Hi all, it's Tuesday August 12th, a week after the first OBBBA article and now it's time for the second article in the series, deductions, something everyone loves because it reduces the amount of income subject to tax. For todays' article, I will stick to deductions that everyone can take, and save itemized deductions, taken on Schedule A, for later. Rest assured, I will cover them because there are some important changes, especially an increase in the controversial State and Local Tax (famously known as the SALT tax) limitations.
The standard deduction, established by the Tax Cuts and Jobs Act (TCJA) of 2017, passed during President Trump's first term in office, was extended and expanded. That's a good thing because if the TCJA was allowed to expire at the end of 2025, the standard deduction would have reverted back to the 2017 levels for the 2026 tax year, those amounts were less than half of the standard deductions that folks were allowed to take on the returns they filed this past April (and some on extension still have yet to file)! That would have been painful for most people, regardless of one's politics.
Let's dig into the standard deduction. As it stands now, those that will be filing Married Filing Joint (MFJ) will go from a standard deduction of $29,200 (in tax year 2024) to $31,750 ($31,500 plus a cost of Living Adjustment (COLA) amount of $250.) Those filing as Single/Married Filing Separately, the standard deduction will go from $14,600 (in 2024) to $15,750 ($15,500 plus $250 COLA). Finally, those filing as Head of Household (HOH) will go from $21,900 to $23,625 ($23,375 plus $250 COLA). Bear in mind also, an additional amount will apply to those over age 65, which, with more and more of the Baby Boom Generation hitting their senior years, will benefit more and more people......
But wait, there's more! (special shout out to the late great Billy Mays)
Many seniors will also be able to take advantage of a special and temporary ADDITIONAL deduction of $6000 PER PERSON over age 65! That means potentially $12,000 additional for a married couple from tax filing years 2025-2028 (meaning the 2026-2029 filing seasons for us geeky tax types). Bear in mind though, this additional $6000 starts phasing out at the $75,000/$150,000 income limits, so those making too much will not benefit from this little senior bonus deduction. Two other very important limitations on this temporary senior deduction is that if you are married you MUST file Married Filing Jointly (MFJ) in order to claim the extra $6000 deduction for one or both applicable spouses if you otherwise qualify based on income. If you are MFS (Married Filing Separately) than you are SOL! Also, the claimant(s) must have a valid Social Security Number in order to be eligible for the extra $6000 deduction.
The final topic I will cover today are personal exemptions. The personal exemption used to be an additional per person amount of income that could be subtracted from one's income, in addition to the standard or itemized deductions, before calculation of one's taxable income. It was a great deal, especially if was married had several children, and I have several clients that lost deduction money when the ability to subtract exemptions from taxes disappeared after it was suspended with the passage of the TCJA (Tax Cuts and Jobs Act) in December 2017. While the exemption is not deductible it still lurks behind the scenes because it is used as a metric for determining other tax return items such as the qualifying relative (QR) dependent credit. The exemption suspension itself is now permanent with passage of the OBBBA.
To refresh your memory, on how the exemption will be used to determine the dependent exemptions, there are two dependent credit categories, the Qualifying Child and Qualifying Relative. The second credit, the Qualifying Relative dependent, has an income test involved, the Qualifying Child dependent has no income test. The now unused exemption amount, adjusted for inflation to $5200 in 2025, will determine if a potential Qualifying Relative will meet the income test. If the potential Qualifying Relative makes more than $5200, they fail the income test. Even if they pass the other tests (which are beyond the scope of this article), they are unable to be claimed as a Qualifying Relative.
Whoa, a lot was covered here. I think I have a brain ache. See you next time.
Halas Consulting is a financial services firm specializing in tax prep, tax resolution and tax advisory services. Halas Consulting is located in Pittsburgh's northern suburbs of Ross Township/West View. The firm is owned by Christian Halas
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