, instead of taking the standard deduction, you may not see the amount of savings that you had in prior years.
| Old Rules | New Rules | |||
|---|---|---|---|---|
| Single | Married Filing Joint | Single | Married Filing Joint | |
| Standard Deduction | $6,300 | $12,600 | $12,000 | $24,000 |
| Personal Exemption | $4,050 | $8,100 | - | - |
| Total Deduction | $10,350 | $20,700 | $12,000 | $24,000 |
| Additional Deduction Under New Rules | $1,650 | $3,300 | ||
In addition, the expanded standard deduction alone won’t make up for the loss of personal exemptions for families – a $4,050 deduction (in 2017) per family member. The below chart shows the impact on a family of five:
| Old Rules | New Rules | |
|---|---|---|
| Married Filing Joint | Married Filing Joint | |
| Standard Deduction | $12,600 | $24,000 |
| Personal Exemption | $20,250 | - |
| Total Deduction | $32,850 | $24,000 |
| Lost Deduction Under New Rules | $8,850 |
In fact, even just adding one child – so that the family could have claimed three personal exemptions – leaves the family with a smaller deduction under the new rules than existed under prior/current law.
Will the new lower tax rates make up for the potential losses of deductions that some families face? Let’s use an accountant’s favorite answer, it depends. Each taxpayer will have a different outcome based on family size, taxable income, the potential for itemized deductions, as well as the child tax credit. Stay posted for additional blogs for more information.
Meghan Scott, EA
