Our new president hasn’t been sworn in yet, but he does have a tax overhaul proposal that has a decent chance of passing. Every change has winners and losers. Even changes that seem positive when first announced. One key provision of the new plan is to bump the standard deduction, from $6,350 single / $12,700 joint to $15K/$30K. Sounds great, right? But as they say, there’s no free lunch, and the personal exemptions are taken away. $4050/yr per person in 2017. Sounds simple, but it impacts taxpayers very differently, based on their circumstances.
- A couple who doesn’t itemize – Their exemption + deduction (E&D) rises from $20,800 to $30,000. $9,200 less taxable income.
- A couple that has $35000 in itemized deductions – They still itemize, but lose their exemptions. $8,100 higher taxable income.
- A 3-child couple who doesn’t itemize – Their E&D drops from $32,950 to $30,000. $2,950 higher taxable income.
- A 3-child couple that has $35000 in itemized deductions. They still itemize, but lose their exemptions. $20,250 higher taxable income.
- Single Parent with 3 kids, taking Std deduction – Their E&D drops from $25,500 to $15,000. $10,500 higher taxable income. Ouch.
The plan also collapses the marginal rate structure a bit. A couple with a taxable $75,000 in 2017 would have a tax bill of $9000 vs the current (2017) $10,317. For the first couple above, the non-itemizer, it’s just gravy, a bit of extra savings. For the itemizers with kids, it only offsets a tiny bit of the high total tax due.
For my family, our deductions are above the new standard deduction amount, so we will see a loss of the $12,150 in exemptions if the new code takes effect. On the flip side, there’s an interesting strategy that might help those who are in a similar position, with itemized deductions that are over this new (proposed) limit. A topic for the next article.