The 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. Cuts and Jobs Act (TCJA) increased the 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. from $6,500 to $12,000 for individuals (and from $13,000 to $24,000 for married filers) and reduced the value of certain itemized deductions. These changes reduce the percentage of taxpayers that itemize deductions and limit the ability of the tax code to encourage certain types of spending.
Itemizing allows taxpayers to deduct certain expenses from their taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. . These expenses include mortgage interest, state and local taxes, charitable donations, and a few other deductions found on Form 1040, Schedule A. In lieu of itemizing, taxpayers can reduce their taxable income by a flat amount via the standard deduction. If a taxpayer’s 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 are more than the standard deduction, they are best off itemizing. Otherwise, the standard deduction provides a larger reduction in taxable income.
With the Tax Foundation’s model, we estimate the percentage of itemizing taxpayers by income group for 2019, under both current and pre-TCJA law.
Source: Tax Foundation General Equilibrium Model, April 2019.
|Income Group||Current Law (2019)||Pre-TCJA Law (2019)|
|0% to 20%||1.2%||3.7%|
|20% to 40%||2.5%||9.3%|
|40% to 60%||5.3%||21.9%|
|60% to 80%||13.8%||45.3%|
|80% to 90%||30.3%||67.8%|
|90% to 95%||50.2%||82.2%|
|95% to 99%||72.8%||91.5%|
|99% to 100%||91.5%||92.1%|
We estimate about 13.7 percent of taxpayers will itemize in 2019. This is more than 17 percentage points lower than it would have been in 2019 under pre-TCJA law. The difference in the proportion of itemizing taxpayers is largest for the third income group quintile (40 percent to 60 percent). The proportion of taxpayers in this quintile that would have itemized in 2019 under pre-TCJA law would have been nearly four times higher than the proportion of taxpayers that we estimate will itemize under current law.
Increasing the standard deduction makes it less likely a taxpayer’s itemized deductions will exceed the standard deduction. Additionally, the TCJA reduced the value of several itemized deductions. For instance, the TCJA reduced how much interest can be deducted from taxable income when paying a home mortgage, from interest paid on $1 million in principal down to $750,000, and capped the state and local 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. at $10,000.
It is also worth noting that the TCJA decreased the tax benefit associated with deductions by lowering individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rates. Deducting one dollar from taxable income before the TCJA’s income tax rate cuts would have reduced a top earner’s tax liability by $0.396. Now, a dollar deduction for a taxpayer with income in the top marginal income tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. would reduce this tax liability by $0.37.
By increasing the standard deduction and limiting certain itemized deductions, the TCJA reduced the percentage of taxpayers that itemize and limited how much the tax code can award tax relief to taxpayers who spend in particular ways.
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