With the release of the latest framework for tax reform from congressional Republicans and the Trump administration, taxpayers are finally starting to get a better sense of how the federal government will respond to their call for a simpler, fairer tax system. Key planks of the proposal, such as the decline in corporate tax rates and the reduction in the number of tax brackets, have gotten plenty of attention for policy makers. Yet for most individual taxpayers, the proposal's plan to nearly double the standard deduction is one of its most attractive features.
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Most taxpayers already use the standard deduction, saving themselves the trouble of having to itemize deductions that in many cases would turn out to be less than the standard deduction anyway. A higher standard deduction will allow even more people to use this simplified way of calculating their taxable income. However, the elimination of certain other tax benefits is likely to water down the favorable impact of an increased standard deduction. Two things in particular could detract from the measure's positive impact: the disappearance of personal exemptions and the elimination of many itemized deductions.
Why losing personal exemptions could leave some families behind
The proposed tax framework touts the increase in the standard deduction as a way of extending what amounts to a zero tax bracket. Single filers will see their standard deduction rise from $6,350 to $12,000 under the proposal, while joint filers would get a boost from $12,700 to $24,000. The proposal doesn't list any special amount for those who qualify for head of household status, raising the possibility that their boost might be to $12,000 as well, leaving them with just a $2,700 increase.
However, the proposal specifically takes away personal exemptions, which currently amount to $4,050 per person. It justifies the move by saying that "this change is fundamental to a simpler, fairer system." Yet the consolidation of personal exemptions into the standard deduction dramatically reduces the beneficial impact. Currently, single taxpayers can claim a total of $10,400 in standard deductions plus personal exemptions. The boost to $12,000 will still lead to a reduction of $1,600 in taxable income, but that's a whole lot less than what the near-doubling language would suggest.
Some families could even get hurt by the proposal. For a married couple with two children, the current standard deduction of $12,700 and four personal exemptions totaling $16,200 add up to $28,900 in reductions to taxable income. A new standard deduction of $24,000 for that family would increase taxable income by $4,900 -- adding to tax burdens rather than taking away from them. The proposal points to a potential increase in the child tax credit, which could offset the higher tax bill from this loss of personal exemptions. However, the specifics haven't yet been made available.
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Loss of itemized deductions will hurt higher-income taxpayers
The doubled standard deduction also comes in the face of other provisions that will eliminate many of the itemized deductions that are most commonly used. The proposal doesn't go into detail, saying only that it "eliminates most itemized deductions but retains tax incentives for home mortgage interest and charitable contributions." That leaves deduction items like real estate taxes, state and local income taxes, medical expenses, and casualty losses on the chopping block.
Because higher-income taxpayers are more likely to itemize than their lower-income counterparts, the loss of these deductions will primarily affect those at the upper end of the income spectrum. Again, measures like the reduction of the top marginal tax rate and the elimination of the alternative minimum tax will offset any tax increase from losing itemized deductions, but it's unclear to what extent those factors will balance each other out without further details.
Look very closely at details as they come out
The legislative process is always a long and difficult one, and you can expect plenty of wrangling and debate, both within the majority party and across the aisle on Capitol Hill throughout the process. Until the details are fully known, you can't afford to jump to incorrect conclusions about individual elements of the Trump tax plan. Only when the entire package has been set will you be able to assess accurately and completely what it means for you and your taxes.
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