Since the Tax Cuts and Jobs Act was signed into law, we have heard many politicians touting that the legislation doubles the standard deduction on individual income tax returns. This sounds like quite a big deal, and may have won some people over. However, the tax benefit derived solely from this component of the changes, will be minimal or nonexistent for most Americans. This is because the near-doubling of the standard deduction came with the suspension of personal exemptions. Let’s break down how much in earnings will be excluded from taxable income from the standard deduction and personal exemptions a married couple with two dependent children will have, for tax years 2017 and 2018.
MFJ + 2 kids, Does not itemize, 2017
Standard Deduction $12,700
Personal Exemptions ($4,050/person) $16,200
Excluded from Taxable Income $28,900
MFJ + 2 kids, Does not itemize, 2018
Standard Deduction $24,000
Personal Exemptions (suspended) $0
Excluded from Taxable Income $24,000
A married couple with two children who do not itemize their deductions in either year, actually will have a lower amount excluded from their taxable income from the standard deduction and exemptions, despite the grandiose appearance of the legislation doubling the standard deduction.
Let’s take a look at the amounts excluded from taxable income for someone like me from deductions and exemptions, a single person who also does not itemize deductions, for tax years 2017 and 2018.
Single, Non-dependent, 2017
Standard Deduction $6,350
Personal Exemption $4,050
Excluded from Taxable Income $10,400
Single, Non-dependent, 2018
Standard Deduction $12,000
Personal Exemption (suspended) $0
Excluded from Taxable Income $12,000
In this case, there will be a marginal benefit for the taxpayer because of this piece of the legislation, beyond that of an inflationary adjustment.
This is not to say that there won’t be a tax savings from this legislation; it is to say that the savings will likely not be derived from this particular change. Decreases in tax rates, expanded child tax credits, and changes in the Alternative Minimum Tax will be more effective causes of American families’ lower tax bills while doubling the standard deduction appears to be a good marketing tactic.
However, one demographic is (perhaps unintentionally) going to recognize the advantages of the new standard deductions: dependent students with earned income.
Assuming that high school and college youth aren’t providing more than half of their own support among other basic criteria, their dependency exemptions (or now, lack thereof, but still potential for credits or Head of Household status by claiming dependency) have been and still will be for their parents who they are still living with.
The suspension of personal exemptions does not make a difference to this crowd when tax time comes around. They were not claiming their personal exemptions and were only entitled to the standard deduction: $1,050 OR $350 + earned income, up to $6,350. Now, that earned income threshold is $12,000. Let’s break down how much taxable income my 17-year-old sister will have for 2017 and 2018, if she makes $10,000 between her two jobs both years, given that she is still my parents’ dependent in both years:
Standard Deduction (6,350)
Personal Exemption (claimed by parents) $0
Taxable Income $3,650
Standard Deduction (12,000)
Personal Exemption (suspended) $0
Taxable Income $0
To student dependents who make moderate amounts of money (approximately $6,350-20,000) at their jobs, the new tax legislation is going to be quite advantageous thanks to the provision doubling the standard deduction. To most of this group, it will be the difference between having some of their withholdings returned and having all of their withholdings returned. To some, it will be the difference between paying in and not paying in.
Working high school and college students have fared well under the Tax Cuts and Jobs Act.
Davis & Hodgdon Associates CPAs has been assisting Vermont individuals and business owners with tax consulting and retirement planning for more than 25 years. Call our office in Williston 802.878.1963 or Rutland 802. 775-7132 to schedule a tax planning strategy session today.
By Alexander Dixon, Davis & Hodgdon Associates CPAs