The new tax reform plan says it will get rid of personal and dependency exemptions, which are on lines 6 and 42 of the tax form 1040. This will be replaced with a larger standard deduction.
So what does that mean, in simple terms?
On the tax form now, you have to figure out how much money you made this year. Then you take away $6,300 for yourself, and an additional $6,300 for your spouse, if you have one. That's called the "standard deduction".
Then, you get to take away $4,050 for every person who lived with you that year and whose expenses you paid for. For most people, this means their spouse, their children, sometimes roommates or live-in relatives. When you take off money for someone who lived with you, it's called an "exemption".
Please note, I'm oversimplifying here; the rules for exemptions can get really complicated, really quickly, if you go into non-relatives, children of divorced parents who share custody, and college kids whose parents pay the majority of their expenses.
To summarize, you figure out how much you made that year. You subtract the standard deduction, then you subtract the exemptions. What's left over is the amount of money you pay taxes on.
Well, subtracting two different things is unnecessarily complicated, so they're gonna combine the standard deduction and exemptions. Instead of doing them separately, you'll just subtract $12,000 for yourself and $12,000 for your spouse. That's it.
I think this is a great plan, just because exemptions are complicated, especially when two different people claim the same child; that almost always leads to a huge, emotionally charged mess. I'm glad they're doing something to improve exemptions, even if that something is "get rid of them entirely". There are other
I did the math on my family, a married couple with two children. The new tax plan gives us $3,300 more in tax-free income. Hooray! But a married couple with more than two dependents would get a bigger tax break under the current system. The average family has less than two children; the birth rate for 2016 somewhere around 1.82528 children per woman. Since most people don't have more than two dependents, that means most people would save money under the new plan.
The tax reform plan also deals with business tax law, but I don't know anything about business tax law. My experience is only with personal tax law.