Does the TCJA simplify the tax code?
If the individual provisions of
TaxA Tax is a mandatory payment collected by local, State, and National governments from individuals and businesses to cover the cost of general government goods, services, and activities.
Cuts and Jobs Act (TCJA) expire at the end of next year, tax filing will get more complicated for millions of Americans.The TCJA simplified tax filing through two main channels: encouraging taxpayers to take the
standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. The 2017 Tax Cuts and Jobs Act, also known as the TCJA, nearly doubled it for all taxpayers.
and raising the threshold for the alternative minimum tax.Taxpayers have the choice of taking the standard deduction or using itemized deductions. Itemized deductions are a way for taxpayers to reduce their
taxable Income. Taxable income is income that is subject to tax after deductions and exemptions. Taxable income is lower than gross income for both individuals and corporations.
. Meanwhile, the standard deduction is a flat deduction available to all taxpayers.Higher-income taxpayers more often utilize itemized deductions as they tend to (among other things) make higher charitable contributions, pay more in mortgage interest, and pay higher state and local taxes, making itemizing more advantageous than taking the flat standard deduction. It is more difficult to comply with itemized deductions. The TCJA shifted many people to the standard deduction due to a few major modifications. First, the law nearly doubled the standard deduction, from $6,500 to $12,000 for single filers and from $13,000 to $24,000 for joint filers, both of which have since been indexed for
inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck will cover less goods, bills, and services. It is sometimes called a “hidden” tax, as it makes taxpayers less wealthy due to increased costs and “bracket-creep”, while increasing government spending power.
These changes were also connected to a broader reform of how the tax code treats families, which included an expansion of the child
tax credit. These changes were also part of a larger reform of the tax code, which included an increase in the child tax credits. A tax credit is a provision of the tax code that reduces the final tax bill of a taxpayer dollar-for-dollar. A tax credit is different from deductions and exclusions, which reduce the taxpayer’s final tax bill, dollar-for-dollar.
. It also eliminated miscellaneous itemized deductions. It also eliminated miscellaneous itemized deductions.The TCJA’s effect on complexity is clear. In 2017, 46.8 millions tax returns claimed itemized tax deductions, which is equivalent to 30.6 percent. In 2018, following the tax reform, only 17.5 millions individual tax returns claimed itemized deductibles or 11.4 per cent. Since then, the percentage of taxpayers who itemize has remained around 10 percent after remaining relatively stable near 30 percent in previous decades. The AMT was designed to prevent high-income tax payers from using excessive deductions to reduce taxable income. The AMT requires taxpayers to add up several deductions and tax items. It also allows for an AMT exemption, which phases out over time for higher earners. Finally, it applies lower tax rates. The AMT is a good idea, but it’s not a substitute for reforming tax deductions. Adding a second tax system also adds complexity to the tax system. In 2016, 89 percent (or about 89 million) of AMT filers had incomes below $500,000.The TCJA dramatically increased the exemption threshold for the AMT and the exemption. The AMT exemption for 2024 will be $85,700 for single filers and $133,300 joint filers. The exemption phaseout threshold for 2024 will be $609,350 single filers and $1,218,700 joint filers. The amounts are adjusted annually for inflation. In 2017, the AMT affected 5 million taxpayers, or 3 percent. In 2018, only 250.000 taxpayers were subject to AMT. The reduction in the number of taxpayers who pay the AMT is not the whole story. Other taxpayers are also required to calculate their AMT liability to determine if they have to pay it. In 2018, a Tax Foundation report estimated that the changes to standard deductions and itemized deductions save taxpayers between $3.1 and $5.4 billion in compliance costs each year. The reduced burden of AMT reporting saved taxpayers $4.6 billion. This means that the total simplification benefits could be $10 billion per annum (valued higher today due to inflation and economic growth). If the TCJA changes expire, they will force more taxpayers into more complex tax filing scenarios, which will increase overall compliance costs by millions of dollars.
While TCJA simplified tax codes for most personal income tax payers, the complexity of the tax code is largely on the business side. The new 20 percent deduction for pass-through businesses under the TCJA is quite complex. The deduction was created by policymakers to provide tax benefits to pass-through businesses, which are businesses taxed under the personal income tax because the corporate rate reduction does not apply to them. This provision had to be accompanied by complicated backstops in order to prevent individuals from reclassifying their labor income as business earnings. The TCJA did not change the complexity of business taxes in any significant way, other than the pass through deduction. The TCJA eliminated a major
tax expenseTax expenditures are deviations from the “normal tax code” that lower the tax burden for individuals or businesses through an exemption or deduction, credit or preferential rate. Expenditures are provisions that can cause significant revenue losses for the government. These include the earned income tax credits (EITC), the child tax credits (CTC), the deductions for employer health care contributions, and tax-advantaged saving plans.
is the domestic production activities tax deduction. It also introduced the research and development (R&D), which added complexity and penalized investments by requiring companies spread deductions for R&D over five years. The TCJA has also changed international taxation in a significant way, replacing one complex system by another.
Despite this, the TCJA’s individual reforms are a significant improvement for the majority of taxpayers. Reversing the AMT limits and increasing the standard deduction could not only hurt taxpayers, but also cause more technical challenges to the IRS’s Direct File program. Direct File is currently limited to simple tax returns that (amongst other limitations) can only take the standard deduction and not itemized deductions. If the TCJA provisions expire, and itemized deductions are more valuable to more taxpayers, this could slow down the potential uptake of the IRS’s free Direct File program, reducing the cost savings for taxpayers. Not all changes in the Tax Cuts and Jobs Act were beneficial to taxpayers. However, the TCJA reduced compliance costs overall for individual filers, and allowing fundamental structural improvements to expire would make the tax code worse.
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