Tax Laws Have Changed…What Does That Mean For You?
Over the next few posts, we will be looking at some of the tax changes that might affect you. One of the biggest changes is the increase in the standard deduction and the elimination of the personal exemptions. Will this change help you or hurt you? Here is a look at two different scenarios to help you decide.
Our first case is a young cosmetologist named Mary. She is single and working as an employee in an upscale salon and her W-2 says that she made $50,000. She doesn’t have any investments or other income. In 2017, she would calculate her taxable income by subtracting the 2017 standard deduction of $6,350 and the personal exemption of $4,050 leaving her with $39,600 and putting her in the 25% tax bracket. That doesn’t mean she has to pay 25% on the entire amount. The first $9,325 is taxed at 10%, $28,625 is taxed at 15% and the remaining $1,650 is taxed at 25%, for a total federal income tax due of $5,638.75.
Now, let’s look at the same situation for 2018 tax laws. Again, she has $50,000 in wages on her W-2, but now we are only subtracting out the standard deduction of $12,000, leaving her with taxable income of $38,000. The tax brackets have also changed so now the first $9,525 is taxed at 10% and the remaining $28,475 is taxed at 12%, for a total federal income tax due of $4,369.50.
In 2018, Mary came out ahead $1,269.25!!
Next, we will look at Yvonne’s situation. She is a single mother with three children. Her children are ages 10, 15, and 19 and she is a massage therapist with a W-2 that is showing $50,000 in wages. In 2017, her taxable income is $24,250, which was calculated by taking the $50,000 and subtracting $9,350 for the standard deduction for head of household and $16,200 for the personal exemptions for her and her three children. Her tax due at this point is $2,970, but since two of her children are under the age of 17 she can deduction another $2,000 because each of those two children are worth a $1,000 Child Tax Credit, making her final amount of taxes due $970.
In 2018, her children are now 11, 16 and 20, but all other circumstances remain the same. To calculate her taxable income, we take $50,000 in wages and subtract the $18,000 standard deduction for head of household, leaving us with $32,000. There are no personal exemptions to subtract and the tax amount due on is $3,568. The child tax credit has increased and is now $2,000 per child and she can also take a $500 credit for the child that is over 17. Yvonne now has a REFUND coming of $932!
In 2018, Yvonne came out better by $1,902!
These are some very basic examples and most people with have other variables to factor in, but in these cases, 2018 looks like it is going to be a great year! Now, start planning on how you can invest this extra money in your business!
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Categories: Tax Information