As taxpayers struggle to understand the impact of what is being labeled “the most sweeping tax rewrite in decades,” the Law Office of Jennifer Guimond-Quigley has put together a three-part guide on the fundamental changes clients will face. This is the third part of that series.
Personal exemptions and deductions saw a major change as a result of the 2017 Tax Cuts and Jobs Act. Whether a taxpayer files individually, jointly, with or without dependents, the new tax system will impact everyone.
Elimination of Personal Exemptions and Increase to Standard Deduction
Personal exemptions were $4,050 per person in 2018, but these exemptions will be suspended from 2018 through 2025. While this change has serious implications for a taxpayer’s taxable income, the effect is somewhat offset by the doubling of the standard deduction.
Under the Tax Cuts and Jobs Act, the standard deduction has increased from $6,350 to $12,000 for single taxpayers, while deductions for married couples filing jointly increased from $12,700 to $24,000. How much this change impacts people will depend on the size of the family. In 2017, a family of three could deduct $24,850 from taxable income ($12,150 in personal exemptions and $12,700 for the standard deduction), while a family of four could deduct $28,900 ($16,200 in personal exemptions and $12,700 for the standard deduction). With the new bill, those same families will only be able to deduct $24,000 from taxable income.
Additionally, taxpayers will not notice an impact on their 2017 returns. The changes to the personal exemptions and the standard deduction take effect “as in the case of a taxable year beginning after December 31, 2017, and before January 1, 2026.” This means the changes are only effective for tax years 2018 through 2025.
Business Income Deduction
The newest acronym for business owners is QBID, which stands for Qualified Business Income Deduction. This is a 20 percent deduction from income attributed to a business (C Corporation, S Corporation, Partnership, LLC and Sole Proprietorship) up to a certain income threshold, before it begins to phase out. However, for those business owners who are able to take full advantage of this deduction, it can mean a very noticeable tax savings.
Due to the complex nature of the new changes, it is recommended that taxpayers consult a trusted tax professional to understand how taxes will change. Read more in our tax overhaul series in regards to financial planning and family law.