Last week, I blogged about four areas where taxpayers will see big changes in 2018 under the Tax Cut and Jobs Act (aka New Tax Law). All the big headlines are about three of those changes — itemized deductions vs. the new standard deduction, lower tax brackets, and higher child credits. The fourth change, elimination of the personal exemption through 2025, is not in the headlines, but it could be significant to some taxpayers.
Before the new tax law became effective, taxpayers got a deduction of $4,050 per qualified person, called a personal exemption. That deduction goes away completely through 2025, hitting some families pretty hard. It hasn’t been mentioned much, with all the talk about doubling the standard deduction. Many taxpayers will miss the personal exemption, but some won’t.
Who won’t miss the personal exemption?
One or two-person households that weren’t itemizing their deductions under the old tax law won’t miss the personal exemption. They get a higher deduction under the new tax law. For example, in 2017, a single taxpayer that didn’t itemize could take a standard deduction of $6,350 and a personal exemption of $4,050, for a total of $10,400. In 2018, that same taxpayer can take a standard deduction of $12,000. No personal exemption. But that taxpayer is happy because she gets to reduce her taxable income by $1,600 more than before.
Who will miss the personal exemption?
Examples of taxpaying households who will miss that $4,050 deduction per person are too numerous to describe. To give you an idea, here are three scenarios:
- Married couples with no dependents filing jointly in 2017 with $20,000 of itemized deductions could also deduct $8,100 of personal exemptions, for a pretty attractive total of $28,100. Those same couples can only deduct the new standard deduction of $24,000 in 2018.
- A head of household non-itemizer with two qualified dependents filing in 2017 could deduct a total of $21,500, a standard deduction of $9,350 and personal exemptions of $12,150. In 2018, that head of household will only deduct the new standard deduction of $18,000.
- A five-person household with $30,000 of itemized deductions got to reduce their taxable income by a total of $50,250 in 2017, after adding the $20,250 in personal exemptions. Same family in 2018? You guessed it – only a $30,000 deduction.
I could go on and on. Taxpayers really need to look at how elimination of the personal exemption will impact them in 2018. Better to figure it out now and plan for it, instead of getting an expensive surprise when filing taxes next year.