Taxpayers that claimed the standard deduction for tax years 2017 and before will see that deduction nearly double under the Tax Cuts and Jobs Act of 2017. While that is exciting news, it is important to understand that personal exemption amounts have been taken away. This change is for all taxpayers whether they claimed the standard deduction or itemized their deductions.
Prior to 2018, taxpayers claimed an exemption for themselves, spouses (if filing jointly), and each dependent. The amount of each exemption for the 2017 tax year was $4,050. That means for a couple with three children, they were able to reduce their taxable income by $20,250 before calculating the tax owed ($4,050 times 5 exemptions). The elimination of personal exemptions will have the largest impact on families with multiple children.
One additional change in tax reform will help offset some of the loss that taxpayers may encounter as a result of the personal exemption repeal. Previously, a taxpayer could utilize a tax credit for dependent children meeting certain criteria up to $1,000 with the ability to claim a refund if the credit exceeded the tax liability up to the amount of the credit. Now, the full credit amount has doubled to $2,000 with the possibility of a refunded amount up to $1,400.
These changes, along with the lower tax rates and larger tax brackets, will require individual tax payers to carefully consider the impact of tax reform on them personally and to plan accordingly.
For more information on Tax Reform and its implications for churches and nonprofits, please consider attending one of the free, in-person National Forums on Tax Reform and/or watching our free Tax Reform Webinar-on-Demand.