As part of his plan to cut taxes for all Americans, Donald Trump’s proposals calls for more than doubling the standard deduction for single and married taxpayers. While this certainly would save lots of people money, it’s not quite as big of a tax cut as it sounds at first. Here’s what people should know about Trump’s new standard deduction, and one big detail that might offset your tax savings.
How much would this deduction mean to American taxpayers?
The simple answer when talking about just the standard deduction is about $1.29 trillion per year. During the 2014 tax year, the most recent for which finalized data is available, about 102.6 million tax returns used the standard deduction instead of itemizing, and the average deduction on these returns was $8,540.
Trump is proposing to increase the standard deduction to $15,000 for single taxpayers and married taxpayers filing separately, and to $30,000 for married taxpayers filing jointly. Trump also proposes getting rid of the head of household filing status, which is currently used on about 15% of all U.S. tax returns.
|Filing Status||Trump’s Proposed|
|Married filing jointly||$30,000||$12,600|
|Married filing separately||$15,000||$6,300|
|Head of household||N/A||$9,300|
Data sources: IRS and www.donaldjtrump.com.
Based on the latest data, and considering all current head of household filers as singles, a little math reveals that the average standard deduction under Trump’s plan would be $20,445, or $11,905 more than the current average. Multiplying this by the 102.6 returns that used the standard deduction gives us a total tax break of $1.22 trillion.
We also need to consider the 44 million taxpayers who itemize. Under Trump’s plan, taxpayers whose itemized deductions add up to less than the new standard deductions would no longer itemize. The mathematics behind this get a little complex, but based on the average standard deduction under Trump and the current averaged itemized deductions taken by taxpayers, the short explanation is that the average taxpayer earning less than $100,000 who itemizes would be better off using Trump’s standard deduction. And, it would add roughly $66 billion in tax savings from this group. That brings us to a grand total of $1.29 trillion in standard deduction tax breaks.
One big caveat
However, this isn’t a $1.29 trillion tax break. As part of the plan, Trump plans to do away with the personal exemption, which is currently $4,050 per person, subject to a phase-out for high-income taxpayers. (Note: The personal exemption for the 2014 tax year was $3,950, so I’ll use that in the appropriate calculations.)
Now, here’s where it gets a little tricky. In 2014, the average tax return had a personal exemption amount of $7,548 to $11,482 for married joint filers, $4,993 for married separate filers, $10,299 for head of household, and $3,730 for single filers.
In a nutshell, the Trump exemptions are a good thing if the savings you get are greater than the personal exemption you’re losing. The average married joint filer, for example, would get an additional $17,400 in standard deduction, but would lose $11,482 in personal exemptions, which translates to a net deduction of $5,918.
Here’s how it would affect the average taxpayer’s deduction, by filing status:
|Filing Status||Standard Deduction (Trump)||Standard Deduction (Present)||Difference||Average Personal Exemption||Net Deduction Change|
|Married filing jointly||$30,000||$12,600||$17,400||$11,482||$5,918|
|Married filing separately||$15,000||$6,300||$8,700||$4,993||$3,707|
|Head of household||$15,000||$9,300||$5,700||$10,299||-$4,599|
Data sources: IRS and www.donaldjtrump.com.
There are a couple of things to note here. First, taxpayers who currently file as head of household will actually see their deduction go down, on average, by about $4,600.
Second, these are just averages, and the change in your deduction would depend on your filing status and how many dependents you claim. For example, a married couple filing jointly who has three children would lose $20,250 in personal exemptions this year, and would actually see their net deduction decrease by nearly $3,000.
For this reason, it’s useful to analyze the breakeven family size numbers for Trump’s plan. Based on filing status, these are the breakeven points. In other words, if your family size is less than the breakeven number (for 2016), you could expect your standard deduction to outweigh the lost personal exception. If your family size is larger, Trump’s tax plan could actually hurt you.
|Breakeven Family Size|
|Married filing jointly||4.3|
|Married filing separately||2.1|
|Head of household||1.4|
Calculated as the increased standard deduction, divided by the 2016 personal exemption amount.
In a nutshell, most people will come out ahead. The vast majority of single taxpayers have one dependent or fewer, and the average married couple has two children or fewer (remember, this includes older married couples who no longer have dependents). However, it’s important to realize that this isn’t an across-the-board tax cut. Many taxpayers would certainly benefit, but others would not.
How big of a tax break is this, really?
Since this would increase the standard deduction by $1.29 trillion, but would eliminate $1.12 trillion in personal exemptions, Trump’s big increase in the standard deduction would only exempt an additional $170 billion from taxable income. This is still a significant amount, but not nearly as much as it seems.
Finally, bear in mind that the standard deduction change is only one part of Trump’s proposed tax changes. He also wants to change the tax brackets, and offer additional breaks for child care, which could help offset the loss of the personal exemption for large families.
Matthew Frankel. Oct 7, 2016