Before you celebrate the increased standard deduction being promoted in the new tax law, take a closer look. The legislators neglected to tell you that they eliminated the personal exemption deduction in 2018!
The increased standard deduction is not what it appears. If you are single in 2017 you qualify for a standard deduction of $6,500 and a personal exemption of $4,050 for a total deduction of $10,550. Under the new law in 2019 you will get a standard deduction of $12,000 and the personal exemption deduction has been eliminated. Your total deduction would be $12,000, an increased deduction of $1,450 and you would enjoy a tax decrease. That is nowhere near the publicized doubling of your deduction.
The same single taxpayer who owns a home and pays mortgage interest, property and state income tax who would normally itemize will feel the negative effect. Example, a single taxpayer in 2017 would qualify for a personal exemption deduction of $4,050. If his or her normal itemized deductions for mortgage interest, property tax, state income tax and contributions are $10,000, the total deduction for 2017 would be $14,050. With the same circumstances for 2018, the personal exemption is eliminated and since the standard deduction is $12,000, the person would not itemize. The total deduction for 2018 would be $12,000, losing $2,050 of deductions under the new law. That person most likely will be paying more tax under the new law.
The same scenario applies to couples that file jointly (example assumes no dependents). The current 2017 standard deduction is $13,000. Each person qualifies for a personal exemption of $4,050. The total deductions for 2017 are $21,100. Under the 2018 tax law, the standard deduction is $24,000. An increased deduction of $2,900 above the 2017 law results in a lower tax for 2018. However, if they pay mortgage interest, property tax, state income tax and contributions totaling $24,000 and normally itemize each person would also have a $4,050 personal exemption plus the $24,000 itemized deduction for a total deduction of $32,100.
Under the 2018 tax law they would qualify for the standard deduction of $24,000 and would not itemize because the standard deduction and their itemized deductions are the same. They would lose the $4,050 personal exemption they each qualified for in 2017. The result is that their total deduction for 2018 would be $24,000, a loss of $8,100 deduction under the new law.
Do the math, they won’t have a tax decrease. This is a small part of the new tax law, check it out to see how it will affect you.
Don David is a resident of Kailua-Kona.
