Under the Tax Cuts and Jobs Act (TCJA), individual income tax rates generally decrease for 2018 through 2025. However, even with these reduced rates, there’s no guarantee that your income tax liability will go down. The TCJA also contains a number of key changes to tax breaks for individuals — reducing or eliminating some while expanding others. What will ultimately determine whether or not you see reduced tax liability is the total impact of these changes taken together. Changes to personal exemptions, standard deductions and the child credit are an interrelated group of provisions in the new law that could affect many taxpayers.
For 2017 returns, taxpayers can claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. For families with children and/or other dependents, such as elderly parents, these exemptions can really add up.
For 2018 through 2025, the TCJA suspends personal exemptions. This development will result in a substantial increase in taxable income for large families. However, enhancements to the standard deduction and child credit, combined with lower tax rates, might mitigate this increase.
Taxpayers can opt to itemize certain deductions on Schedule A, or take the standard deduction based on their filing status instead. Itemizing deductions when the total will be larger than the standard deduction will result in a lower tax bill, but it makes the filing process more complicated.
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.
The TCJA nearly doubles the standard deductions for 2018 to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. (These amounts will be adjusted for inflation for 2019 through 2025.)
For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps even provide some additional tax savings. But for those with many dependents or those who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from enhancements to the child credit.
Credits can carry more weight than exemptions and deductions because they reduce taxes dollar-for-dollar, rather than just reducing the amount of income subject to tax. For 2018 through 2025, the TCJA doubles the child credit to $2,000 per child under age 17.
The new law also makes the child credit available to more families. For 2018 through 2025, the credit doesn’t begin to phase out until adjusted gross income exceeds $400,000 for joint filers or $200,000 for all other filers, compared with the 2017 phaseout thresholds of $110,000 and $75,000, respectively.
The TCJA also includes, for 2018 through 2025, a $500 credit for qualifying dependents other than qualifying children.
Tip of the iceberg
A variety of factors will influence the impact the TCJA has on your tax liability for 2018 and beyond. The items discussed above are just the tip of the iceberg. For example, the TCJA also brings many changes to itemized deductions. If you’d like assistance assessing the new tax law’s effect on your specific tax situation, don’t hesitate to reach out to a KraftCPAs tax advisor.