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Young married families with children need to know about how the recent tax changes could impact next year’s tax return. There are four major changes to the tax returns of young married families: the increase to the standard deduction, the removal of dependent exemption deductions, the increase to the child tax credit, and the decrease to the married filing jointly tax rate.
While everyone lost the dependent exemption deduction, if you are utilizing the standard deduction, which in effect has been doubled in the new tax law, then the increase should offset the loss of the exemption deductions for young married families. Additionally, if any of your dependents qualify for the child tax credit, then the increase to the tax credit, which was also doubled, should further help to offset the removal of the dependent exemption. The last major change to the new tax law has decreased the average tax rates across the board for all tax filers. In summary, the exemption removal is partially offset by the increased tax credit and your decreased average tax rate.
The primary factor in determining if you will pay more/less in taxes is whether or not you utilize the standard deduction.
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There are four major changes to the tax returns of young married families: the increase to the standard deduction, the removal of dependent exemption deductions, the increase to the child tax credit, and the decrease to the married filing jointly tax rate. All of these changes can have a significant impact on your tax return and should be considered as you plan for your taxes in 2020. In my professional opinion, you should always fall in an area of owing $1,000 to getting a $1,000 refund.
If you owe more than $1,000 then you are not withholding enough and you should decrease the exemptions on your W-4.
Conversely, if you are getting more than a $1,000 refund, then you are giving the government an interest-free loan on the money you have already earned! While it is always nice to get a large refund check at the beginning of the year, wouldn’t it be better to have a bigger monthly budget and plan better year-round? Whichever you decide, the recent tax changes for young married families can significantly impact your tax return, which is why you need to understand how each change can potentially impact you.
Decreased tax rates for young married families
Of the four major changes, the decreased tax rate impacts everyone in just about the same way, specifically, everyone will have a decreased average tax rate on the same taxable income year over year. This alone does not mean you will pay less in total taxes, but rather it means if your income after all deductions was exactly the same in 2017 and 2018, then you will pay less tax in 2018. For example, if you utilize the tax brackets from the IRS website, and you calculate the taxes owed on $100,000 of taxable income for 2017 compared to 2018, in 2017 you would have an approximate 16.5% average tax rate and in 2018 you would have an approximate 13.9% average tax rate. The main takeaway here is you will pay fewer taxes on the same money earned compared to the previous tax law.
Child tax credit increase
This is a simple change, which if you qualify for, has great benefits to you as the taxpayer. If you are claiming the child tax credit, then in 2017 you would have received a $1,000 credit per child, this has now increased to $2,000 per child. This is significant because tax credits are a dollar for dollar reduction to your tax liability. For example, if you have 2 kids and owed $4,000 in taxes, then you would pay $0 in taxes. It is important to remember, there are eligibility requirements that need to be considered before claiming this credit. The 6 requirements to be eligible for the child tax credit are:
- Age – Child must be under 16 as of December 31 of the tax year.
- Citizen – Child must be a US Citizen by December 31 of the tax year.
- Dependent – Child must be claimed as a dependent on your tax return.
- Relationship – Child must be related to you as a: son, daughter, step-son, step-daughter, grandchild, niece, or nephew. This includes legally adopted children as well.
- Residency – Child must have lived with you half of the year.
- Support – Child must not have provided more than half of their own support.
Dependent exemption deduction removal
This is also a simple change, which impacts everyone across the board because there are no more dependent exemption deductions on anyone’s tax returns. These deductions were approximately $4,000 for you, your spouse, and each dependent. This could be a major impact on taxpayers which is primarily offset by the increased standard deduction. This can also be partially offset by the increased child tax credit and decreased average tax rates. You may owe more in taxes from the removal of this deduction, which is why you will need to understand how the next major change impacts you.
Increase to the standard deduction
The change that I believe will impact the most tax returns is the increase to the standard deduction. In essence, the standard deduction was changed from $12,000 in 2017 to $24,000 in 2018, and this change can impact your return in a myriad of different ways. The most common negative impact will be if you itemize your deductions in prior years in excess of $12,000. If you fall into this category, then you should consult with your tax professional immediately, if you have not already, to make sure you are withholding properly. Conversely, if you are utilizing the standard deduction, or receiving the benefit of the increased standard deduction, then you will most likely be paying less in taxes than in previous years.
It is important to note, just because you received a bigger or smaller refund from 2017 to 2018, does not mean that you pay more or less in taxes. You need to look at your withholdings and total tax owed to determine if you actually paid more in taxes from year to year. With all of that said, there are a lot of moving parts at work on your tax return, and before you make any changes to your withholdings (W-4), you should consult with a CPA that has a full understanding of all the pieces of your tax return and how they impact each other.
Find your most recently filed tax returns (last 2 years is preferable)
If you do not have a physical or electronic copy of your most recently filed tax returns, then contact your tax preparer and they should be able to email you a PDF version of them.
Review your tax returns
Compare your last two years in the areas we covered. The most important sections to review are the following lines: Standard/Itemized Deduction, Taxable Income, Total Tax, and Federal Withholdings.
Determine which change impacts you the most
Make sure you understand what each change means to you and how it impacts your tax return. Go to the IRS website and research any topic you need more information on. The IRS website/tax code is the rulebook that we all have to follow, and will guide you properly.
Consult with your CPA/tax preparer as to the best avenue moving forward
On your most recently filed tax return, if you owed more than $1,000 or received a refund of more than $1,000, then you should consult with your preparer as to if you should change the exemptions on your W-4 so you are withholding the proper amount.
About the Author
Adam Goldstein, CPA/ABV
Adam is a Certified Public Accountant (CPA) and Accredited in Business Valuation (ABV) with over 9 years of experience in taxation and business valuation. His experience ranges from preparing standard individual returns and complex high-net-worth returns to small business returns. He has worked in public accounting and private equity, but currently operates a personal tax practice serving various clients across the entire United States, as well as a handful of international clients.