Come new tax season, come new rules. The Tax Cuts and Jobs Act brought along a revelling sequence of change for fellow Americans. In the previous blog on 2019 New Tax Rules, we talked about the changes in tax rates and the annual adjustments in brief. In this blog, we will talk about the changes in the standard deduction, personal exemptions, and the child tax rate that the IRS has brought in time for this filing season. Let’s walk you through them one by one:
The standard deduction would be higher
The Tax Cuts and Jobs Act nearly doubled the standard deduction from what they were previously. All American taxpayers can now choose between using the standard deduction or itemized deductions. What itemizing deductions mean is that you add up all of the individual tax deductions to which you're entitled and then you subtract those from your adjusted gross income or your AGI. To familiarize you with these terms, AGI is-Adjusted Gross income- which is your total income minus a few minor adjustments here and there, like student loan interest or any other sort of additional interest you might be paying.
The standard deduction is a set amount that is chosen to be deducted instead. As a taxpayer, it is your frill to choose whichever of the two methods seems more beneficial to you. As the majority of households have already been inclined towards the standard deduction method more, this array of changes are set to create a whirl amongst taxpayers.
Based on our data sources from IRS, lets us see a comprehensive comparison between standard deductions of 2017, 2018, and 2019.
|FILING CATEGORIES||STANDARD DEDUCTIONS- 2017||STANDARD DEDUCTIONS- 2018||STANDARD DEDUCTIONS- 2019|
|Single/ Two married individuals filing separately||$6350||$12,000||$12,200|
|A married couple, filing jointly||$12,700||$24,000||$24,400|
|The head of a household||$9350||$18,000||$18,350|
The outcome of this change is foreseen as more Americans filing their returns using standard deductions, as per rough estimation by experts, this number is bound to go up as high as 95%. According to the yesteryear data, approximately 70% of individuals filed their tax returns using the standard deduction, while the remaining 30% of the taxpayers found that it was more beneficial for them to itemize.
Bidding good-bye to personal exemptions!
The surging figures of the standard deductions are not be misunderstood for the fact that the taxpayers are going to enjoy double exemptions, the IRS has played intelligently enough to keep checks and balances, let's read on to know how is this.
While we witnessed an increase in the value of the standard deduction, a not so fortunate event of omission of personal exemption also took place. This change was backed up by the fact that the lawmakers wanted to simplify the tax code and to do that and abate confusions, the standard deductions were surged significantly to compensate for the fact of getting rid of the personal exemption. In case you are new to filing taxes or if you were inquisitive in general, here’s a simple brief about the personal exemption. It can be explained as a certain amount of income taxpayers exclude from their taxable income every year. Before this change was rolled out, a taxpayer could claim one personal exemption for themselves, their spouse, and one for each of their dependents.
In the year 2017, each personal exemption was an effective $4,100 tax deduction.Before this, there was no bar as to the number of dependents one could claim on themselves. As an example, we can take a hypothetical situation, where a married couple with 4 dependent children, now this couple could claim six personal exemptions. This pushes us to say that, the higher bar of standard deductions hasn't been a boon for larger families.
A double raise in the child tax credit
It might be so, that larger family with multiple kids perhaps find it mauling, the whole revoking of the personal exemption, for pretty obvious reasons. Well, to make for that slot of disappointment, we see that the child tax credit has been increased, and along with that more of the credit is now refundable with the income limitations being far less restrictive.
One shouldn't confuse credit for a deduction, both of them are two very different factors. To put it in simple words, a deduction would be something that would lower the amount of income that the government would consider when it comes to taxing you as an individual, on the other hand, a tax credit reduces the amount of tax you owe on a whole. Say, if you owe $100 in tax, a $100 credit would pay it off for you, what a deduction would do, is that it would just lower the income level that your tax rate would apply to. Thus a $100 credit is way more affable than a $100 deduction.
The whole tax reform proved to be good for the Child Tax Credit, as it was doubled to $2,000 per qualifying child under the age of 17. Up to $1,400 of this amount is refundable, which means that it can be claimed even if the taxpayer's existent federal income tax liability is already zero. So this means that even in a case where a parent has a small income or owes no federal income taxes, they could still avail benefits of this and get money back.
We see that now with the popular tax reforms, the income phase-out thresholds are remarkably higher compared to what they were previously, this lets the credit be readily available to far more Americans. Upon observing the trends, we see that the tax benefits are targeted towards benefiting low- to moderate-income taxpayers, and not very much towards the rich. However, the range of people who can benefit from the Child Tax Credit has been significantly expanded.
|FILING CATEGORY||FULL CREDIT-MAXIMUM AGI||AGI THRESHOLD WHERE CREDIT DISAPPEARS|
|Married Filing Jointly||$400,000||Over $440,000|
|Head of Household||$200,000||Over $240,000|
|Married Filing Separately||$200,000||Over $240,000|
A single individual filing taxes on their own can have a maximum AGI of $200000 and this credit ceases to exist when the AGI crosses over 240000, similarly for a married couple who files their taxes as a joint entity can have a maximum of $400000 for a full credit and not beyond $440000. Now we see that the head of a household can again have an AGI of $200000 in compliance of full credit, and finally, a married couple who file their taxes separately can have a maximum AGI for $20000 for availing full credit with the maxed out limit of $240000.