By Ryan Ellis
One quick side dish for Thanksgiving Week: the percentage of Americans who itemize their deductions will go way down under the House version of tax reform, which means the percentage claiming the “zero bracket” or standard deduction will rise.
How Things Are Now
Under current law, taxpayers can choose between itemizing their deductions, or claiming the “standard deduction.” The standard deduction is about $13,000 for a married couple and $6500 for a single person.
If a taxpayer chooses to itemize deductions instead, it’s because the sum of those deductions exceed the standard deduction. The most common itemized deductions are: state and local tax paid, mortgage interest paid, and charitable contributions made.
Just over 25 percent of taxpayers choose to itemize, with that number rising significantly with income.
The Deduction Decision After Tax Reform
The House version of tax reform changes each of those figures.
The standard deduction grows to $24,400 for a married couple and $12,200 for a single person. Itemized deductions are limited to mortgage interest (primary residences only, and up to $500,000 of indebtedness on new homes), charitable contributions, and up to $10,000 of real property taxes.
As a result, the number of taxpayers claiming itemized deductions will plummet, so says the White House Council of Economic Advisers:
The number of Americans foregoing the standard deduction to claim itemized deductions will fall from just over 26 percent today to less than 8 percent under tax reform.
Put another way, almost 92 percent of taxpayers will choose the standard deduction in tax reform.
What’s most interesting to me is the $100,000 to $200,000 tranche. It goes from virtually all taxpayers claiming itemized deductions (nearly 73 percent) to under 20 percent in tax reform. Going forward, many of the hot button tax issues will get a lot cooler.
Obviously, that means a much simpler tax return for most of these taxpayers. They will most likely be able to use the 1040A or 1040EZ instead of the long form, which means far fewer records to dredge up. Most Americans will just need the prior year’s return and a W-2.
Read more here.