Learn which exemption, deduction & credit changes impact you and your family this tax season

Published 12:08 am Wednesday, February 28, 2018

Let’s be honest: we all want a bigger tax return. And the easiest way to achieve that goal is through exemptions, deductions and tax credits.

However, big changes are coming to all three thanks to the tax bill. While these adjustments won’t affect your 2017 tax filing, it’s important to know what to expect as you plan for 2018 finances.

“It’s not enough to know if you’re going to pay more or less taxes. You might pay less, but still have significant changes to your taxes that mean, for example, you won’t get a tax benefit from giving to charity next year. Every taxpayer is going to be affected and may need to learn new strategies to get the best tax outcome,” explains Kathy Pickering, executive director of The Tax Institute at H&R Block

Perhaps the most notable change for most taxpayers is the elimination of personal exemptions. Prior to the passage of the “Tax Cuts and Jobs Act” taxpayers could claim exemptions for themselves, their spouse and qualified dependents, such as children or other relatives. In 2017 the personal exemption was $4,050.

“Without this benefit, more of a taxpayer’s income is subject to taxation. For example, in 2018 a married couple would potentially have to pay taxes on more than $8,000 of their income they previously wouldn’t have,” Pickering says.

However, before you start to panic, other changes in the legislation may significantly offset this loss.”

“Virtually all taxpayers will be impacted by the loss of personal and dependent exemptions, which will increase their taxable income. However, it is important to look at the taxpayer’s whole situation,” Pickering says.

The standard deduction, for instance, has nearly doubled. The IRS allows taxpayers to either itemize their deductible expenses or choose the standard deduction – a set amount based on filing status. In 2018, the standard deduction for individuals will rise from $6,350 to $12,000; for head-of-household filers, it increases from $9,350 to $18,000; and married individuals filing jointly can deduct $24,000, up from $12,700.

“The larger standard deduction will likely decrease the number of taxpayers who itemize to decrease their taxable income,” adds Brian Ashcraft, director of Tax Compliance for Liberty Tax.

The new tax law also doubled the Child Tax Credit from $1,000 to $2,000 per qualifying child in 2018. The age cut-off remains the same (under 17 at the end of the year), but there are a couple other changes to the credit. The law limits the refundable portion to $1,400 and lowers the earned income threshold for the refundable credit to $2,500.

“For some taxpayers this increase, coupled with the larger standard deduction, may make up for the loss of the personal exemption. For large families, it may not have the same effect,” Ashcraft explains.

Pickering also notes that large families may see the most significant changes in their 2018 filings compared to 2017 filings.

“For a husband and wife filing jointly with four qualifying dependents that could equal $24,300 in personal exemptions, depending on income, plus a standard deduction of $12,700 for a total of $37,000 in 2017,” she explains. “Under the new tax law, the same family may be eligible for a $24,000 standard deduction and $8,000 in child tax credits for a total of $32,000.”

Navigating tax exemptions, deductions and credits is never simple – even less so with these new changes. That’s why, as you finish filing your 2017 taxes and look forward to the new year, you should consider consulting a tax expert to help ensure you maximize your 2018 return.

“Whether you prepare your own taxes or get assistance, this is the perfect time to talk with a tax professional to get help understanding how your situation may be affected by the new legislation and any adjustments you may need to make to get your best tax outcome in the future,” Pickering says.

— By Carley Lintz, CTW Features