Are You Exempt?
Few of us are exempt from income taxes, we know that. But when you prepare your taxes, how dependent are you on the dependent exemptions for reducing your taxable income? If the answer is "VERY", then you may be disappointed with last year's tax reform bill.
The 2017 reform bill made two major changes that effect most people, and a third that effects low-income earners with children as dependents. The first, and biggest, is that the standard deduction has been raised: For singles, from $6,300 to $12,000 and for married filing jointly, from $12,600 to $24,000.
That's a big bump. In fact it could completely eliminate the usefulness of itemized deductions. Unless you have a huge mortgage, there's a good chance your mortgage interest deduction will no longer be be enough to side-step your standard deduction. For everyone else it's no-brainer big gainer.
Flip side: Exemptions will no longer be available. If you have children that could be a big deal, even though it is somewhat mitigated by the increase in the Earned Income Credit (EIC) for low income earners. Let's look at a few examples.
Singles get an increase of $5,700 in the standard deduction but lose the $4,050 (in 2017) exemption, for a net improvement of $1,650. That $1,650 comes off your taxable income, which means the saving is based on your tax bracket -- at 35% you'd save $577.50, at 12% you'd save $198.
Couples with no children get an increase of $11,700 in the standard deduction but lose $8,100 in exemptions, for a net improvement of $3,600, which means a tax savings of $1,260 in the 35% bracket and $432 in the 12% bracket.
Nuclear families - those with two parents and two kids - see a gain of $11,700 in the standard deduction but lose $16,200 in exemptions. That loss may be offset by Earned Income Credit, which could range from $120 if the taxable income is $50,000 but $5,385 if the income is only $25,000. Leaving the EIC out of the equation, nuclear families come out $4,500 behind, which translates to $540 in the 12% bracket and $1,575 in the 35% bracket.
What about larger families? I know a couple with six kids, so they come out $20,700 behind. That means in the 12% tax bracket they will owe $2,484 more but in the 35% bracket they will owe $7,245 more. That's very tough love.
It can get more complicated quickly as more variables are included, but you get the picture: You need to take these changes into account when figuring out your income taxes versus what they were last year.
Not up to the challenge? I can help. Set up a free no-obligation appointment at https://meetme.so/DaleNapier . We'll estimate the reform's impact on your bottom line, and get you ready for the new year.