Why Your Income Tax May Decrease - Part II

Peter VanderWoude, MS, CPA, CGMA

July 1, 2018

Last month’s tax article covered how the new tax law’s increase in the standard deduction and the decrease in tax rates may yield a lower income tax liability for each of us. This lower tax liability may occur even with the elimination of personal exemptions and the likelihood that our itemized deductions will not exceed our standard deduction for 2018.  

Once taxable income and income tax liability has been calculated on our tax return, the focus turns to any tax credits that can be applied against the tax liability. For those of us that have children, we have come to enjoy and expect the $1,000 Child Tax Credit each year. Then, if you experienced this, when our child turned 17 we were flabbergasted that our child no longer qualified us for the Child Tax Credit!

For 2018, that Child Tax Credit for dependents age 16 and younger by December 31 is now doubled to $2,000 per child. This $1,000 increase in the tax credit makes up for the loss of the personal exemption for your child. There is up to a $1,400 refundable portion of this credit for 2018, if tax credits exceed tax liability.

Since Congress has given us something to make up for the loss of the personal exemption for our younger children, what about your 17-year-old and older children in college? There is now an expanded aspect of the Child Tax Credit where a partial credit of $500 is available for dependents above age 16; however, no portion of this partial credit is refundable. Another plus in 2018 for many taxpayers, the Child Tax Credit does not begin to phase-out until much higher income levels than in past years, $200,000 for single taxpayers and $400,000 for married taxpayers.

Let’s consider a young family with two children that has $75,000 in total income and takes the standard deduction for both 2017 and 2018. In 2017, this family would have had a federal taxable income of $46,100, federal tax of $5,983, Child Tax Credit of $2,000 and a net federal tax of $3,983. In 2018, this family will have a federal taxable income of $51,000, federal tax of $5,739, Child Tax Credit of $4,000 and a net federal tax of $1,739. For this young family the new tax law in 2018 will reduce the federal income taxes paid by $2,244, a significant savings.

This same couple without children would have federal taxable income and net federal tax of $54,200 and $7,198 in 2017, and $51,000 and $5,739 in 2018, respectively. Again, a significant reduction in federal income tax of $1,459. State income taxes have not changed and should be the same for both years. If you are curious about your own specific tax picture for 2018, contact your tax professional. For reference, Equus Advisors has a 2018 Tax Guide available for download at the link on the lower left on our homepage at EquusCPA.com.  

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