Last week we outlined some changes affecting individual taxpayers, including adjustments to tax rates and brackets. This week we want to draw your attention to a few more parts of the tax reform bill that will impact many individuals and families. This bill encourages a broad shift from itemized deductions to a new, larger standard deduction. Although circumstances will vary from person to person, the Heritage Foundation estimates that 90% of taxpayers will claim the standard deduction (up from about 70% now).
To start, Congress nearly doubled the standard deduction. It rose from $6,350 to $12,000 for individuals, and $12,700 to $24,000 for married couples. Many filers will find their tax return preparation substantially simplified, while other taxpayers, who may have benefited from personal exemptions (including larger families), may find that they really don’t like the impact of this so-called simplification. The bill removes personal exemptions completely; in other words, no longer can parents claim $4,050 per dependent. However, the impact of this change is somewhat balanced by an increase in the child tax credit, which Congress also doubled to $2,000. If the parents do not owe taxes, they can still claim a refundable credit of $1,400 per child. This credit will phase out starting at a modified adjusted gross income (MAGI) of $200k for individuals, or $400k for married couples.
On top of all that, there is yet another new credit, this time for other types of dependents! Because the child tax credit only applies to children under 17, a $500 non-refundable credit is offered for children over 17, and non-child dependents of any age. The latter group may include elderly parents, adults with disabilities, and so forth.
Again, for many the tax process has been simplified: take the larger standard deduction and apply credits to the remainder. No longer will that twenty percent of taxpayers painstakingly itemize deductions on Schedule A. Of course, please continue to track your income and expenses, as some will still find themselves better off itemizing deductions instead of taking the standard—but that will likely be a minority. We will build on this next week when we will look at the variety of deductions and adjustments that Congress eliminated.