Put another way, those taxpayers collectively received $925 billion more in deductions than they would have received if they had been required to claim the standard deduction.īecause the 2017 tax act nearly doubled the amount of the standard deduction and placed new limits on itemized deductions, taxpayers claimed itemized deductions on fewer than 18 million tax returns in calendar year 2019 those itemized deductions totaled $645 billion. By comparison, if the taxpayers who filed those returns had claimed the standard deduction instead, their deductions would have totaled $475 billion, and aggregate taxable income would have been about $925 billion higher. Those itemized deductions totaled $1.4 trillion. In calendar year 2017 (before the 2017 tax act took effect), taxpayers claimed itemized deductions on almost 47 million tax returns, according to the Internal Revenue Service. Because most statutory tax rates will increase when the 2017 tax act expires, the tax benefit of itemized deductions will also generally increase in 2026. The net effect of the expiration of those provisions will be to increase the number of taxpayers who itemize and the amount of deductions they claim. Pease and often called the Pease limitation, can reduce those itemized deductions by up to 80 percent, depending on the taxpayer's income. That limit, originally proposed over 30 years ago by Congressman Donald J. Finally, a provision that reduces the overall value of certain itemized deductions will be restored for taxpayers whose AGI exceeds a specified threshold. Furthermore, several itemized deductions that were temporarily eliminated by the 2017 tax act will be reinstated, including the deductions for unreimbursed employee expenses and tax preparation fees. The limit on state and local taxes will be removed, and the limit on mortgage interest will revert to the higher aggregate loan amount ($1.1 million) set by pre-2018 tax law. In addition, several restrictions on deductions that were put in place by the act will no longer be in effect. The standard deduction will be reduced by roughly 50 percent, making itemization beneficial for more taxpayers. Many of the tax rules relating to itemized deductions were also affected by the 2017 tax act and, like those affecting the AMT, are scheduled to expire at the end of 2025. The AMT does not currently affect many taxpayers, but the Congressional Budget Office projects that, once changes put into effect by the 2017 tax act (Public Law 115-97) expire at the end of calendar year 2025, the AMT will affect more than 7 million taxpayers. (AGI consists of income from all sources not specifically excluded by the tax code, minus certain deductions.) The alternative minimum tax (AMT), which acts as a parallel tax system, also serves as a limit on itemized deductions by disallowing some and restricting others. For some types of expenses, such as medical expenses, only the amount that exceeds a certain percentage of the taxpayer's adjusted gross income (AGI) can be deducted. Currently, taxpayers cannot deduct more than $10,000 in state and local taxes, nor can they deduct home mortgage interest on loan amounts over $750,000. The tax code imposes several limits on the amount of itemized deductions that taxpayers can claim. (Tax expenditures are exclusions, deductions, preferential rates, deferrals, and credits in the tax system that resemble federal spending in that they provide financial assistance for specific activities, entities, or groups of people.) Most of the tax savings from itemized deductions constitute a tax expenditure for the federal government. For instance, $10,000 in deductions reduces tax liability by $1,200 for someone in the 12 percent tax bracket and by $2,400 for someone in the 24 percent tax bracket.īecause deductions reduce the cost of incurring certain expenses, they serve as subsidies for undertaking deductible activities. The change in taxes from deductions depends on the taxpayer's marginal tax rate (the percentage of an additional dollar of income that is paid in taxes). For calendar year 2022, the basic standard deduction amount ranges from $12,950 for a single filer to $25,900 for a married couple filing jointly, with additional amounts allowed for taxpayers who are age 65 or older or blind. Taxpayers benefit from itemizing when the value of their deductions exceeds the amount of the standard deduction. Deductions reduce the amount of income subject to taxation (taxable income). When preparing their income tax returns, taxpayers may choose to take the standard deduction-a flat dollar amount-or to itemize and deduct certain expenses, such as state and local taxes, mortgage interest, charitable contributions, and some medical expenses.
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