by Anthony Rivieccio
January 7, 2018
You’ll hear this a lot this upcoming tax season: ” The Standard Deduction has doubled- no reason to itemize”. You might even hear, ” Just use the standard deduction, and you’ll get more tax money back”. You will start to hear this from : Our President, The Media, your friends, brochures- but not from a true financial professional
Yes, the standard deduction is an ” automatic deduction based on filing status” that one can take- unless they can itemize, and if that amount is more, then of course you would itemize and take the higher amount . So yes, there is some truth that ,for a single person, if that standard deduction went from $6,100 ( 2017) to $12,000 (2018), then yes, that is an EXTRA $6,100 of free deductibility . So far the front side of the coin looks wonderful
But now comes the three card Monte trick.
Exemptions are now eliminated from the IRS code. An exemption is that $4,000 deduction you get , per person for being in the home . I explain to my Clients to think of it as your ” household Deduction”. So if your single you get a $4,000 exemption. Married, that’s 2 or $8,000 . Three in the home ( a child);that $12,000 in exemptions.
So yes in 2017, a Single person, for example, would have received an automatic 2 part deduction:
Standard Deduction: $6,100
Gain of deductibility $10,100
Based on a Fed tax bracket of 25%, that’s $2600 of tax savings
BUT NOW WE ARE WALKING INTO TAX SEASON 2018 -WHERE THE STANDARD DEDUCTION HAS DOUBLED AND EXEMPTIONS ARE ELIMINATED!.
SO, how does it look for that Single person now:
Single 2017. 2018
Standard : $6,100. $12,200
exmptions $4,000. 0
net Gain. $10,100. $12,200
Wonderful!. This $2100 of extra deductibility will ( in a 25% Fed bracket) will bring them an extra $600 in their refund.
So you would think if a single person had a child, they would receive more right?
Head of household ( 1 child)
standard : $9,175. $18,350
exemptions $8000. 0.
net Gain. $17,175. $18, 350
This $1175 of extra deductibility savings will bring an extra $294
So yes , on the surface, ” doubling the standard deduction” can work. it can bring you more money ( so obviously if you can itemize, you can get back even more) ….but wait a minute…
Let’s try that math again on the same ” head of household” person and assume she had 2 kids instead of 1, using the same 2017 & 2018 tax rules
head of household
1. child. 2 kids / 2 kids *
2017. 2018 l 2018
standard : $9,175. $18,350 $18,350
exemptions $8000 0. $ 12,000
net Gain. $ 17,175 $18350 $30,350**
Extra in Refund $294. * $3,000
* If exemptions were kept at $4000
Hmm, so by getting rid of the exemption rules while ” doubling ” the standard deduction, this person LOST tax deductibility money, from 2017 to 2018. And the $12,000 in LOST deductibility ( from 2018-2018) based on a 25% Federal tax bracket, would have brought this person back $3,000 (**) instead of the expected $,1,175 in deductibility, which will bring only an extra $294 in their refund.
Three card Monte?
That’s interesting!. Now let’s try that marriage secnerio-with no child
married ( no children)
2017. 2018 standard $12,200. $24,400
exemptions $8000 $. 0
net. $20,200. $24,400
This $2200 of deductabiy savings will bring , an extra $650 in their refund
Let’s try the marriage secnerio- now with 1 child.
married 2017. 2018. 2018
no children. / 1 child
standard $12,200. $24,400. $24,400
exp $8000. $. 0. $12,000 net $20,200. $24,400 $36,400
While the new law will bring an extra $2,200 in deductibility (2017-2018) which will bring an extra $650 in their refund , if the Government would have kept the exemptions (2018-2018) the deductibility an extra $12,000, which would have brought an extra $3,000 in their tax refund instead . So did they gain $650 it lose $3,000 ( or $2,350 net)
So, it looks like fuzzy math from both sides of the coin. Doubling the standard deduction gives you extra free deductibility while the loss of exemptions takes most of the prior deductibility away- like a 3 card Monte game.
And since exemptions change the game – more than the doubling of the standard deduction , once you have ( in our math) a TOTAL OF MORE THAN 2 PEOPLE IN THE HOUSEHOLD, your gaining crumbs, while losing more loads of bread.
So when my editor boss, who just got married and had a child in 2018 asked me to explain how this law helps him – this is the true 2 sided answer.
” Well Mr Bossman, it looks like your extra deductibility will technically lower your taxable income by $2,200, which should bring you back an addition $650.
But if the Government would have kept the exemption law, with the child, you could have received, $3,000 more”.
So a tax decrease/ increase? Sounds like 2 sides of the same coin? Like a 3 card Monte game- the ball slips from one cup to the other?
It’s almost the same right!. While the Government is giving them $650, they took away the $3,000 , that would have occurred without the exemption change.
In real dollar terms, if this married couple with a child is making $65000 a year , the extra $650 is a 1 % tax decrease. The lost $3000 translates to a 5% loss vs 2017 taxes.
So you gained 1% but lost 5%?
Get ready, Abbott & Costello’s 13×7=28, movie skit from the 1950s might be coming back real soon. When you see the new movie release- in your tax REFUND- or lack thereof. I have a sad feeling the 13×7=28 skit is gonna make more sense than this new Tax Math, which is now the law of the land.
Professor Anthony Rivieccio, MBA PFA is the founder and CEO of The Financial Advisors Group, celebrating its 20th year as a fee-only financial planning firm specializing in solving ones financial problems. Mr. Rivieccio, a recognized financial expert since 1986, has been featured by many national and local media including: Klipingers Personal Finance, The New York Post, News 12 The Bronx, Bloomberg News Radio, BronxNet Television, the Norwood News, The West Side Manhattan Gazette, Labor Press Magazine, Financial Planning Magazine, WINS 1010 Radio, The Bronx News, and The Bronx Chronicle. Mr Rivieccio is also currently an Adjunct Professor of Business , Finance & Accounting for both, City University of New York & Monroe College, a Private University. For financial assistance , Anthony can be reached at (347) 575-5045. If you would like a FREE copy of our 2018 Tax e-Guide just give our office a call. Feel free to visit their FACEBOOK Business page for past Financial Focus articles: www.facebook.com/iwantmytaxmoney
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