You have of course heard about bigly splashy tax reform enacted late last year by the Congress and signed into law by the president. For weeks, we have been hearing about all the tax cuts it contains, and how people are immediately benefitting.
As I write, the IRS released a new calculator to figure one’s (presumably lower) withholding from wages. Note: be very careful in adjusting your withholding!
As people begin to delve into the complexities, some are discovering that the Congress giveth with one hand but taketh with the other.
For example, there’s the “double the standard deduction” we often heard about—as a “good thing” for us. What went away to “pay” for it? Personal exemptions. Those exemptions were amounts of income that were taken right off the top and deducted first from your income computation.
For 2017 it was $4,050 for each: taxpayer, spouse and dependents. As a tradeoff, Congress granted a federal child credit. Credits are like “payment coupons”: credited in your favor after you figure your tax bill. For 2018 and beyond there are no federal personal exemptions. By the way, don’t be fooled: taking the exemptions away and “doubling” the standard deduction actually results in more tax revenue, 1.2 trillion over ten years. Yes, it was a bad NYC subway shell game.
For simplicity, many states “conform” to the Internal Revenue Code as of a specific date. Cali- fornia conforms, often opting out of specific provisions. Some conform automatically to the current version, using those definitions and numbers in state computations.
Of note, the National Council on State Legislatures reports ten states that currently “couple” their state personal exemption with the federal personal exemption. In those states the personal exemptions just went down to zero.
In those cases this will automatically mean higher state tax bills. Some people will be affected more heavily than others. Unless states act soon, there will be—surprise!!—higher state tax bills, and some may be pretty significant.
The District of Columbia projects its middle-income taxpayers will see an increase in tax unless DC “decouples” from the federal definitions. Ruefully, DC also says “we don’t have a child credit”.
This is something to watch as the year progresses, because we may be in for many surprises as states react (or don’t) to the federal changes.
Your state withholding may need new adjustments, and not for good reasons. Stay tuned.