Here's How to Tell Whether the New GOP Tax Plan Will Simplify Your Taxes
The Tax Cuts and Jobs Act, the Republican tax plan on the brink of becoming law, could change the way over 27 million U.S. taxpayers file their taxes. Are you one of them?
While the plan might not lead to the postcard-sized tax filings Republicans once touted, it will encourage more taxpayers to opt for the standard deduction. According to the Tax Policy Center’s latest analysis, the number of U.S. taxpayers likely to itemize would fall from 46.5 million — roughly one third of the total — to 19.3 million in 2018, the first year the bill would be in effect.
To understand the dramatic drop, you need to first grasp a few things about how the tax code works. In any given year, taxpayers can choose between claiming the standard deduction or itemizing their deductions.
Those who choose the standard deduction can subtract a pre-set amount of income — for 2017, it's $6,350 for single filers and $12,700 for those filing jointly — from their gross earnings before income tax rates are applied. Those who choose to itemize, on the other hand, arrive at the amount of income they can subtract by claiming eligible deductions, like those for mortgage interest or state taxes.
While itemizing can save you money, it's a big hassle, multiplying the number of forms and other paperwork filers need to send to the IRS. Documenting deductions is a big reason the average American taxpayer spends upwards of two work days on their tax return.
The biggest — but not only — reason fewer taxpayers will itemize under Tax Cuts and Jobs Act is a dramatic increase in the standard deduction. The bill would double the value of the provision to $12,000 for single filers and $24,000 for those filing jointly.
The tax plan would also curtail the value of some deductions taxpayers can currently claim, making to itemizing less attractive. For instance, the plan would cap the state and local tax deduction at $10,000 for property or income taxes and would limit deductible mortgage interest to loans worth $750,000 or less, down from the current $1 million cap.
The upshot is that for many taxpayers itemizing would become less attractive, leading additional numbers to claim the new, increased standard deduction instead.
Of course, for taxpayers who already claim the standard deduction, the tax bill won't impact the way they file. And for those who are affected, the change won't be permanent since many of the bills individual provisions expire after 2025.