The tax reform bill that became law toward the end of 2017 took effect for the 2018 tax year. When you file your 2018 return early next year, you'll get your first chance to see the actual impact of the many changes to the tax laws that the legislation made.
One of the biggest changes involved a big boost to the standard deduction for 2018. However, even though standard deduction amounts are much higher than they were before, not every taxpayer will benefit from them. In particular, there are three main reasons why taxpayers could miss out on the full impact that a higher standard deduction should have.
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The new standard deduction
The change to the standard deduction in the tax reform package was substantial. As you can see below, the amounts came close to doubling from previous figures that applied to 2017 tax returns.
With increases of as much as $11,300, someone in the 37% tax bracket could expect to see savings of more than $4,000 on their taxes as a result of the move. However, if any of the following situations applies, then your net benefit from the change in standard deductions could be a lot less than you expect.
1. You took personal exemptions
Under previous law, nearly everyone was eligible to take personal exemptions. The impact of these exemptions was to reduce your taxable income in a way that's almost identical to the reduction for the standard deduction, with the amount for 2017 being $4,050 per exemption. However, the new tax law eliminated personal exemptions entirely.
Almost 140 million taxpayers took an average of $8,238 in personal exemptions during 2016, the most recent year for which information's available. For your return, if $4,050 multiplied by the number of personal exemptions exceeds the increase in your standard deduction, then you could end up with higher taxable income than you would have had under the old law.
2. You itemized your deductions
The majority of taxpayers take the standard deduction, but under previous law, a substantial number got bigger benefits from itemizing. More than 45 million taxpayers itemized their deductions on their returns in 2016, and the average amount that these taxpayers claimed in itemized deductions was $28,645 per return.
Not every person itemizing their deductions was able to deduct this much. But if your current itemized deductions for 2018 exceed the amount of the standard deduction, then it won't really matter what the standard deduction actually is.
3. You used to itemize, but it no longer makes sense
On a related note, a lot of people who used to itemize in the past will no longer find it worth their while to do so going forward. A number of new provisions affected the amount taxpayers can itemize, the most important of which is the new limitation of $10,000 on deductions of amounts paid for state and local taxes.
That will have an especially huge impact on higher-income earners, especially in high-tax states where income and property taxes are most expensive. If those taxes were the primary reason you itemized in the past and they're now limited, it could be that the new standard deduction will be your best bet -- despite its being much lower than whatever you claimed as itemized deductions in past years.
Keep a close eye on your taxes
One thing to remember is that even if your taxable income is higher than it was last year because of this combination of law changes, it's possible your overall taxes will be lower. That's because of reductions in tax rates for various brackets across the income spectrum.
Even so, it's important to pay attention as you prepare your taxes for the 2018 tax year. With all the new changes in place, finding out how much you actually save in the end will be an important data point in evaluating how much good tax reform did for you and your family.
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