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A House committee has approved a bill that would temporarily extend the standard tax deduction used by most taxpayers by $2,000 per person for the next two years.
The “Tax Cuts for Working Families Act” (H.R.3936), recently approved by the House Ways and Means Committee, which writes the tax law, would temporarily increase the standard deduction by $2,000 for single taxpayers and $4,000 for married taxpayers in 2024 and 2025. The deduction would begin to phase out for single taxpayers whose income reaches $200,000, or $400,000 for married taxpayers. A financial advisor can help you optimize your tax strategy and understand the changes to the tax code.
“The vast majority of my constituents use the standard deduction on their taxes every year,” said West Virginia Representative Carol Miller, adding that the measure will increase economic activity in local economies. “The additional $4,000 deduction represents a $100 billion tax cut for working families and will go a long way toward helping my constituents make ends meet.
Potential Impact of Standard Deduction Increase
Nearly two-thirds of households would receive a tax cut in 2024 under the proposal, according to Penn Wharton’s nonpartisan budget model research. However, because the standard deduction reduces the amount of income subject to tax, it is not refundable and would not bring money to low-income taxpayers. In fact, only a small percentage of the poorest 20% of families have enough income to benefit from a tax cut under the proposal, the Pennsylvania researchers concluded.
But those at the top of the income scale wouldn’t benefit from significant tax savings if the bill passed, either. Not only is the highest deduction phased out for incomes of $200,000 or more (or $400,000 for couples), but a higher proportion of high-income families use itemized deductions.
“The poorest fifth of Americans would receive only 2% of the benefits of this provision, which means on average a tax cut of only $30 next year,” said Richard Neal, Massachusetts representative and ranking Democrat on the committee.
According to Pennsylvania researchers, the change would cost about $96 billion over 10 years.
The standard deduction for 2023 will be $13,850 for singles and $27,700 for couples. The deduction nearly doubled under the 2017 Tax Cuts and Jobs Act, which expires in 2026. A growing number of taxpayers have opted to claim the standard deduction rather than itemize deductions for mortgage interest, charitable contributions, medical expenses and a host of other deductible expenses. According to the IRS, 90% of taxpayers opted for the standard deduction for their 2021 taxes.
Will it Help Ease Inflation or Make it Worse?
Proponents of the temporary increase said it was aimed at reducing inflation, which reached 9.1% last June before falling back to 4% in May. The Federal Reserve’s inflation target is 2%, which is the historical average.
This reasoning was criticized in an analysis by the conservative American Enterprise Institute, which pointed out that the increased disposable income of so many Americans tends to exacerbate inflation and contradicts the Federal Reserve’s efforts to slow consumer spending by raising interest rates.
Conclusion
An increase in the federal income tax standard deduction would benefit most American households, but only a small number of low-income taxpayers would see their tax bill fall. Since the increase in the standard deduction in 2017, fewer taxpayers have itemized their deductions on their returns.
Tax Optimization Tips
- When it comes to saving and investing for retirement, taxes are an important and complicated consideration. Saving in a traditional IRA or 401(k) gives you an immediate tax break, since contributions are made pre-tax. A Roth account, on the other hand, is funded with after-tax dollars, so your money grows tax-free. Here are some additional tips for late career savers who decide to switch to a Roth account.
- An experienced financial advisor can help you optimize your tax strategy. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three approved financial advisors in your area, and you can make a free introductory call with your assigned advisors to decide which one is right for you.
