Personal exemptions

We can assume the tax writers sought to simplify the tax code by the very large increase in the standard deduction. The increase in the standard deduction had a price–the repeal of personal exemptions. And for taxpayers who 1) don’t itemize deductions and 2) claim no dependents, the repeal always results in a reduction of federal tax. That’s because the new standard deduction is higher than the previous law combination of standard deduction and personal exemption.

The result of the repeal becomes much more complex when itemized deductions or dependents (other than the taxpayer and spouse) are factored in.

Under the previous tax code, each taxpayer, spouse and dependent reduced taxable income by the personal exemption amount ($4,050 in 2017). For high income taxpayers, these personal exemption deductions were phased out as income increased. In the new tax law, all personal exemption deductions are repealed for all taxpayers.

In their place, the standard deduction has vastly increased for all taxpayers, and tax rates have been reduced in all except the lowest tax bracket. Also, the Child Tax Credit has doubled, the eligibility of the credit has vastly increased, and a new Family Tax Credit has been introduced.

The increased standard deduction and the changes in allowed itemized deductions are expected to reduce the number of filers who itemize their deductions from about 33% under the old law to about 8% under the new law. This may be the only ‘tax simplification’ in this dizzying new tax code!

In some limited situations, the repeal of personal exemptions for lower-income taxpayers who itemize will increase their tax bill. Click here for an example.

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