The Republican plan to nearly double the standard deduction as part of a sweeping tax overhaul appears to be a windfall for average Americans because it would allow them to shield thousands of additional dollars from taxes.
But don’t start planning how you’d spend those savings yet.
Another un-touted proposed change that would eliminate personal exemptions would significantly reduce the benefit for some people and conceivably wipe it out for others.
A family with two or more children actually could end up worse off than under the current tax code, depending on the final shape of the law, a sign that the Republican plan might not help the middle class as much as it does the wealthy.
“It is definitely not a windfall,” Jacob Leibenluft, a senior advisor at the Center on Budget and Policy Priorities, a liberal think tank, said of the larger standard deduction.
“You have all of these pieces that serve to give with one hand and take away with another hand and whether people come out as winners or losers we won’t know until we get all the details,” he said.
The uncertainty about the effects of the larger standard deduction, which affects lower- and middle-income earners, contrasts with the clear benefits already in the Republican tax plan for wealthy Americans. The top tax rate would be lowered to 35% from 39.6% and the estate tax and alternative minimum tax would be eliminated.
“They’ve done a big specific tax break for the wealthy and they are much more muddled for those at the bottom and in the middle,” Leibenluft said.
The larger proposed standard deduction would mean that individual filers would be able to reduce their taxable income by $12,000 right off the top instead of the current $6,350, according to the tax reform framework released Wednesday by President Trump and top congressional Republicans
Married couples filing jointly would be able to use the standard deduction to reduce their taxable income by $24,000 instead of the current $12,700.
“Under this framework, the first $12,000 of income earned by a single individual will be tax free, and a married couple won’t pay a dime in taxes on their first $24,000 of income,” Trump said as he pitched the plan in a speech Wednesday in Indianapolis.
“So, a married couple … can spend their money on their family, on their children, on what they have to do. So much better,” he said. “In other words, more income for more people will be taxed at a rate of zero.”
But Trump didn’t mention that the framework also proposes to eliminate the existing $4,050 exemption that can be claimed by taxpayers for themselves, their spouses and their dependents and also reduces taxable income. That exemption currently phases out at upper-income levels.
Under existing law, a single filer can combine the $6,350 standard deduction and $4,050 personal exemption to shield $10,400 from federal income tax. Under the Republican plan, a single filer can shield $12,000, so there’s a $1,600 benefit there.
But it’s a different story for people with children.
Under existing tax law, a married couple with two children can combine the $12,700 standard deduction and $16,200 in personal and dependent exemptions to shield $28,900 from federal income tax. Under the Republican plan, that same couple would be able to shield just $24,000.
“Increasing the standard deduction and losing the personal exemption is a trade-off that might work for single filers with no kids,” said Howard Gleckman, a senior fellow at the nonpartisan Tax Policy Center. “It doesn’t work at all for a single filer with two kids. They’d be worse off.”
“The more kids you have, the worse off you are in that trade-off,” he said.
The Republican plan promises to offset some of the loss from eliminating the personal exemption for families by “significantly” increasing the existing $1,000 tax credit available for each child younger than 17 years old. But that figure still has to be determined by the White House and Congress as they work to draft legislation and then try to pass it.
The Republican tax plan also proposes a new $500 tax credit for other non-children dependents, such as elderly relatives, that also could help offset the loss of the personal exemptions.
And most importantly, the Republican tax plan has not defined the income level for new tax brackets.
Those proposed brackets include an increase in the lowest one to 12% from 10% — a bump that Trump and Republican leaders said would be offset by the larger standard deduction.
The income levels for the new 12%, 25% and 35% brackets would determine how much taxes people pay on income not shielded by the standard deduction and are key to figuring out if they would be better off under the Republican plan.
For example, a person with income of $60,000 currently pays taxes in three different brackets: 10% on the first $9,325 of taxable income; 15% on income from there to $37,950, and 25% on the rest.
It’s not known what the income levels would be for the new 12% and 25% brackets.
Gary Cohn, Trump’s top economic advisor and an architect of the plan, said Thursday that based on administration assumptions about the income levels that would be attached to the brackets, the increased standard deduction would benefit the middle class.
A typical family earning $100,000 with two children that uses the standard deduction “can expect a tax cut of about $1,000,” Cohn told reporters at a White House media briefing.
“Don’t look at any one piece. Look at the plan in its entirety,” he said. “We are going to give middle-class Americans a tax cut.”
Democrats said they haven’t seen the evidence.
“When Republicans propose increasing the standard deduction and at the same time eliminate the personal and dependent exemptions, you're going to have a lot of families, particularly the large ones — and the Republicans say that they're the champions of family values — those folks are going to have a net tax increase,” Sen. Ron Wyden (D-Ore.) said Wednesday.
Experts said that until lawmakers decide on the other key tax plan details, it’s unclear if the larger standard deduction would put more money in people’s pockets.
“There will be some low- and moderate-income people who will benefit from an increase in the standard deduction even if they lose their personal exemption. There are other people making the same amount of money who will lose in that trade-off just because of the structure of their family,” Gleckman said.