Question

The December 2017 tax reform bill significantly increased the standard deduction and eliminated an entire class of itemized deductions (the Miscellaneous Deductions including tax preparation costs, investment advisory fees, gambling losses, personal casualty losses, investment expenses, and work-related expenses of W2 employees). The tax reform law also limited the mortgage interest, real estate, property, sales, and state income tax deductions. Do each of the following:

Select one of the eliminated deductions and explain the economic changes that will result from the deduction’s elimination. What taxpayers will lose as a result of the eliminated deductions? How will that change the economic incentives that are present in our economy?

Explain the impact of the increased standard deduction on the number of taxpayers who itemize each year. What taxpayers will benefit? Which taxpayers will not benefit?

Explain the economic impacts of limiting the real estate, property, sales, and state income tax deductions to $10,000. What taxpayers will benefit? What taxpayers will not benefit?

Answer 1

The Tax Laws of country nowdays are shifting from Itemizing to Standard deductions. Some may consider Standar deductions useful while some may consider it not useful.

We will understand the concept with an example.

Eg. Repairs to Real estate, a significant item is also shifted from itemised to standard deduction. Earlier Assessee has to produce the original bills in front of the Assessing officer in charge and only then, deduction was granted which resulted in consumption of money as well as time. If the produced bills were able to satisfy the officer, only then deductions were allowed. Assessing officer was also assigned to thoroughly check those expenses.

However now there is no need to do that as Standard deduction is availaible to all the assessee irrespective of any such bills present or not, or such expenditure incurred or not. This also reduces the assessing officer pressure/work load as he does not have to check whether expenditure has been incurred or not, reducing various resources of department such as cost and time.

But this benefit come with a cost which is even if the amount exceeds the standard deduction availaible to you and original bills are present with assessee, officer would not allow the same as standard deduction is the only deduction permitted now. Hence no further benefit or expenditure is allowed even if they are real. Hence Tax payers paying large bills than the standard deduction can not claim such higher charges than the standard deduction. The excess amount incurred by them will not be reduced.

But large no of tax payers of society does not have such bills on a yearly basis. And even if they are, they does not exceed the standard deductions. Hence its a great economic incentive to such taxpayers as their tax bills are reduced drastically and also they doesnt have to produce any bills to claim so.

Another example for standardisation is sales. With the recent changes, an assessee has the option to pay taxes on profits calculated by reducing standard dedctions. However if he is of opinion that his profits are below than such amount, he/she can prove that by producing bills and invoices. Thus it provides a choice to elect standard deduction or not.

Large no of tax payers are in support if this decision as now they are hassle free as only a part or percentage of their profits has to be paid as taxes and that too without any hassle.

Conclusion

Benefits to tax payers

1. Hassle free work
2. No need to produce bills and invoices
3. Cover large no of small taxpayers of the economy.
4. Reduction in resources consumed such as time and money.

Disadvantages to tax payers

1. If the amount is higher than the standard deduction, no resort for such amounts.
2. Detailed checking if assessee elect not to apply standard deduction not availed and apply normal procedures and relevent rules.