Student Editor: Andrea G.
During the winter of 2018, our government engaged the public in one of the most nail-biting political events since the Presidential Election. Eyes were glued to the news for several weeks as rumors of potential changes were circling around. The new tax reform is important because it affects everyone. Now that the final law has been passed, it is essential to decode what it means for us as taxpayers, since taxes affect many of our financial decisions. We will now discuss some of the major changes you need to know regarding the Tax Cuts and Jobs Act.
The Tax Cuts and Jobs Act (TCJA) will impact taxes filed for 2018. So, the taxes that will be filed by April 2017 will not include any of these newest changes, but it is important to begin planning for taxes and make adjustments beginning January 2018. It is also important to note that all of these changes will revert by the year 2025, so keep in mind that these changes are not permanent.
Suspension of Personal Exemptions
The biggest change enacted by TCJA is the suspension of personal exemptions. Under the prior tax laws, every taxpayer received a reduction of $4,050 for every individual in their household that was declared in their taxes. That provision is now eliminated for taxes filed for year 2018. For taxpayers without dependents, this change is supplemented by an increase on standard deduction which will be discussed in the next section, but for taxpayers with dependents, this could be either positive or negative depending on the age and number of dependents that are filed on your tax return. Even though exemptions have been eliminated, if you qualify for the Child Tax Credit (one of the provisions for this credit is that your children are 17 or under), the good news is that even though you will not receive the exemption, your Child Tax Credit will double, going from $1,000 to $2,000, not considering potential phase-out amounts. If your dependents are over the age of 17, however, you can still claim a new Family Tax Credit up to $500. The elimination of personal exemptions will impact taxpayers differently depending on the numbers of dependents, age of dependents, and filing status.
Another one of the substantial changes due to TCJA is the increased amounts for standard deductions. Here are how the amounts have changed according to filing status:
|Married Filing Joint or Surviving Spouse||$12,700||$24,000|
|Head of Household||$9,350||$18,000|
|Single or Married Filing Separate||$6,350||$12,000|
This increase in standard deductions will have a significant impact on your taxes, but keep in mind that the 2017 amounts do not account for the additional $4,050 personal exemption that individuals received. Although it will positively impact taxpayers who have usually taken the standard deduction, it is unclear as to how it will impact taxpayers who usually itemize their deductions. Under the tax code, individuals can either itemize their deductions, meaning they provide evidence of specific expenses they had during the year such as medical expenses and charitable contributions, among others, or they can simply take a standard deduction. Taxpayers can only take the greater of either the standard or itemized deduction amount, so if your itemized deductions surpassed the standard deduction, it would reduce your amount of taxable income. With the increase of standard deduction, however, it could mean that less people will itemize their deductions. There will also be changes to the expenses that can be itemized, so please reference the Congress’ legislation below for more information on changes to itemized deductions and other changes not discussed in this article.
Talk to a Tax Professional!
It is highly recommended to speak with a tax professional about detailed changes to your particular tax situation and how you can plan for your taxes for the upcoming few years. Please be aware that there are many free tax services programs where you can get a consultation regarding your particular tax situation.
For more information about taxes, please explore our Consumer Jungle website for articles and activities!
- Legislation: https://www.congress.gov/bill/115th-congress/house-bill/1
- Free Tax Services Programs: https://www.irs.gov/individuals/irs-free-tax-return-preparation-programs