The impact of the new law on your taxable income
One of the most notable changes in the new law is the elimination of the personal exemptions and the increase in the standard deduction.
I am certain that everyone who is reading this post knows exactly what I am talking about, but for those of you who are not sure, here is a simplified version.
If you have your tax return within reach take a glance at the first page of your from 1040. There, you will see the various sources of potential income. A typical taxpayer may earn wages, interest income, dividend income, self-employment income and rental income just to name a few. If you have income from all of these sources, stop right here, you are too rich to worry about taxes by yourself please, refer to your personal CPA. The rest of you, please stick around. You don’t have a personal CPA; so, it might be useful for you to understand where your money goes.
After adding up your reported income, you arrive at your Adjusted Gross Income AKA AGI. Here is where the standard deduction comes in. The law says that a taxpayer may elect to deduct a standard amount from her AGI. This amount depends on your filing statues. For example if you are filing as single person or married but filing separately (MFS) from your spouse you are entitled to deduct $6,350 from your AGI. If you are married and filing jointly (MFJ) with your spouse, you are entitled to a deduction of $12,700. If you are an unmarried individual with a dependent, you are considered to be a Head of Household (HOH) and that entitles you to a standard deduction of $9,350.
By now you see a pattern: not every dollar you earn is subject to taxation. As you can see, the standard deduction reduces your taxable income. But wait there is more, here comes the personal exemption. The law also says that a taxpayer is entitled to an additional deduction of $4,050 for each person in the household. So a family of four for example will be entitles to an additional deduction of $16,200. This further reduces taxable income; thus reducing the tax liability.
The Tax Cuts & Jobs Act have eliminated the personal exemption and increased the standard deduction. Under the new law, a single filer or a person who is married and filing separately is entitled to a standard deduction of $12,000. A couple filing jointly will be entitled to a standard deduction of $24,000 and a Head of Household is entitled to a standard deduction of $18,000