Trump’s Tax Plan, Part 2: Fewer Itemizers?
In a previous blog, we discussed some of Trump’s proposed tax changes, and their potential impact on taxpayers. In this blog, we’d like to discuss the impact that the proposed changes may have on those who itemize their deductions.
The current (2016) standard deduction amounts are $6,300 for Single filers (and Married Filing Separately), $12,600 for Married Filing Jointly, and $9,300 for Head of Household (note that under the changes proposed, Head of Household would be eliminated). For the purposes of this discussion, we’ll use a Married Filing Jointly couple as our example. This couple has a combined AGI of $120,000, two children, and a mortgage on their home. The most common deductions a family like this may claim are property taxes, mortgage interest, sales tax, and charitable giving. The average property tax bill in Texas for 2015 was $3,327 (chron.com). For a family with our example family’s AGI, the average mortgage interest deduction claimed in 2015 was $8,928 (taxfoundation.org). The sales tax deduction our family would be eligible for, according to the IRS’ Sales Tax Deduction Calculator, would be $1,567. And finally, according to the Motley Fool, the average family in our family’s AGI range claimed $3,886 in charitable deductions. For comparison, we’ll look at three different scenarios for our example family: no charitable deductions, the average amount of charitable deductions, and double the average amount of charitable deductions. This would put their itemized deductions as:
As you can see, the total itemized deductions for our family exceed the standard deduction in all three cases. The family would also receive $4,000 for each personal exemption, for an additional deduction of $16,000. The total reduction in tax liability ranges from $29,822 to $37,594.
However, under the tax changes proposed by President-elect Trump, property tax deductions, sales tax deductions, and personal exemptions would be eliminated. The proposed tax changes would “make up” for this by increasing the standard deduction for Married Filing Jointly from $12,600 to $30,000. How does this work in practice? Let’s take a look at our family under the proposed guidelines:
Under the proposed scheme, the elimination of certain deductions and personal exemptions would be replaced with a higher standard deduction. For some this would have a positive outcome, but for others the outcome would be worse than the current system. In the above table, you can see the family with no charitable giving would get a $30,000 standard deduction as compared to the current itemized deduction and exemption of $29,822, a net benefit of lowering taxable income by $178 with Trump’s proposed tax reform. On the other hand, the families with average and above average giving would see their deductions and exemptions that exceed $30,000 ($33,708 and $37,594, respectively) replaced with the lower $30,000 standard deduction. These couples would not be able to itemize since several of their itemized deductions would be eliminated. The result for our example families with average and above average charitable giving would be higher taxable income. Obviously, these are examples and every tax-payer’s situation is different.
By increasing the standard deduction, the proposed changes may simplify filing for many by reducing the number of taxpayers itemizing their deductions, but it may be at the cost of increasing the overall tax burden for some taxpayers. Stay tuned, as we will be keeping our eye on these and other proposed changes as they appear.