Ready or not, it's officially tax season. Over the next two months more than 100 million taxpayers who haven't already filed their taxes for the 2016 calendar year are expected to prepare and file their taxes, or at least file for extensions.
For many Americans, tax time is somewhat bittersweet. On one hand, preparing your taxes and reviewing your finances over the past year can bring about the same level of excitement as watching paint dry. The main reason preparing your taxes can be such an arduous process is that the U.S. tax code is incredibly complicated -- the Tax Foundation found that the U.S. tax code is now comprised of more than 10 million words. Just as terrifying, the instructions to complete Form 1040, the most basic federal income tax form, are more than 100 pages long.
Image source: Getty Images.
On the other hand, nearly three-quarters of all taxpayers, according to IRS data, are due federal tax refunds in a given year. Preparing your taxes may be a complete pain, but for most taxpayers the reward is a refund check that's averaged anywhere from $2,700 to $3,100 over the past couple of years. That sizable chunk of change can make a big difference for an individual or family.
The evolution of the standard tax deduction
The goal for each taxpayer is simple: owe as little as possible and/or maximize their refund. The means to both ends is maximizing your tax credits and deductions -- legally, of course.
For most taxpayers, one of the biggest tax deductions usually winds up being the standard tax deduction, which for 2016 was $6,300 for single filers and married filers with separate returns, $12,600 for joint filers, and $9,300 for persons claiming head of household status.
The standard tax deduction was put in place all the way back in 1944 to ensure that all taxpayers had at least some of their income shielded from taxation by the federal government. Standard tax deductions have typically increased on par with the rate of inflation, although between 1944 and 1969, one could take 10% of their adjusted gross income as a standard deduction, up to a maximum deduction of $1,000. Here's a look, courtesy of data aggregated by the Tax Policy Center, of how the standard tax deduction has evolved since 1970.
Data source: Tax Policy Center. Chart by author.
Taxpayers typically have two choices. They can either choose to itemize their deductions and provide evidence of their itemized deductions to the IRS if requested, or they can choose to take the flat-rate standard tax deduction, which comes with no questions asked.
Obviously the smarter choice for taxpayers is to take the deduction that reduces their tax liability the most, but that's not always what happens. Because the U.S. tax code can be so complicated, and because consumers fail to keep good tax records of deductible expenses, most taxpayers don't itemize their deductions and prefer to go with the "safer" route of taking the standard tax deduction. As such, it's probably fair to say that some taxpayers are leaving money on the table and in the hands of Uncle Sam by not itemizing.
Trump's tax proposal could mean big changes to the standard tax deduction
While the standard tax deduction has historically increased in value with the inflation rate, proposed individual income tax reforms from President Trump could mark a major step away from this inflationary increase.
During his campaign, Donald Trump offered to simplify the U.S. tax code by adopting the House Republicans' tax reform plan. The House individual income tax plan would reduce the current seven-bracket tax schedule, which ranges from a low of 10% to a high of 39.6% on ordinary income, to a three-bracket tax schedule consisting of 12%, 25%, and 33% ordinary income tax brackets. More importantly, Trump would eliminate practically all deductions and credits, save for the charitable giving deduction and mortgage interest deduction. The head of household claiming designation would also disappear.
Image source: Department of Defense Current Photos, Flickr.
On the flipside, Trump's tax reforms would also provide a sizable increase in the standard deduction taxpayers would receive. The standard tax deduction for single filers would increase to $15,000, while married filers would be able to claim a standard deduction of $30,000. The large proposed increase in the standard tax deduction is what Trump claims will keep a lot of lower-income folks from owing anything come tax time.
What remains to be seen is if Trump's (and the House Republicans') tax proposal gains any traction. Passing a tax reform bill is going to take an airtight tax plan as well as the support of most Republicans and even some Democrats in Congress. While it remains a priority of the Trump administration, it's still likely months, or even more than a year, away. For taxpayers, Trump's tax tactics are worth keeping an eye on, but it's not worth adjusting your tax strategy just yet.
