Individual Provisions in Tax Reform Part II

Since the recent signing into law of the Tax Cuts and Jobs Act on December 22, 2017, the CK team has received many inquiries about its effect on future tax burdens. According to a recent survey from HubSpot, 88.5% of small businesses don’t understand the full impact of the tax bill. It’s apparent that business owners are seeking more clarity. As your trusted business advisors, we hear you loud and clear. To help you get through this transition, we will be posting our latest insights into the effects of the new law. You can subscribe here to receive our weekly email updates.

Last week, we reviewed the regular and alternative minimum tax rate provisions affecting individuals. This week, we will review the changes in the standard deductions and child/family tax credit that individuals will see in 2018.

Standard Deduction

One of the goals of the 2018 tax reform was simplification of the tax rules. Early on, you may have even heard about filing your future tax return on a postcard. While we are still far from taxes being that easy, the higher standard deductions will mean that less individuals will itemize their deductions.

Similar to 2017, in 2018, individuals can claim the greater of their itemized deductions or the standard deduction. Here’s what the higher basic standard deduction looks like:

photo of 2018 standard deductions | Cray Kaiser Ltd.

As we mentioned, we expect many taxpayers will no longer claim itemized deductions. Part of this is due to the increased standard deduction, and part of this is due to the reduction in certain itemized deductions which we will cover next week.

Personal Exemption

While we see a benefit in the higher standard deduction, it is partially offset with personal exemptions being eliminated starting in 2018. Families with children will undoubtedly be hurt the most by this change. However, the new law provides for enhanced credits for families.

Child/Family Tax Credit

Under prior law, families could claim a maximum child tax credit of $1,000 for each qualifying child under the age of 17. The credit started to phase out for married couples with an adjusted gross income above $110,000 (singles at $75,000). Due to the lower income levels at which the credit phased out, many families did not receive the benefit of the credit.

In 2018, the credit has been doubled to $2,000 for each qualifying child under the age of 17.  Additionally, the phaseout levels have been increased. The credit now begins to phase out for married couples with adjusted gross income above $400,000 (all other taxpayers at $200,000).  In addition to the qualifying child credit, a partial credit of $500 is allowable for each dependent other than a qualifying child.

Here’s an example:

Let’s take a married couple with three children under 17 and an adjusted gross income of $200,000. In 2017, they would receive no child tax credit as their income is more than the phaseout level. Under the new law, they will receive a $6,000 tax credit ($2,000 per child * 3 children). The tax credit will more than offset the loss of the personal exemptions in 2018.

Next week, we will review the changes to 2018 itemized deductions. In the meantime, please call us at 630-953-4900 with your questions.