By David M. Hanson, CPA
The Standard Deduction
The standard deduction is a tax deduction allowed under federal tax law (and some states such as Iowa) to individual taxpayers. This deduction varies in amount depending on the filing status of the taxpayer; i) single filer, ii) married filing joint filer, iii) married filing separately filer, and iv) head of household filer.
Use of the standard deduction by taxpayers is optional. A taxpayer may choose, in lieu of taking the standard deduction, to itemize their deductions in the event that the sum of their itemized deductions exceeds the amount of the standard deduction. Itemized deductions include a number of deductible items including, but not limited to medical expenses, home mortgage interest, state/local/property taxes, and charitable contributions.
The federal income tax was originally established in 1913. For years up until the onset of World War II, federal income tax was paid by very few taxpayers (primarily the rich as rich was defined in those days). Because the cost of financing the U.S. war effort was going to be so significant, tax laws changed back in that time such that the tax collection base “broadened”. Specifically, whereas previously only a few taxpayers were having to pay income tax, the law changes resulted in more than 70% of U.S. citizens having to pay income. Talk about broadening the base!
The tax law changes prior to World War II resulted in what many people viewed as an overly complex tax system. Contributing to that complexity was the ability of taxpayers to itemize deductions. There was no such thing as a standard deduction at that time; everybody itemized.
Congress, realizing what a complicated beast tax calculations had become, decided that what now is known at the standard deduction should be created and made available to taxpayers. This provided the option to taxpayers to deduct the greater of their itemized deductions or the new standard deduction. Unlike the standard deduction of today however (a fixed amount) the standard deduction then was a variable amount. Specifically, it equaled 10% of a taxpayer’s taxable income; so, the greater the amount of a taxpayer’s taxable income the greater the amount of the taxpayer’s standard deduction. The overall desired effect of the change, i.e., introducing the standard deduction, was accomplished. A great many taxpayers began to use the standard deduction in lieu of itemizing.
The Progression to 2017
Congress acted again in 1964 to change the standard deduction. As a part of the Revenue Act of 1964 a minimum fixed amount standard deduction was put in place; i) Single taxpayers – $300, ii) Married taxpayers – $400. Small numbers it might appear at first blush but remember these were 1964 dollars. A lot of inflation has occurred between now and then!
Over the years the amount of the standard deduction has ratcheted up for inflationary reasons and tax policy changes. For example, from 1979 to 2017 the standard deduction became between 276% and 400% of the 1979 amount depending on your filing status; i) Single taxpayers – $2,300 to $6,350, ii) Married taxpayers – $3,400 to $7,200, iii) Head of Household taxpayers – $2,300 to $9,350.
Changes in 2018
At the end of 2017 Congress passed new tax legislation known as the “Tax Cuts and Jobs Act”. The changes made by this legislation, most of which are first effective in 2018, were significant. One of those changes was to substantially increase the amount of the standard deduction. Specifically, the standard deduction became roughly 190% of the 2017 amount; i) Single taxpayers – $6,350 to $12,000, ii) Married taxpayers – $12,700 to $24,000, iii) Head of Household taxpayers – $9,350 to $18,000. To say the increase is significant is an understatement to say the least.
The increases described above were part of an overall Congressional objective of tax simplification and reduction. Depending on which pundit you might listen to, whether or not the objective was achieved is up for debate. More specifically, whether an individual taxpayer’s bottom line tax bill changes favorably (taking into account all of the new tax law changes, including the increase in the standard deduction) remains to be seen and will be dependent on individual circumstances.
As is usually the case with the tax law, there are many variables and nuances to consider in each taxpayer’s situation. Seeking the advice of an experienced, qualified tax professional is highly recommended.
The Standard Deduction – What’s New About That?
The standard deduction has a long history and changed markedly effective in 2018.