Items to know about the tax reform Part 1

July 27, 2018

Most of the country is aware by now that President Trump signed into law many changes to the IRS tax code, but what most people don’t understand is what those changes are. As you can tell based on the title, this will be a multi part blog post. Today we will cover the changes to the standard deduction. Our next post will cover changes to the personal exemption and how that pairs with the changes to the standard deduction. If you would like to have a more personal discussion related to the new tax regulations you can contact us set up a meeting (meetings can be conducted in person, over video conferencing, or over the phone) to discuss your personal tax situation.

The standard deductions approximately doubled across the board. Using the filing status of Married Filing Jointly as an example, the standard deduction in 2017 was $12,700 and in 2018 it increased to $24,000. So, in English what does this mean for you? The short answer is, it depends, but there are three basic scenarios that I’ll cover here.
The first scenario is individuals who in 2017 did not itemize their deductions but used the standard deduction. For this group the law now allows you to automatically take an additional $11,300 reduction to your income before tax is calculated. I am providing an example below that ignores all other aspects of the tax code to illustrate the isolated impact of this change. As you can see from the table below there is a significant change for this group of individuals.

 20172018
Income $ 100,000 $ 100,000
Standard Deduction $ 12,700 $ 24,000
Taxable Income $ 87,300 $ 76,000

The second scenario is individuals who in 2017 itemized their deductions, but the amount of the itemization was less than $24,000. This group will still see a benefit from the change in the law, but the benefit will be reduced by the amount their itemized deduction is greater than $12,700. I included another table below to show the impact. In this case we will assume the taxpayer had $20,000 in itemized deductions. As you can see in the table, this taxpayer only saw a $4,000 benefit instead of the $11,300 benefit the taxpayer who used the standard deduction in 2017. One item to note is the taxable income for both taxpayers is now the same.

 20172018
Income $ 100,000 $ 100,000
Standard Deduction $ 12,700 $ 24,000
Taxable Income $ 87,300 $ 76,000

The second scenario is individuals who in 2017 itemized their deductions, but the amount of the itemization was less than $24,000. This group will still see a benefit from the change in the law, but the benefit will be reduced by the amount their itemized deduction is greater than $12,700. I included another table below to show the impact. In this case we will assume the taxpayer had $20,000 in itemized deductions. As you can see in the table, this taxpayer only saw a $4,000 benefit instead of the $11,300 benefit the taxpayer who used the standard deduction in 2017. One item to note is the taxable income for both taxpayers is now the same.

 20172018
Income $ 100,000 $ 100,000
Itemized/Standard Deduction $ 20,000 $ 24,000
Taxable Income $ 80,000 $ 76,000

The final scenario is taxpayers who had itemized deductions greater than $24,000. This group will see no changes to their taxable income. This is because they used the itemized deduction in 2017 and will continue to use the itemized deduction in 2018.

Finally, below is a list of the 2018 tax year standard deductions.

Filing StatusStandard Deduction
Single12000
Married Filing Jointly24000
Married Filing Separately12000
Head of Household18000
Surviving Spouse24000
We would love to hear your feedback related to this post. Was it helpful? Were the concepts explained in a way that is easily understood? Would you like more in-depth discussion? Please let us know!