Tax Reform for Individuals: Standard Deduction and Personal Exemption Changes

If you’re used to itemizing deductions for expenses such as mortgage interest, state and local income tax and charitable contributions, you may be changing the way you file your tax return following the Tax Cuts and Jobs Act (TCJA). Under the new tax law, the standard deduction amount and personal exemptions have changed and will affect a large number of taxpayers. Below we discuss what has changed and how individuals will be affected when it comes to filing taxes.

Previous Law

Under the previous tax law in 2017, the inflation-adjusted standard deduction was $6,350 for single and married filing separately filers, $9,350 for heads of household, and $12,700 for joint filers and surviving spouses.

An additional deduction was given to those who are over the age of 65 or blind. The additional deduction in 2017 included $1,550 for single or heads of household and an additional $1,250 for joint filers, surviving spouses, and married filing separately filers. The standard deduction amounts were indexed annually for inflation by the Consumer Price Index for all-urban consumers (the “CPI-U”).

Before the TCJA, an individual reduced adjusted gross income (AGI) by personal exemption deductions in addition to the standard deduction or their itemized deductions. Personal exemptions were allowed for the taxpayer, spouse and any dependents. Indexed annually for inflation, in 2017 the amount for each personal exemption was $4,050.

New Law

Under the new TCJA, effective for tax years 2018–2025, the standard deduction nearly doubled. The new standard deduction increased to $12,000 for single and married filing separately filers, $18,000 for heads of household, and $24,000 for joint filers and surviving spouses. The additional deduction for those over the age of 65 or blind remains unchanged and will continue to increase for inflation based upon the CPI-U. However, the standard deduction dollar amounts will be indexed for inflation going forward using the Chained Consumer Price Index for all-urban consumers (C-CPI-U) rather than the CPI-U.

The new tax laws of the TCJA have suspended the personal exemption deductions for the tax years 2018–2025, so there will be no deductions allowed for personal exemptions.

Impact on Individuals

Because of the new standard deduction increases, there will be less taxpayers itemizing their deductions and more choosing the standard deduction. Taxpayers can no longer claim an exemption for themselves, their spouse, and their eligible dependents. The new tax provisions, including the higher standard deduction may or may not make up for this change depending on your tax situation.

Visit our Tax Reform Resource Center for videos, blog posts and resources on how tax reform will impact you, your family and your business. Contact an Anders advisor with questions on how the new tax law will affect you.