The IRS has released a draft copy of a new form: Schedule L, the Standard Deduction for Certain Filers. The form is for an additional standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. for state and local real estate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es, new motor vehicle taxes, or a net disaster loss. Until now the standard deduction has been one of the simplest portions of the tax code for taxpayers to understand and benefit from.
The federal government believes that income used to pay certain expenses should not be taxed. To achieve this, taxpayers are allowed to deduct those expenses from income before tax is calculated, thereby lowering the resulting tax bill. You can deduct things like certain medical and dental expenses, state and local income or sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es paid, real estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. es paid, mortgage interest paid, gifts to charity, certain job expenses, and a few other categories. Together these are known as itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. s.
But the federal government has also put a minimum on the amount that you can deduct. This minimum is known as the standard deduction, and in 2009 equals $5700 for single filers and $11,400 for married couples. It represents the minimum amount that the federal government believes should be tax-free for every taxpayer, regardless of the actual itemized deduction amount. You can always deduct the higher of the standard or itemized deductions in order to maximize the tax savings. So if someone is claiming the standard deduction it is because it gives them a greater benefit than itemizing their deductions.
As mentioned above, real estate taxes are deductible under itemized deductions. In a sense, the itemized deductions are implicitly contained within the standard deduction, plus an extra amount to bring total deductions up to the standard deduction level. But now there is an additional “standard” deduction for real estate taxes paid for those who do not itemize (which comes with its own 21 line form). This deduction is not really “standard” since it only applies to certain taxpayers. It looks a lot more like an itemized deduction, making its name a bit of an oxymoron. This goes against the fundamental principle behind the standard deduction, turning it into a standard-plus-itemized deduction, rather than allowing taxpayers to claim the greater of the two. In a sense, the standard deduction for real estate taxes is a double deduction, since the standard deduction already implicitly contains a real estate tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state/local taxes paid, mortgage interest, and charitable contributions. .
This, arguably, is unfair to itemizers, who only get to deduct their real estate taxes once. Of course, maybe lawmakers believe that the standard deduction is too low and too much income is being taxed already. But if that is the case then the standard deduction should be increased across the board, not just for taxpayers who pay real estate taxes. Do we not care about renters, a population that includes many low income people who might be most in need of the extra deduction?Share