A flurry of tax-related legislation is working its way through Congress in the run-up to the summer break. And among the proposed changes is an expansion of the Standard Deduction, a tax break that a great many taxpayers take advantage of every year.
The House of Representatives recently passed the Tax Cuts for Working Families Act, submitted by the Ways and Means Committee, the committee responsible for drafting tax legislation, And along with a plethora of potential tax code revisions, is a plan to increase the Standard Deduction by $2,000 for individuals and $4,000 for couples filing jointly.
How Does The Standard Deduction Work?
For those unclear on the details of the Standard Deduction, it’s a tax cut that works similarly to deductions for dependents. You can reduce your taxable income with dependents by claiming a deduction for children and other dependents residing in your household for whom you’re financially responsible.
In the case of a Standard Deduction, instead of claiming a third party as a dependent, you’re taking the deduction for yourself or you and your spouse or domestic partner if you’re a couple filing jointly.
You must, however, forgo the option to claim the standard deduction if you itemize your tax deductions.
Who Qualifies For The Increased Standard Deduction?
The deduction is aimed mainly at middle-income and working-class taxpayers and families.
An estimated two-thirds of these households could see their taxes lowered by this increased deduction. That said, you won’t see a refund because the Standard Deduction reduces overall taxable income to a refund. And most in the lowest tax bracket don’t report enough earned income to claim the deduction.
On the other end of the spectrum, according to the legislation’s current language, the deduction would be limited to individuals earning less than $200,000 and couples earning less than $400,000.
How Much Will The Proposed Increase Raise The Standard Deduction?
To provide some context, the standard deduction for 2023 will be $13,850 for singles and $27,700 for couples (it’s also worth noting this deduction was nearly doubled by the 2017 Tax Cuts and Jobs Act, set to expire in 2026). Thus, the Standard Deduction increase would raise those amounts to $15,850 and 29,700, respectively.
Analysts also believe increasing the Standard Deduction will likely prompt more taxpayers to opt-in rather than itemizing deductions for common tax breaks, like mortgage interest, charitable donations, medical costs, and other deductible expenses.
The Proposed Standard Deduction Increase is Only Temporary
The legislation will only apply to the 2024 and 2025 tax years. Additionally, with the Standard Deduction increase implemented by the Tax Cuts and Jobs Act is also expiring, meaning this tax break has a very limited shelf life.
Questions About Whether The Standard Deduction Makes Sense For You?
Just a quick disclaimer, this legislation has yet to be finalized and passed into law. Though it seems likely, it will make it through Congress.
As to whether claiming the standard deduction or itemizing your deductions is the better option, it all depends on your personal finances. But if you have questions or are wondering which choice makes the most sense for you, get in touch for a FREE consultation!
