Today we were all supposed to see the unveiling of the Republicans’ tax plan, complete with facts and figures, drafted as a bill Congress could pass. This has not happened yet, because they can’t agree among themselves over the details and are even now radically changing their own plan to assuage their own membership. We might see their tax plan tomorrow, but then again maybe we won’t. There are many aspects of the GOP’s tax plan that are broadly known so far, and others which are vague and ill-defined. The latter is what everyone’s waiting to see, because drafting an actual bill means putting figures on paper rather than just creating political talking points ― which is so far all Republicans have done on many aspects of their plan. But they did put numbers to one radical change to the income tax law already, so their proposal to almost double the standard deduction while eliminating personal exemptions can already be subject to a deep and wonky dive into the numbers.
As with almost any fundamental change to the tax system, answering the question “Is this going to help or hurt me and my family?” is a tough one to answer. This is especially true in this case, because it is an example of one hand taking while the other is giving away (or robbing Peter to pay Paul, choose your own metaphor). There are many factors involved, and the way the numbers work almost assures that there will indeed be both winners and losers at all income levels. Without seeing the final GOP plan, it’s impossible to say what will happen to Schedule A, for instance, where Republicans have been eyeing removing deductions for state and local income taxes (including, up until a few days ago, also removing property tax deductions ― but that is rumored to have now changed). The proposed removal of the Alternative Minimum Tax will also impact how many families figure their deductions and their taxes. These and other changes make it complex to figure out who exactly will be benefiting, who will be losing out, and by how much.
To keep things simple, I’m going to ignore all the other changes today, and look at the simplest tax return possible ― one where the tax filer only claims the standard deduction (instead of using Schedule A to itemize deductions). I’m also not going to take into account income level, which could very well change the final numbers for even the simplest tax returns (raising or lowering the actual amount of taxes paid, in other words). I’m just looking for the simplest way to see whether families would benefit by the proposed change to the standard deduction and the elimination of exemptions.
First, I’ll lay out how things stand now versus the proposed changes. Then I’ll run the numbers for four examples: a single person with no children, a single parent with one minor child living with them, a married couple with no children, and a married couple with three kids. These aren’t all the possible scenarios, but they should serve to see the basic outline of the Republican plan.
The status quo versus the GOP proposal
Filers of the easiest tax form to fill out (1040EZ) aren’t even aware that there is a difference between the standard deduction and the personal exemption, because both are lumped into one number they can subtract from their income before the tax amount is computed. But filers of Forms 1040 or 1040A see the number broken down into two figures. The first is the standard deduction. Using 2016 figures (the latest available), the standard deduction for single people is $6,300, and for married couples it is doubled to $12,600. Added to this figure are personal exemptions, which is figured at $4,050 for every member of the household (adults and children). So a single childless tax filer would get a $4,050 exemption, a married couple or a single parent with one child would get $8,100, and a family of five would get $20,250. Also, currently families making under a certain amount of money can claim up to $1,000 as a “child tax credit,” which (unlike the standard deduction and the exemptions) is not subtracted from your income but instead subtracted from the amount of taxes you owe.
The Republican proposal is to eliminate the exemptions altogether, and roughly double the standard deduction, to $12,000 for single people and $24,000 for couples. No extra money is added to this figure for children, though. The GOP has indicated that it may raise the amount possible using the child tax credit, but they have yet to put a figure on this amount, so it is impossible to tell what the final outcome of any families’ taxes will actually be.
Single with no children
A single person with no children is the simplest example possible under the tax code. They currently get $10,350 of their income tax-free, because of the standard deduction ($6,300) and one personal exemption ($4,050). Under the Republican plan, they would do even better, because they’d take the new single $12,000 standard deduction. This results in them gaining $1,650 more tax-free income for the year, which would assumably lower their overall taxes.
Single with one child
The simplest example of a household with a child in it is a single parent with one child living at home. Currently, they would get $14,400 in tax-free income for the year, from a standard deduction of $6,300 and an exemption of $8,100. Under the Republican plan, however, they would only get the $12,000 standard deduction. This means they lose $2,400 in tax-free income, which would raise their overall taxes by the additional tax for that amount.
However, such a family also currently gets a $1,000 child tax credit (unless they made a lot of money ― this credit is phased out as income rises). This means they have to pay $1,000 less on whatever total taxes they owe. The difference between a credit and a deduction is that credits lower your taxes whereas deductions lower your income (before the taxes are calculated) ― making credits much more valuable. It is unclear how the Republicans will adjust the child tax credit, although they have been indicating they may raise it. If raised enough, the additional child tax credit could make up the difference in what this family loses in their deductions. Before hearing an actual number, though, it is impossible to say this with any certainty.
Married with no children
The famous SINKs and DINKs, in other words. “Single-income, no kids” or “double-income no kids,” this is the easiest example of a married couple to use. Currently a childless couple can claim $20,700 in their standard deduction ($12,600) and their exemptions ($8,100). Under the GOP proposal, this would rise to $24,000. This would mean a benefit of $3,300 more in tax-free income to the couple. Since they have no children, the child tax credit would not impact them in any way, either now or under the GOP proposal.
Married, three children
A large family with three children and married parents is the final example worth examining. Currently, the family gets a whopping $32,850 in tax-free income every year. They get the married standard deduction ($12,600) and $4,050 for every member of the household, which adds up to an additional $20,250. Large families will get hit the hardest under the GOP tax plan, because with the removal of the exemptions, they will only get the same $24,000 standard deduction that a childless couple gets. This results in paying taxes on an extra $8,850 per year.
Again, this could be remedied by adjustments to the child tax credit, but it’d have to be a pretty big adjustment. Currently, the family gets a $3,000 tax credit every year (if they don’t make too much in income). This tax credit would have to rise enough to cover the income tax on that extra $8,850 of income, or the family would wind up paying higher taxes each year.
If this all seems needlessly complicated, well, I didn’t come up with the Republican proposal so don’t blame me. Normally, when Congress tweaks the tax code, they make changes which everyone can see and fully understand as beneficial ― like raising either the standard deduction or the exemption amount. If, for instance, the exemption was boosted to $6,100 per person, then for every member of the household the family would get an extra $2,000 of income tax-free. That’s pretty easy to understand, in other words, no matter what size your family happens to be. But Republicans are complicating things by simultaneously taking away while appearing to generously give.
“We’re going to DOUBLE the standard deduction!” is what the GOP will say to sell their tax plan to the voters. They will not mention the fact that exemptions are disappearing, because the word “double” is so much better, politically-speaking. But even this doubling isn’t going to make up the difference for larger families ― instead, it will ultimately raise taxes for them. Taxpayers are going to have to understand this concept in order to adequately figure how the proposed changes will affect them.
There are many unanswered questions which need hard figures before this final calculation can even be made, though: What will happen to the tax brackets? Will the child tax credit rise, and if so by how much? How many families will never use Schedule A with the increased standard deduction, and how will that impact things like homebuying and charitable giving? Will there still be extra deductions for blind people and the elderly, or will those be removed as well as the exemptions? Will shifting some tax breaks for children from exemptions to a credit that is phased out as income climbs negatively affect average middle-class households?
All of these questions were supposed to be answered today, and perhaps they will be tomorrow. But it behooves journalists to understand this basic fundamental change in the tax system, because it falls to them (and to economics experts) to explain the proposal to the American public. Republicans are going to try to get away with loudly claiming they’re doubling everyone’s deductions, but they shouldn’t be allowed to make such a claim without being challenged on the basic facts. In our four examples, two families benefited ($1,650 more in tax-free income for a single childless filer, and $3,300 more for a childless couple), but two families would ― absent any other changes ― see their taxes go up ($2,400 less in tax-free income for a single parent with one child, $8,850 less tax-free income for the family of five).
Republicans could have very easily created a “middle-class tax cut” by just raising either the standard deduction or the personal exemption amount. They could also have easily helped families with children out by just raising the child tax credit. They could have phased any or all of these changes out at a certain income level to avoid the tax cut going largely to the wealthiest Americans. They did not do so ― instead, they chose a needlessly complex method that is very likely to create both winners and losers. Some families’ taxes will go down, and some will go up. Whenever the Republican tax plan is actually revealed, each family should be able to estimate pretty accurately which group they’re going to fall into. But it certainly won’t be as easy as “our standard deduction will be doubled,” that’s for sure.
Chris Weigant blogs at ChrisWeigant.com
Follow Chris on Twitter @ChrisWeigant