It’s Fix The Tax Code Friday!
Tax reform is front and center these days in the minds of many taxpayers. But what tax reform might look like is still a big question. Should it be a simple rate change? Eliminate tax credits and deductions? Or somewhere in the middle?
One proposal involves limiting rather than eliminating tax deductions. To limit deductions, instead of cutting the charitable deduction or the home mortgage interest deduction, a flat dollar amount would be imposed. If that sounds familiar, it is: the idea of capping deductions has been pitched by a number of candidates over the years, including former presidential hopeful Mitt Romney, who suggested a cap of $25,000. A 2014 study of the issue prepared for Congress noted that “proposals on the exact value of a flat-cap have varied from $17,000 to $50,000 per joint tax filing unit.” That same study found that a $17,000 cap would affect 71% of taxpayers who itemize while a $50,000 cap would affect taxpayers with incomes above $250,000, approximately 6% of all taxpayers who itemize.
(You can read the study, which downloads as a pdf, here.)
Currently, approximately two-thirds of all taxpayers claim the standard deduction. You tend to itemize your deductions if the total of your deductions exceeds the standard deduction. For the current tax year, the standard deduction for single taxpayers and married couples filing separately is $6,350 in 2017; for married couples filing jointly, the standard deduction is $12,700.
Another option would be to cap itemized deductions by a percentage of adjusted gross income (AGI). That feels like it might be more “fair” result (feel free to decide what you think that means) – but clearly, less simple.
The idea, no matter how it is capped, is to limit the amount of available deductions for taxpayers. The result, of course, without any further adjustments would be higher taxes for some taxpayers. That’s why the proposal in its various iterations tends to be tied directly to lower tax rates.
That, of course, brings us to today’s Fix The Tax Code Friday question:
Would you support a limit on itemized deductions in exchange for lower tax rates?
