How Trump Wants to Change Your Tax Deductions

Expect big changes to your deductions if Congress adopts President Donald Trump's tax changes.

The proposals released Wednesday explicitly call for doubling the standard deduction and protecting write-offs for homeownership and charitable gifts.

The standard deduction is a fixed amount taxpayers can subtract from income if they don't itemize write-offs for mortgage interest, donations to charity, state and local taxes and other items on Schedule A. This benefit dates to 1944, when Congress wanted to simplify filing as it broadened the income tax from a "class tax" to a "mass tax" to help finance World War II, said Joseph Thorndike, a historian with Tax Analysts.

Currently the standard deduction is $6,350 for single taxpayers and $12,700 for married joint filers. About 70% of tax returns opt to use it instead of itemizing.

Mr. Trump wants to double the standard deduction, raising it to $12,700 for singles and $25,400 for married joint filers. According to an estimate by the Tax Policy Center, this change could reduce the percentage of itemizers from 30% to as little as 5%.

Such an increase could cut taxes and simplify filing for many people. It would also take pressure off the overburdened Internal Revenue Service, because the agency wouldn't have as many deductions to police.

While the full implications of Mr. Trump's proposals won't be clear until crucial details are revealed, the changes could create winners and losers.

Last year, both Mr. Trump and House Republicans issued tax plans with large increases in the standard deduction. To make this feasible, they proposed rescinding the personal exemption, which is a break of $4,050 per person for taxpayers and their dependents.

The current proposals don't address this issue, but the loss of this valuable break could hurt large families, unless other benefits are broadened.

Another maneuver in Mr. Trump's 2016 plan would have rescinded a special tax status for single parents. This change, together with others he proposed, would have caused many single parents to owe more despite a larger standard deduction, according to Roberton Williams of the Tax Policy Center.

For example, Mr. Williams said, a single parent earning $100,000 would owe about $1,400 more under Mr. Trump's 2016 plan than under current law unless changes are made.

Mr. Trump's recent proposals, which includes his promise to protect deductions for mortgage interest and charitable donations, suggests that other write-offs on Schedule A are in jeopardy. Currently these include breaks for medical expenses; state and local taxes paid; investment interest; casualty and theft losses; gambling losses; and certain employee expenses, among others.

The deduction for state and local taxes is especially at risk given the Republican majority in Congress. Its benefits go mostly to taxpayers in states where Democrats hold sway, such as California, New York and New Jersey.

This deduction also costs the government a great deal of revenue. Taxpayers using it this year will save more than $100 billion, according to the congressional Joint Committee on Taxation. That is more than the mortgage-interest deduction.

Should this deduction be repealed, the pain would be spread unevenly due to another quirk in the law: taxpayers subject to the Alternative Minimum Tax already lose all or part of their state and local tax deductions.

The Alternative Minimum Tax was first imposed nearly 50 years ago to keep the wealthy from overusing tax breaks. Based on the tax's current construction, taxpayers who earn about $200,000 to $1 million a year wouldn't feel the loss of their state and local tax deductions as much as middle-class taxpayers or very high earners, Mr. Williams said.

There is yet another way deductions could take a hit if Mr. Trump's proposals are adopted. The White House release calls for three tax brackets -- 10%, 25% and 35% -- instead of seven. While that could bring a welcome drop in tax rates for many, it would also lower the value of write-offs, because the savings from deductions are proportional to the tax rate.

Write to Laura Saunders at laura.saunders@wsj.com

(END) Dow Jones Newswires

April 28, 2017 08:08 ET (12:08 GMT)