An Individual Taxpayer’s Guide to Tax Reform

The 2018 Tax Cuts and Jobs Act, the first major tax overhaul in over three decades, will impact different households in different ways. Two of the most talked about changes brought about by tax reform involve the increase in the standard deduction and the elimination of the personal exemption. While these changes are independently significant, viewing them together will help you understand their overall effects.

Standard Deduction Increase
Most notably, the 2018 tax reform law increases the standard deduction to $12,000, $18,000, and $24,000 for “single,” “head-of-household” and “married filing jointly” filers, respectively. This is great news for taxpayers who claimed the standard deduction in years past. The almost doubling of the 2017 standard deduction will decrease their taxable incomes by $5,650, $8,650 or $11,300, depending on their filing status.

However, taxpayers itemizing deductions in excess of the new threshold amounts will not be able to capitalize on the increases. The large pool of Americans itemizing deductions that are greater than the prior standard deduction but less than the new standard deduction may in fact be negatively impacted – and the negative effects tie directly to the elimination of the personal exemption.

An End to Exemptions
Prior to 2018, tax filers could decrease their taxable income by $4,050 for each dependent. The Tax Cuts and Jobs Act eliminates that personal exemption deduction. The change will affect certain households substantially, while others will not be affected. Consider the following examples:

  • John is a single man with no dependents who has been claiming the standard deduction. For 2018, he will see an increase in his standard deduction of $5,650 and a decrease in his personal exemption of $4,050. In total, these changes will net him a $1,600 decrease in taxable income.

    John is positively affected by these two tax reform changes.

  • Jack and Mary file “married filing jointly” and have two dependents. In years past, they have itemized deductions at $20,000. For 2018, Jack and Mary once again have $20,000 in deductions, which does not meet the requirement for itemizing. Therefore, they will have to take the new standard deduction of $24,000. But they will lose $16,200 in personal exemptions: a net $12,200 increase in taxable income.

    Jack and Mary are negatively affected by these two tax reform changes.

Use the following charts to determine, based on your 2017 deductions, how the first two changes of the tax reform could affect your household for the 2018 tax year*.

Single 1 exemption 2 or more exemptions
STANDARD Positive effect Negative effect
Married Filing Joint 2 exemptions 3 or more exemptions
STANDARD Positive effect Negative effect
Married Filing Joint 2 exemptions 3 or more exemptions
Itemized over $15,900 Negative effect Negative effect
Married Filing Joint 2 exemptions 3 or more exemptions
Itemized between $12,700 and $15,900 Positive effect Negative effect
Single 1 exemption 2 or more exemptions
Itemized over $7,950 Negative effect Negative effect
Single 1 exemption 2 or more exemptions
Itemized between $6,350 and $7,950 Positive effect Negative effect

*Figures are based solely on the standard deduction and exemption changes and do not take other tax reform changes into account.

If you have itemized in years past, but will now benefit from the standard deduction, there are some things to consider:

  1. Reconsider your reason for charitable donations:
    Everyone loves a cheerful giver, but if you have been donating to charitable organizations just to get a tax benefit, you may want to reconsider.
  2. Unreimbursed employee expenses:
    If you have unreimbursed job travel, union dues or job expense costs, consider asking your employer to reimburse these costs. While you may have accumulated these costs in the past for a tax benefit, you will not receive the benefit in 2018 if you take the standard deduction. Additionally, the Tax Cuts and Jobs Act eliminates miscellaneous itemized deductions, subject to a “2 percent floor.” (You can deduct certain expenses – unreimbursed job expenses, investment expenses, tax preparation fees, etc. – that exceed 2 percent of your adjusted gross income.) This may lead taxpayers with significant miscellaneous expenses who have previously itemized deductions to take the standard deduction in 2018.
  3. No need to prepay:
    In an effort to increase itemized deductions, you may have prepaid real estate taxes in years past. Under the standard deduction, there would be no incentive to prepay those items in 2018.

Other considerations
Child Tax Credit Changes
As noted earlier, taxpayers with multiple dependents are most negatively affected by the personal exemption elimination. To offset this disadvantage, the new law increases the child tax credit from $1,000 to $2,000. The Tax Cuts and Jobs Act also created a $500 credit that can be taken for any non-child dependent. A dependent must be under the age of 17 to be considered a “child” for child tax credit purposes. The income phase out for this credit does not start until $200,000 of taxable income for single taxpayers and $400,000 for married taxpayers filing jointly. Additionally, parents can receive up to $1,400 as a refund if the credit is larger than their federal income tax liability.

It is important to remember that while the standard deduction and exemption changes affect taxable income, the child tax credit decreases, dollar for dollar, the tax that you owe.

Other Itemized Deduction Limitations
If you are trying to determine whether you will be itemizing or taking the standard deduction for 2018, you will want to consider two additional Tax Cuts and Job Act changes.

  1. State and Local Tax Cap: Under the tax reform, taxpayers can only deduct $10,000 in state and local income.
  2. Mortgage Interest Deduction: If you purchased a home after December 16, 2017, you can only deduct the interest on up to $375,000 (single) or $750,000 (married filing jointly) of mortgage debt. Additionally, most interest deductions on home equity debt have been eliminated.

Staying informed and making appropriate decisions during the tax year will help prepare you for tax time next spring. While it is beneficial to stay in the know, you don’t have to do it alone. An HBK tax advisor is ready to help guide you along the way with a personalized tax projection.

About the Author(s)

Kaitlyn Cook is a Senior Associate in the Alliance, Ohio office of HBK CPAs & Consultants. She has been with the firm since December of 2014 and works on both tax and audit portfolios as well as specializing in forensic accounting cases.

Kaitlyn is a Certified Public Accountant and a Certified Fraud Examiner in the state of Ohio. She earned her Bachelor of Arts degree in Accounting from the University of Mount Union and her Masters of Professional Practice in Accounting degree from Ohio Northern University. She is a member of the American Institute of Certified Public Accountants, the Ohio Society of Certified Public Accountants and the Association of Certified Fraud Examiners.

Kaitlyn is the President of the Alliance Rotary Club and the former Treasurer of the Alliance chapter of Habitat for Humanity Young Professionals.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.