The effect of raising the standard deduction

Question

I am preparing for next year's taxes (this year is already in the books). By next year I will have purchased a new home, and so I think I will qualify for itemized deductions.

Reading up on it now, it seems it might be difficult to amass greater than the new high-limit standard deduction (for married filing jointly). One reason is because the closing is not until mid-year. According to some sites that explain the new higher standard deductions, once you can itemize under the old tax laws, your tax savings become higher (seemingly not linearly).

My question is, does raising the standard deduction preclude savings by taxpayers? It seems this particular law prevents taxpayers from being able to take advantage a previous boon. To put it differently, did this new set of tax laws effectively 'screw' the taxpayers at large?

Answer 1

Raising the standard deduction by itself does not "screw" anybody: either the standard deduction is less than you can itemize, in which case you still itemize and see no change, or it's more than you can itemize, in which case you take the standard deduction and benefit.

What has "screwed" certain taxpayers is the $10k cap on state and local taxes (SALT). The people that have been "screwed" by this provision are those who live in high-cost-of-living areas with high state and local taxes, including property taxes.

Only slight related: eliminating personal exemptions and increasing the child tax credit "screws" people without dependent children but is a boon to people with children. The Trump tax package certainly shifted some tax burden around and whether you like the effects or not probably depends on the degree to which your pile was increased or diminished.

Answer 2

It hurt taxpayers in a certain range of deductions.

People who had < $7950 of itemized deductions win

For people with less than $6,350 of itemized deductions in 2017, they simply took the standard deduction. They also took 1 personal exemption for themselves of $4,050, totaling $10,400 of deductions off their taxable income. In 2018, both were replaced with a $12,000 standard deduction. So they gained $1,600 of combined deduction at no expense.

People who made between $6351 and $7950 also gained, but gained less and less as they approached $7950.

People who had > $7,950 of itemized deductions lost out

Someone who had $7951 of itemized deductions was worse off by $1 of deductibility. This ramps up in a linear manner, until someone who has $12,000 of itemized deductions lost out by $4,050 of deductions.

For people with itemized deductions above $12,000, they are not helped at all by the $12,000 standard deduction. However, they lose the Personal Exemption of $4,050.

Answer 3

tl;dr: skip down to the bolded implicit question.

You have asked both explicit and implicit questions. Specifically:

...does raising the standard deduction preclude savings by taxpayers?

No.

...did this new set of tax laws effectively 'screw' the taxpayers at large?

I'm noting that here you ask about the new "set of tax laws" instead of specifically the "standard deduction". Whether the new tax bill as a whole helps or hurts the average person, or the country collectively, is obviously debatable. Like most partisan bills, depending on who you ask it can range from fantastic to reprehensible. There were quite a few changes and each one shifts taxes around.

Regarding your title question:

[What is] the effect of raising the standard deduction?

This is hard to answer by itself in practice because the standard deduction wasn't the only thing that changed. But in theory, if it were the only thing that changed, then the effect would be exactly that some people would no longer itemize and consequently pay less taxes than before, and overall the IRS would collect less money in total.

Based on these statements:

I am preparing for next year's taxes ... By next year I will have purchased a new home, and so I think I will qualify for itemized deductions.

I believe your implicit question here is:

Based on there now being a higher standard deduction than previous years, how should this guide my future financial decisions compared to the pre-2018 tax laws?

If you have never itemized before, and you aren't sure if you'll be able to itemize, then you probably shouldn't change anything regarding your decisions. The decisions only change when you know for sure that you can itemize, in which case this means that certain deductible expense can now be bought at a discount (equal to your tax bracket). For example, if you can afford to donate $1000 to a charity, but you are able to itemize and you're in the 24% tax bracket, then you can actually afford to donate $1316 since you'll get a 24% discount on that donation. (You can also add in your state income tax rates if applicable.)

Answer 4

Perhaps this is a bit pedantic, but anyone can itemize, it's just that many people shouldn't. If your itemizations are less than the standard deduction, then taking the standard deduction is advantageous, but not mandatory.

The first order answer as to the effect of raising the standard deduction (you seem to be focusing on the standard deduction, so I'm not analyzing the effect of the tax bill in general) is that anyone whose itemizations are less than new standard deduction will have their tax bill reduced, and anyone whose itemizations are greater than or equal to the standard deduction will see no effect. So some are helped, and none are harmed. However, there is a psychological phenomenon that people compare their situation to a "base case", and so whether something is seen as "good" or "bad" can depend on what they're taking as the "base case". So someone might look at the effect just of not taking the deduction (effectively, comparing "take the itemized deduction plus the standard deduction" to "just take the standard deduction", even though the first is not a valid option), and feel "screwed".

But there are effects beyond the immediate ones. If one person pays less taxes, at least one of the following must occur: someone else pays more taxes, spending goes down, or the national debt goes up. So either another taxpayer, or a recipient of federal funds, or future generations in general are worse off. Tax policy isn't entirely a zero sum game, but if someone is getting a tax break that you're not, then you're likely worse off for it.

Furthermore, tax policy has a lot of effects on the economy. Deducting mortgage interest makes mortgage payments effectively smaller, which means people can take on larger mortgages, which raises house prices. So raising the standard deduction decreases house prices. Also, being able to tout a donation as "tax deductible" is a significant selling point for charities. With less of donations being tax deductible, charities may get less money. And so on.

Answer 5

I believe your question is "whoa, that standard deductible is sooo high, I can't even reach it with half a year's mortgage interest payments, and those web sites say we used to be able to get an even higher deductible by itemizing, previous to the passage of the 2018 Jobs act. We used to get more by itemizing, did something terrible happen to 'screw' everybody? We can't itemize anymore?"

The answer is that yeah, those who have property taxes greater than 10K can only deduct 10K (SALT taxes). And nobody can deduct for number of children anymore. But you can still deduct mortgage interest, charitable donations, 10K SALT, etc

So I guess you could say it was an effort to simplify tax code, now "it's harder to take deductions, because there are fewer, and the standard deduction is pretty high, so...not worth it to itemize anymore." (for many)

So basically those that used to take "a lot of deductions" (due to kids and/or SALT) have to take the "somewhat high" standard deduction now (which will be less than what they used to itemize, by a bit, bummer). I wouldn't exactly call that "screwed" though it might be less deduction (unless they were paying a ton of SALT taxes, yeah they'll pay more). Some people will lose, some people will gain (by taking the new standard deductible), but for sure a lot more people will take it.

Those that used to itemize due to claiming "lots of dependents" get an increased earned income tax credit so I'd imagine that offsets the loss. It seems that it did in my particular case, maybe a small loss. Those that make like 500K and can't qualify for the EITC they'll lose more.

So to your question of were taxpayers at large "screwed" it doesn't seem so. Some were. Some get a tax break.

If you were in the camp where what you "used" to itemize is less than what the new standard deduction is, enjoy your gain!

In terms of "did it hurt you somehow" it kind of depends on how much your property tax will be (and mortgage interest payments, which are still deductible). My hunch is you'll find it's close to a wash.

To be clear, many people still itemize. People that had lots of "charitable" deductions still itemize, possibly close to a wash, possibly small loss there (since they can't also deduct children and SALT to make it add up to a nice big amount).

So it seems overall it mostly hurts those that pay lots of SALT taxes. Though they still get the standard deductible if that helps. And if they have other deductions like mortgage interest and charitable, they can still itemize. Just not as much. Plus the deductions for dependents are still "made up" to them in the increase EITC. So see where you fall in that spectrum.

If you happen to have a "nicer" house (i.e. high value) in a state that has high property tax values, well...yeah you're paying higher taxes now. So if that's your case, then your taxes have increased. For "some" people (ex: a poor person who used to not itemize, or a person in a place where either property tax is low or property value is low) they may have gone down, or stayed the same, depends on the exact situation.