The changes from the Tax Cuts and Jobs Act (TCJA) for 2018 through 2025 will lower individual income tax rates on the whole, but your income tax liability will not automatically go down with it. The TCJA changes involve some tax break expansions while other breaks are reduced or eliminated. What will ultimately determine whether you will enjoy reduced taxes or not is the combined result of all the tax break adjustments. Pay attention to changes made in personal exemptions, standard deductions and the child credit – these interrelated areas will affect many taxpayers.
In 2017 taxpayers are able to deduct $4,050 in personal exemptions for themselves, their spouses and any dependents. These exemptions can really add up, especially for families with children and or other dependents (such as elderly parents).
The TCJA suspends personal exemptions for 2018 through 2025, causing a sizable hike in taxable income for large families. Modifications to the standard deduction and child credit, when combined with lower tax rates, can potentially mitigate this increase.
Taxpayers can choose to itemize certain deductions on Schedule A or take the standard deduction based on their filing status instead. Itemizing deductions adds to the filing process (and can make it more complicated) but when the total will be larger than the standard deduction, it will save tax.
For 2017, the standard deductions are $6,350 for singles and separate filers; $9,350 for head of household filers; and $12,700 for married couples filing jointly. For 2018 the TCJA raises the standard deductions to $12,000 for singles and separate filers; $18,000 for heads of households; and $24,000 for joint filers. (These numbers will adjust for inflation for 2019 through 2025.)
These changes could result in a higher tax bill for taxpayers who itemize deductions or who have many dependents. For others, the standard deduction increases could make up for the exemption removal and possibly provide added tax savings. The individual results will partially depend on the degree to which taxpayers can benefit from improvements to the child credit.
Credits reduce taxes dollar-for-dollar while exemptions and deductions reduce the amount of income subject to tax. Because of this, credits can carry more weight in tax reductions than exemptions and deductions. For 2018 through 2025 the TCJA double the child credit to $2,000 for each child under age 17.
With the new law the child credit will now apply to more families than before. For 2017 the credit didn’t begin to phase out until adjusted gross income exceeded $110,000 for joint filers and $75,000 for all other filers. For 2018 through 2025 phase out thresholds have been raised to $400,000 for joint filers or $200,000 for all others. The TCJA also includes a $500 credit for qualifying dependents other than qualifying children for 2018 through 2025.
Tip of the iceberg
This article only contains the tip of the iceberg regarding all the factors influencing your tax liability for 2018 and beyond. For instance, not mentioned here are the numerous changes the TCJA has made to itemized deductions. JLK Rosenberger can help assess the impact of all the changes on your tax situation. Call us at 949-860-9902 or click here to contact us.