There are winners and losers when it comes to the recent tax changes proposed by Congress. As it turns out, those who owe back taxes to the IRS may be in the winner category. The proposed changes will significantly increase the amount of income that is beyond the IRS’s reach. If the legislation is passed as it currently stands, this could be a huge benefit for individuals who are paying the IRS via monthly installment agreements and/or those whose wages or other income are being levied by the IRS.
The Current Rules
Section 6334(d) provides the general rule that the IRS is prohibited from levying on the taxpayer’s exempt income. It defines exempt income by reference to the standard deduction for the individual and any additional personal exemptions the individual may be able to take on his tax return. This amount is divided by 52 for those who receive their income weekly, 12 for those who receive their income monthly, etc.
Current Standard Deduction
For single individuals, the standard deduction for 2017 starts at $6,350 and is increased by $1,550 for those born before January 2, 1953 and by $1,550 for those who were blind as of December 31, 2017.
For married individuals who file jointly, the standard deduction for 2017 starts at $12,700 and is increased by:
- $1,250 if they were born before January 2, 1953.
- $1,250 if their jointly-filing spouse was born before January 2, 1953.
- $1,250 if they were blind as of December 31, 2017.
- $1,250 if their jointly-filing spouse was blind as of December 31, 2017.
For head of household (single parents), the standard deduction for 2017 starts at $9,350 and is increased by $1,550 if they were born before January 2, 1953 and $1,550 if they were blind as of December 31, 2017.
The personal exemption for 2017 is $4,050 per person/dependent. This amount is subject to a phaseout, or reduction, once adjusted gross income for the year is $313,800.
For a single individual with no dependents, this means that $200 of their monthly income is exempt from the IRS. For a married individual with four kids, $2,408 of their monthly income is exempt.
The Proposed Rules
The Senate bill proposes to increase the standard deduction to $12,000 from $6,350 currently. It raises the standard deduction for married couples filing jointly to $24,000 from $12,700.
The Senate bill proposes to eliminate the $4,050 per person personal exemption.
The Senate bill goes on to say that in any year when there is no personal exemption, the exempt amount is equal to $4,150 per person. This amount is indexed for inflation that may occur in later years.
For a single individual with no dependents, this means that $1,345 of monthly income is exempt from the IRS. This is a significant increase over the $200 of monthly income.
For a married individual with four kids, $3,383 of their monthly income is exempt. This is also higher than the $2,408 that is exempt under the current rules.
Take Action if the Tax Changes are Enacted
Individuals who are paying the IRS via installment agreements and individuals whose wages or other income are being garnished by the IRS should follow this issue in the news and be prepared to act if the bill is enacted into law.
If the proposed law is passed, these individuals will need to see how the rules impact their agreements. This is especially true for those individuals whose payment agreements and/or wage levies are right at the limits under the current rules.
To the extent these individuals have more exempt income under the new law, their payment agreements will need to be re-negotiated and/or they will need to act to ensure that the IRS does not garnish more income than allowable. They may also need to re-consider whether they can qualify for an offer in compromise to settle their tax debts.
The media has been reporting that the government is expected to pass this legislation by the end of the year.