A tax reform bill called the Tax Cuts and Jobs Act (TCJA) proposed changes by the IRS that were passed at the end of 2017. These changes included the increase of the standard deduction for married couples and singles, as well as the elimination of personal exemptions, which has altered how the public is to calculate their taxes. How will the removal of a personal exemption affect you? With our financial acumen, TPI Group is here to provide you with everything you need to know to better understand and calculate your taxes.
What is a Personal Exemption?
A personal exemption is a set amount of money you are allowed to deduct from your taxes, regardless of your filing status.
If you have dependents, you can also deduct their personal exemption from your taxes; however, your dependents cannot simultaneously apply it to their own taxes. It’s important to remember that even if you don’t apply their personal exemption to your taxes, the fact that you can, means they automatically cannot apply it to their own taxes. A personal exemption is permitted once per taxpayer.
If you are filing your taxes separately from your spouse, you can apply their personal exemption to your taxes:
- if your spouse didn’t have an income.
- if your spouse is not filing their own return.
- if your spouse is not already a dependent.
The personal exemption for 2017 was $4,050, which means you can claim your exemption on your 2017 taxes this coming October 15 if you were given an extension.
The Different Between Exemptions and Deductions
Exemptions and deductions help in reducing your taxable income, but the underlying difference is this:
- Exemptions rely upon your filing status—it determines the number of exemptions you can claim—and the number of dependents you have.
- Deductions rely upon your expenses.
The standard deduction is a set amount of money—determined by your filing status—that you are allowed to deduct based on your expenses. Here are some of the 2017 figures:
- Single taxpayers have a standard deduction of $6,350.
- Married taxpayers have a standard deduction of $12,700.
- The head of a household taxpayer has a standard deduction of $9,350.
Deductions are also offered to salaried workers, self-employed workers, and students if they’re paying off student loans. Additionally, there are many people of 65 years and older who qualify for a higher standard, including single and married individuals, widows and widowers, heads of households, as well as blind individuals.
It’s important to note that the TCJA also made changes to itemized deductions, which were beneficial if they totaled an amount greater than the standard deduction. Now, high-income individuals are facing lower deductions.
The Impact on Your 2018 Taxes
Families with several children, as well as single-parent families, will be hit the hardest now that the personal exemption has been removed. Increasing the standard deduction and the child tax credit will compensate for the loss, although it will be more beneficial for married couples who don’t have children yet. The personal exemption is said to return in 2025.
If you need assistance with filing your taxes for October 15, TPI Group is here to provide tax preparation and planning, IRS audits, accounting, and more for high-income individuals and companies in various industries. Let us help you organize your affairs and file on time. Contact us today for a free tax planning consultation!