Not long after Congress averted the debt limit crisis through bipartisan legislation signed by President Biden, Republicans in the U.S. House of Representatives have proposed $237 billion in tax cuts. As Kiplinger reported, the House GOP tax cut package is a trio of bills covering a broad range of potential tax changes, including a temporary, bonus standard deduction called the “guaranteed deduction.”
“This bonus will help ease the burden of inflation and allow families to spend their hard-earned wages the way they see fit,” Rep. Michelle Steel (R-Calif.) said in a statement regarding the bill. Steel, a member of the House Ways and Means Committee, introduced the proposal earlier this month alongside fellow Ways and Means member Rep. Nicole Malliotakis (R-NY).
Whether bipartisan support exists for various provisions in the tax package is uncertain. However, the proposed bonus standard deduction has triggered debate over which taxpayers — wealthier or those with middle or lower incomes — will benefit. Here's what you need to know.
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GOP Proposes Temporary Bonus Standard Deduction
- House Republicans have proposed tax legislation. The Tax Cuts for Working Families Act contains a temporary boost to the standard deduction.
- The higher deduction would be renamed the “guaranteed deduction.”
- The bonus standard deduction would be temporary, however, expiring in 2025.
- Early estimates from the Joint Committee on Taxation are that the bonus standard deduction would cost nearly $97 billion over 10 years.
The House GOP bill proposes a new bonus deduction ($4,000 for joint filers, $3,000 for head of household, and $2,000 for single filers) that would be added to the standard deduction for two years (2024 and 2025 tax years). The bonus deduction is inspired by the 2017 Tax Cuts and Jobs Act (TCJA), which nearly doubled the standard deduction.
Note: The TCJA (also commonly known as the Trump tax cuts) either placed restrictions on, eliminated, or in some cases, essentially reduced the benefit of various itemized deductions for things like mortgage interest, state and local taxes, and charitable contributions. Those changes, along with some other tax cuts under the TCJA, are set to expire in 2025.
The proposed bonus deduction would phase out at $200,000 for single filers, $300,000 for head of household, and $400,000 for joint filers. Proponents say the top 1% of taxpayers would not receive a tax cut due to the bonus deduction essentially because wealthier taxpayers tend to itemize deductions.
Note: Whether you take the standard deduction or itemize is generally up to you (there are some exceptions), but most taxpayers take the standard deduction.
On Wednesday, Jason Smith (R-Mo.), chair of the Ways and Means Committee, highlighted a June 14 analysis by Penn-Wharton. According to the analysis, middle-class families and older adults with moderate incomes would benefit the most from the guaranteed bonus deduction. Penn-Wharton’s model also found that two-thirds of households would receive a tax cut, with middle-income families seeing the largest increase in after-tax income.
“Economists confirm the Guaranteed Deduction Bonus is a tax cut for working families,” Smith said in a statement regarding the findings.
Who Really Benefits From a Bonus Standard Deduction?
The Penn-Wharton analysis comes alongside Tax Policy Center findings, which indicate that the temporary increase in the standard deduction would result in modest tax cuts for most households. However, according to the TPC, those gains would translate into small tax increases in 2025 when the bonus deduction would expire.
Similarly, the Institute on Taxation and Economic Policy’s (ITEP's) analysis of the House GOP bills suggests that the bonus standard deduction may offer support to middle-income taxpayers. However, ITEP says the bonus deduction would provide little assistance to those in greater need.
- ITEP’s revenue impact analysis of the GOP tax cut package put the cost of the bonus standard deduction at $45.5 billion for 2024.
“This tax break does not help many low-income families who already have incomes less than the current standard deduction or who are eligible for tax credits targeting working families with very modest incomes,” ITEP wrote of the bonus standard deduction, adding, “As a result, the poorest fifth of Americans would receive just 2% of the benefits of this provision, and an average tax break of just $30 next year.”
Bonus Guaranteed Tax Deduction: Bottom Line
Given the political divides in Congress, it’s unlikely that the bonus standard deduction will gain bipartisan support. However, the hope is that some year-end bipartisan tax legislation addressing key tax changes involving R&D expenses and 1099-K online seller relief will eventually pass.
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