Jason LeRoy of Doeren Mayhew

By Jason W. LeRoy, ASA, CVA, CFE – Shareholder, Valuation and Litigation Support Group

The Tax Cuts and Jobs Act (TCJA) was signed into law by President Trump on Dec. 22, 2017 representing one of the most significant revisions to the Internal Revenue Code in more than 30 years. As a result, taxpayers will see changes to their personal exemptions.

Personal Exemptions Pre-TCJA

The maximum personal and dependent exemption amount for tax year 2017 was $4,050. However, the total personal exemptions to which an individual is entitled was phased out (i.e., reduced and eventually eliminated) as their adjusted gross income moves through a certain range as outlined below:

The personal exemption allowance provided a significant tax benefit to individuals with families and dependents, especially those in Michigan. In 2017, Michigan taxpayers were allowed to take a number of exemptions, depending on the number of people in the taxpayer’s households, their ages and other factors. The number of personal exemptions for Michigan’s income tax purposes was historically tied to the number of personal exemptions claimed for federal income taxes, allowing up to a $4,050 per dependent.

Personal Exemptions Post-TCJA

Under the terms of the TCJA, the following changes were made to the personal exemptions:

  • In 2017, taxpayers claimed a personal exemption for themselves, their spouse (if married filing jointly) and each qualifying child or qualifying relative. Each exemption reduced taxable income by up to $4,050 in 2017. Moving forward, the personal and dependent exemptions are eliminated from 2018 through 2025.
  • Personal exemptions are scheduled to return in 2026, unless modified or extended by Congress.

The elimination of personal exemptions is said to be mitigated by increases in the Child Tax Credit and the standard deduction, as well as decreases in individual tax rates. However, single parents and families with lots of dependents could see a higher tax bill as a result of the new personal exemption changes on a federal level, but likely not on a state level – at least in Michigan.

For example, Governor Rick Snyder signed Senate Bill 748 into law on Feb. 28, 2018 to keep the personal exemptions previously allowed under the Michigan state income tax rules. The bill sets the state’s personal exemption amount to $4,050 per dependent for 2018, then gradually increases it to $4,900 by 2021.

Practice Tips for Family Law Practitioners

The new laws enacted under the TCJA as they relate to personal exemptions should be carefully reviewed on a case-by-case basis.

  1. The elimination of personal exemptions is viewed as being offset by the increase in the Child Tax Credit, among other changes. Any divorce judgments entered into before the TCJA became law may need to be reviewed to determine if revisions are needed to account for the changes in the personal exemptions and the Child Tax Credit. It may be beneficial to make any necessary revisions prior to the changes in the deductibility of alimony payments going into effect after Dec. 31, 2018.
  2. Settlement agreements may need to contain provisions considering what happens if personal exemptions are reinstated. Under the terms of the TCJA, the elimination of personal exemptions will extend through year 2025, at which point the personal exemptions would be reinstated. This of course assumes there are no modifications or extensions by Congress.
  3. The changes to the personal exemptions should be considered along with other changes from the TCJA that could affect your clients’ after-tax income, such as, changes to the Child Tax Credit, individual income tax rates, mortgage interest deductions, alimony, standard deductions and more.
  4. The Michigan state income tax laws will continue to allow a personal exemption of $4,050 per dependent, which gradually increases to $4,900 by 2021. Separate or divorced parents will need to determine which of them can claim the child(ren) as dependents for Michigan state income tax purposes.

The impact of the personal exemption changes should be considered in conjunction with the multitude of changes reflected in the TCJA. You should strongly encourage your clients to consult with a tax advisor, like those at Doeren Mayhew, to help assess the specifics of their situation. This will provide insightful information to better serve your clients that are already separated or divorced, or heading down that path. Contact them today.


About the Author
Jason LeRoy specializes in preparing business valuations for litigation and non-litigation purposes, and providing expert witness testimony and marital dissolution consulting services, as well as fraud and forensic accounting services. He can be contacted directly at leroy@doeren.com or 248.244.3177.