More Tax Breaks, More Headaches
We all know that the tax code is complicated. But one rule has long shielded most taxpayers from that complexity: the standard deduction.
The standard deduction is a fixed amount, currently around $16,000 (and doubled for a married couple). Each year at tax time, taxpayers choose between deducting that amount or claiming itemized deductions such as mortgage interest, charitable contributions, state and local taxes, and medical expenses.
The premise behind the standard deduction is simple. Rather than itemizing minor expenses (a $500 charitable contribution here, a $1000 medical expense there), most taxpayers need not go through the trouble. Unless your itemized deductions collectively exceed the standard deduction, you claim the standard deduction. Conversely, only those taxpayers whose itemized deductions add up to more than the standard deduction claim them on their tax return. This turns out to be only about 10 percent of taxpayers. The other 90 percent file significantly simpler tax returns by virtue of not itemizing. This is the intent of the standard deduction, and it’s good policy.
But in 2017, Congress passed the Tax Cuts and Jobs Act and did something unusual. It created a new “pass-through” business deduction for certain small businesses and allowed taxpayers to claim it in addition to the standard deduction. Taxpayers now choose between itemizing or taking the standard deduction, and then claim the pass-through deduction on top if they are eligible.
On its own, the new pass-through business deduction added needless complexity to the tax system. But last summer, in the One Big Beautiful Bill Act (OBBBA), Congress expanded the approach. Lawmakers created several new deductions that operate outside the itemized-deduction system. These include a deduction for interest on cars made in the United States, a deduction for tips, a deduction for overtime income, and a new $1,000 charitable deduction.
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These deductions all stand alone. In other words, taxpayers who claim the standard deduction (which again, is most taxpayers) claim them in addition to the standard deduction. A worker who receives deductible tips, earns deductible overtime pay, and makes a $100 charitable donation now has three additional items to track and report.
The political appeal is obvious. If Congress makes the car-loan interest deduction an itemized deduction, the 90 percent who take the standard deduction can’t use it. The same is true for tips and overtime. So lawmakers created new deductions outside the itemized-deduction framework.
But there is a significant cost to writing tax laws this way. Each time Congress adds a tax break by creating a new line item on the tax return, the preparation process becomes longer and more complex. And the tax law becomes harder to comprehend.
The OBBBA adds four new line items in addition to the standard deduction. (One of these rules, the new $1000 charitable deduction, doesn’t take effect until next year’s filing season.) Each new rule comes with its own complexity in the form of caps, income phaseouts, and eligibility criteria. This is not good tax policy. And it runs completely counter to the point of the standard deduction, which is to make tax return preparation simpler, cheaper, and less time consuming.
Congress is also setting a dangerous precedent. Each election brings new promises for targeted tax breaks. Over time, the exceptions will swallow the rule. Taxpayers must now sort some expenses into itemized deductions, compare them to the standard deduction, and track a growing list of additional deductions on top. Lawmakers don’t just give up revenue when they hand out tax preferences — they legislate away the very simplicity the standard deduction was designed to create.
