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Under the new Tax Cuts and Jobs Act, the standard deduction is almost doubled to $12,000 for single people, which is up from $6,500, and the standard deduction for married filing joint returns is also doubled to $24,000, which is up from $12,700 from what it would have been in 2018. The standard deduction for head of household is $18,000. Exemptions for blind and elderly (65 and older) remain in place. So, what does this mean to you?
Certainly doubling the standard deduction will also help (in addition to the rate cuts mentioned yesterday) to help reduce taxes for some people; however, it isn’t as good as it seems. Why?
Let’s take an example of John who is a single taxpayer. He would have had, under the old law, a $4,150 exemption for himself and a standard deduction of $6,500. Thus, his total personal exemptions and deductions (not counting itemized deductions) would have been $10,650. The new standard deduction for him will be $12,000; thus, his net benefit is that his overall personal deductions have gone up by $1,350. For people that don’t itemize, this will help reduce taxes somewhat.
However, if you were itemizing due to high property taxes, interest, state income tax etc., these deductions had to exceed your standard deduction, which was $6,500. Thus, increasing the standard deduction to $12,000 significantly reduces the benefit of itemized deductions and will result in lower amounts of itemized deductions that could easily overshadow the increased personal deductions of $1,350 that were given as a result of doubling the standard deduction.
Thus, for people who itemize deductions, this one change isn’t that good. In fact, it can be more detrimental than beneficial. If, however, you don’t have enough itemized deductions to take advantage of, to begin with, you will benefit by the doubling of the standard deduction. Does everyone understand this?
Sandy’s hot tip: Despite what I said above, doubling the standard deduction does greatly improve one of the best business tax strategies that I mention in my book, “Lower Your Taxes: Big Time” and in Taxbot University, which is to hire your children in your business. The reason is that the standard deductions shelters reasonable wages from being taxed. Thus, in prior law, I could pay up to $6,300 in reasonable wages tax-free to my kids in 2017. Under the new law, I can pay up to $12,000 income tax-free to my kids or grandchildren if the wage is reasonable for what they do and for the hours they work. Again this is another example of why people should have a business or consider starting up a business. As you can see there are a number of beneficial provisions for businesses.
Tomorrow, I will discuss the increase in the child tax credit, how it works, and what it means to you. So stay tuned.
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