Items to know about the tax reform Part 2

August 3, 2018

This is a follow up to the previous blog post regarding the changes to the standard deduction in the new tax code. If you haven’t already, I recommend you go back to that post and read it prior to this. In this post we are going to discuss the changes to the personal exemptions which will be relatively short. We will also discuss how this will affect your taxes when considered along with the changes in the standard deduction.

The short story is the personal exemptions were eliminated in the new tax bill. Now that we have that out of the way it will be helpful to back up a step and explain what the personal exemptions were to explain the impact they will have on your taxes. Personal exemptions worked like the standard deduction. There were two main differences, first is the amount of the personal exemption is the same for everyone ($4,050 in 2017). Second, you receive an exemption for each person associate with the tax return (the taxpayer, spouse if filing jointly, and any eligible dependents). Most people are familiar with this when they would fill out their W-4 form at work that determines how much will be withheld from your paycheck for taxes. So, if you are married filing jointly and have 2 eligible dependents in 2017 your total deduction for personal exemptions would have been $16,100.
To illustrate the affect this has on your taxes we need to look at this change with the change in standard deductions. Let’s look at the table below that provides a comparison of your 2017 taxable income versus your 2018 taxable income. This table assumes the taxpayer is filing married filing jointly.

 2017  2018
Number of Exemptions2340
Income $ 100,000 $ 100,000 $ 100,000 $ 100,000
Itemized/Standard Deduction $ 12,700 $ 12,700 $ 12,700 $ 24,000
Personal Exemptions $ 8,100 $ 12,150 $ 16,200 $ -
Taxable Income$ 79,200 $ 75,150 $ 71,100 $ 76,000

As you can see from this table, if you have two exemptions which is the minimum you can have for a married filing jointly return then you come out slightly ahead in 2018 compared to 2017. However, if you have any dependents at all, then you will have a higher taxable income in 2018 than you did last year.

So far, this new tax plan seems like a bad deal for our example taxpayer. However, there are other items that are going to help the taxpayer out and likely reduce the amount of tax that is due in 2018. We will talk about more of those in the next installment.

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!