Tax Reform – Standard Deduction Changes

Dec 11, 2018Accounting, Business, Business Tax

The new tax reform law is the most significant tax legislation in decades. Now businesses and individuals are trying to digest the details and evaluate how the changes will impact their tax situation. Fortunately, Smith Schafer can help you figure things out.

One of the major impacts of the Tax Cuts and Jobs Act (TCJA) are the changes to the standard deduction amounts.

What is a standard deduction? The standard deduction is a deduction of a fixed dollar amount, adjusted each year for inflation, reducing a taxpayer’s taxable income.

Under the new the tax reform act, the standard deduction amounts available for each filing status have increased significantly compared to 2017. In addition, the act retains additional deductions for the elderly and the blind.

STANDARD DEDUCTION (FOR YEARS 2018-2025)

  • Married Filing Joint or Surviving Spouse – $24,000  ($13,000 in 2017)
  • Head of Household – $18,000 ($9,550 in 2017)
  • Married Filing Separately or Single – $12,000 ($6,500 in 2017)
  • Age – If you are age 65 or older, you may increase your standard deduction by $1,600 if you file Single or Head of Household. If you are Married Filing Jointly and you OR your spouse is 65 or older, you may increase your standard deduction by $1,300. If BOTH you and your spouse are 65 or older, you may increase your standard deduction by $2,600.
  • Blindness – If you are legally blind, you may increase your standard deduction by $1,600 if filing Single or Head-of-Household. If you are Married Filing Jointly and you OR your spouse is blind, you may increase your standard deduction by $1,300. You may increase your standard deduction by $2,600 if BOTH you and your spouse are blind.

While the standard deduction under the new tax reform is higher, it may not mean the taxpayer’s deductions will be higher than pre-tax reform years. In addition to changing the standard deduction amount, the act includes several provisions modifying deductions many taxpayers are used to. Below are samples of changes to taxpayer’s individual tax returns impacted by the standard deduction.

ITEMIZED DEDUCTIONS 

A taxpayer is allowed to claim the standard deduction if their total itemized deductions for the year are less than the standard deduction amounts listed above. Along with changes to the standard deduction under TCJA, other itemized deductions have been changed, eliminated or restricted by the new tax reform. For example:

  • a maximum of $10,000 allowed for state and local tax deduction,
  • unreimbursed medical expenses exceeding 7.5 percent of  adjusted gross income (taxable income plus standard/itemized deduction) and
  • modified mortgage interest limitations on mortgage debt.

The result of the changes to itemized deductions and the higher standard deduction is that many taxpayers may not receive a benefit from itemized deductions and will instead utilize the standard deduction.

FILING REQUIREMENTS

Prior to the TCJA, taxpayers were required to file a tax return if their income reached the amount of the standard deduction, plus the personal exemption amount. Under the TCJA, taxpayers are required to file if their income reaches the new increased standard deductions.

Questions?

For additional information on the TCJA tax reform and its impact on individuals:

The new tax law is broad-reaching and complicated. In this time of change, Smith Schafer can be a valuable resource, helping you stay atop the latest developments. Contact us today to learn tax saving strategies that best fit your situation. We look forward to speaking with you soon!

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