Standard Deduction Research Articles

The Standard Business Deduction

This paper describes a proposal for a standard business deduction (SBD) for small businesses. The SBD would work like the regular standard deduction. The latter is a fixed amount that is claimed in lieu of claiming itemized deductions below the line. The SBD would be a fixed amount that is claimed above the line in lieu of deducting actual business expenses. Taxpayers claiming the SBD would report their gross business earnings, subtract the SBD, and arrive at net business income. No Schedule C would be necessary. Like the regular standard deduction, claiming the SBD would be optional for the taxpayer. If a taxpayer’s actual business expenses exceeded the SBD, he could instead opt to claim those expenses. An SBD would greatly simplify the tax system for small business owners. Taxpayers who chose to claim it could be relieved of the burden of tracking business expenses during the year and could self-prepare their tax returns without the need for expensive tax preparation assistance. Not only would the SBD reduce socially wasteful taxpayer compliance costs, but it would also reduce IRS enforcement costs. Such simplification should be attractive to policymakers on both sides of the aisle and would benefit the government and taxpayers alike.

Tax Reform and Tax Experts

ABSTRACT The Tax Cuts and Jobs Act (TCJA), passed in 2017, represents the most comprehensive revision of the U.S. income tax since the Tax Reform Act of 1986 (TRA86). Although the TCJA shares many features with TRA86—corporate tax rate cuts, increasing the standard deduction, cutting back on deductions—it sharply differs in that it is neither revenue neutral nor distributionally neutral, both aspects of which are troubling in light of the large long-run federal fiscal imbalance and rising income inequality. Regardless of one's normative evaluation, the TCJA provides scores of natural experiments that can inform us about the consequences of tax changes on a wide range of economic behaviors.

Tax reform to decrease donations, trigger new giving strategies, experts say

While the overall economic impact of the tax overhaul passed by Congress at the end of 2017 may be unclear, the ramifications for the philanthropic community are more or less agreed upon: Charitable giving among Americans is likely to decline in 2018, with estimates ranging from about 1.7 percent up to 5 percent compared to 2017. That's mainly due to provisions in the new law that double the standard deduction. With a higher standard deduction, fewer taxpayers will itemize their deductions, and the tax incentive for donating to charity goes away.

Itemized Deductions in a High Standard Deduction World

New tax legislation enacted in December 2017 exacerbates the extent to which various itemized deductions, such as the charitable contribution deduction and the home mortgage interest deduction, disproportionately benefit high income individuals. This essay develops this critique and concludes by suggesting paths for reform that should be considered by a future Congress.

Administration, Committees Issue Tax Reform Framework

September 27 brought the Trump Administration's, and Ways and Means and Finance Committees', “Unified Framework for Fixing Our Broken Tax Code.” Three proposals that would decrease charitable giving are included: reduction of individual tax brackets, a doubling of the standard deduction, and repeal of the estate tax. Here are the relevant features.

How Taxing Is Tax Filing? Using Revealed Preferences to Estimate Compliance Costs

This paper uses a quasi-experimental design to estimate the cost of filing taxes. Using US tax returns, I observe how taxpayers choose between itemizing deductions and claiming the standard deduction. Taxpayers forgo large tax savings to avoid compliance costs, which provides a revealed preference estimate of such costs. I show that costs increase with income, consistent with an opportunity cost of time explanation. These estimates suggest substantial costs of filing federal income taxes, significantly larger than previously estimated using surveys. (JEL H24, H26, H31)

Tax Obstruction Crimes: Is Making the Irs's Job Harder Enough (Online Appendix)

This is the online appendix to Townsend, John A., Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough (July 1, 2009). Houston Business and Tax Law Journal, Vol. 9, No. 255, 2009. Available at SSRN: https://ssrn.com/abstract=2061018 The article for this appendix questions the potential mischief that can arise from the notion that conduct which makes the IRS's job harder is an obstruction type crime under the defraud / Klein conspiracy in 18 U.S.C. § 371 or, its tax code counterpart for the single actor, 26 U.S.C. § 7212(a) (the Omnibus Clause). The Appendix goes through some common audit profile lowering examples which might be characterized as making the IRS's job harder. Examples considered are: Example 1: Choosing the Standard Deduction When Itemized Deductions Are Larger Example 2: Claiming Fewer Deductions than Otherwise Available Example 3: Variation: Claiming Fewer Charitable Deductions Example 4: Making the Amount of Charitable Deductions Based on Audit Factors Example 5: Conforming Deductions to IRS Audit Models. Example 6: Follow the Forms Strategy Example 7: Planning Return Positions Based on the Taxpayer Civil Penalty Rules Example 8: Same Example with Preparer Penalty Rules in Play Example 9: Failure to Disclose Where Even a Civil Penalty Would Not Apply Example 10: Drafting Return Disclosure to Lower the Audit Profile Example 11: Filing a Paper Return to Exploit IRS Inefficiencies Example 12: Incorporating Example 13: Filing a Return on Extension Example 14: Filing a Return That Incorrectly States the Economic Position of the Taxpayer Example 15: Resisting in an Audit Example 16: Noncompliance with Summons Example 17: Noncompliance with Summons (Part 2) Example 18: Variation on Resisting an Audit Example 19: Structuring Transactions for less Visibility on Audit Example 20: Action to Delay via U.S. Bank Example 21: Action to Delay via Foreign Bank Example 22: Taking a Deduction as Schedule C Rather than Schedule A Example 23: Taking an Nol Carryover to a Later Year Example 24: Declining to Amend a Tax Return Example 25: Manipulating the System Example 26: Staging a Voluntary Disclosure

Offsetting the Effects of Medical Expenses on Older Adults' Household Food Budgets: An Analysis of the Standard Medical Expense Deduction.

The Supplemental Nutrition Assistance Program (SNAP) provides critical nutrition assistance to over 40 million Americans each month. Low-income older adults (60 and older) and disabled participants experience additional budgetary constraints because of high out-of-pocket medical expenses. In recent years, some states have adopted a "Standard Medical Expense Deduction" (SMED) for senior and disabled beneficiaries, making it easier to report medical expenses in the SNAP application process. We conduct a descriptive national analysis that shows increases in benefit levels and reporting of medical expenses for states that have implemented SMED. We then present descriptive findings from Medicare claims data among a sample of low-income older adults in need of food assistance in Georgia. Average medical expenses among this sample approach $200 per month, whereas those for persons diagnosed with multiple chronic conditions exceed $300 per month. Policy implications of this analysis include the need for more states to consider adoption of SMED or alternative estimating approaches, leading to increases in benefit levels for the neediest beneficiaries and decreases in administrative burden among state agencies. We present two possible policy approaches states might take to receive approval for these changes from U.S. Department of Agriculture.

Implications of Fiscal Policy for Housing Tenure Decisions

Many of the world's wealthy countries provide fiscal incentives to homeowners. Yet, the impact of such tax breaks on housing tenure decision is unclear. Using difference-in-differences approach, this study estimates the effect of mortgage interest deduction on home ownership in the United States. The identification relies on the large changes in income tax rates and standard deduction. The largest of these changes increased income tax rate by as much as 23,9% and decreased standard deduction by 7,2% between 2002 and 2004. The baseline estimates suggest that increase in income tax rate in a state that allows mortgage interest deduction is associated to 3 percentage points increase in home ownership relative to states that didn't change their fiscal policy and to 5 percentage points - relative to states that do not allow mortgage interest deduction but had a comparable increase in tax rates. The results are robust to a range of alternative specifications.

A Historical Review and Prospective Modern-Day Assessment of the Non-Itemizer Charitable Contribution Deduction

ABSTRACT The direct charitable contribution deduction was an experimental deduction for the 1982–1986 tax years. It represents the only example in the tax laws in which non-itemizers were allowed a charitable contribution deduction in tandem with the standard deduction. This article offers a review of three distinct eras in tax history: the advent of the standard deduction, the enactment of the direct charitable contribution deduction, and its subsequent abandonment. This article clarifies the literature to demonstrate that the direct charitable contribution's demise was not a matter of course. The deduction was made permanent by the House of Representatives. Its extension was the subject of rigorous debate in the Senate and was tabled by only a few votes. This article also considers the prospect of a modern-day direct charitable contribution. Taken on balance, concerns of economic necessity, fiscal viability, and measurable impact on the charitable sector suggest that reinstatement is neither necessary nor a prudent tax subsidy. Modern-day data indicate that non-itemizers are already giving. The tax incentive, therefore, proffered through the non-itemizer charitable contribution deduction would likely have relatively minimal effect on the charitable sector.

How Taxing is Tax Filing? Leaving Money on the Table Because of Compliance Costs

I use a quasi-experimental design and a novel identification strategy to estimate the burden of filing taxes. Employing a sample of US income tax returns, I observe the preferences of taxpayers when choosing between itemizing deductions and claiming the standard deduction. Taxpayers forego tax savings to avoid the hassle cost of itemizing, resulting in an average burden of itemizing of $644, with substantial heterogeneity. A revealed preference argument implies that itemizing deductions is as painful as working 19 hours. The burden of tax filing is larger for richer households, consistent with the fact that the value of time increases with income. I explore two explanations for the result. First, it could be due to an extreme aversion to filing taxes. Such aversion implies that itemizing deductions imposes aggregate hassles costs of 0.2% of GDP and back-of-the-envelope extrapolations to filing federal taxes yields an overall burden of 1.25% of GDP. Second, if taxpayers are time inconsistent they may forego large benefits even when hassle costs are relatively small due to procrastination. I provide evidence most consistent with taxpayers being present-biased. Both explanations – whether driven by preferences or mistakes – suggest that the tax filing burden is significantly larger than previously estimated. I discuss policy implications of the result.

Ordinary Medical Expenses

Although extraordinary medical expenses are appropriately deducted to compute a taxpayer’s standard of living, taxpayers should bear ordinary medical expenses out of their post-tax income, with no allowance beyond personal exemptions, the standard deduction, and low tax brackets. The proposal defines ordinary expenses as less than 15 percent of adjusted gross income. Consistently, tax-excluded employer healthcare plans appropriately cover extraordinary medical expenses. The proposal would not allow an exclusion for plans that cover ordinary medical expenses, defined by the same 15 percent level. The deduction of ordinary medical expenses and the exclusion of insurance plans that cover those expenses cause wasteful inflation of medical costs. Deductions and exclusions to accomplish a subsidy are not a way to help the needy, they inappropriately benefit the highest-bracket taxpayers as if their health and life were worth more. The proposal is offered as a part of the Shelf Project, a collaboration of tax professionals developing methods of raising revenue, in ways that improve the fairness and efficiency of the tax base. The Shelf Project has 68 proposals so far. Comments are welcome either as public debate, directed to the Tax Notes editor, or privately to cjohnson@law.utexas.edu.

Charitable Donations: Feeling Good but Hardly Worth It

Our paper focuses on the perceived benefits of tax deduction associated with charitable donation from an individual’s viewpoint. After analyzing four average cases of taxpayers from various income levels and after dividing them as home owners or renters, we conclude that a taxpayer is more likely to receive the benefit of a charitable deduction if the taxpayer also owns a home which is secured by a mortgage. The tax benefit is defined as the dollar amount of tax that is reduced by donating to charitable foundations. We look at the tax benefit as the savings derived from the charitable contribution in excess of the standard deduction. For any amount below the standard deduction, there is no direct tax saving generated from donating. We conclude by discussing the advice the donors, their financial advisers and tax consultants can take from this exercise. If the donor is thinking about giving to charity in the hope of saving taxes, he/she needs to take a close look at their income and standard versus itemized deductions available to them. Since lower income individuals may rely more on cheaper tax services, the tax preparation companies like H & R Block need to make their clients aware of more effective ways to save on taxes. Taxpayers who reside in major cities and generally rent need to pay even closer attention to their tax status.

Doing Too Much: The Standard Deduction and the Conflict Between Progressivity and Simplification

In U.S. federal income tax, the standard deduction, along with the personal exemptions, provides taxpayers with a minimum amount of untaxed income, effectively creating a ―zero bracket amount.‖ For historical and political reasons, however, the standard deduction also operates as a simplified substitute for the itemized deductions, such as the deductions for extraordinary medical expenses, charitable contributions, and home mortgage interest. This seemingly reasonable compromise in fact leads to substantial, and surprising, conceptual complexity. In particular, close analysis of each of the two roles shows that their effects, and related criticisms, are often contradictory, which in turn makes it difficult, if not impossible, to have coherent policy debates regarding the proper roles of the standard deduction and the personal deductions. This flawed compromise between progressivity and simplification is not necessary. We can replace the standard deduction with a true, independent zero bracket amount and a floor under the itemized deductions while staying revenueand distribution-neutral. This would effectively divorce the two roles of the standard deduction—zero bracket amount and simplification of the itemized deductions—leading to more coherence in individual income taxation and giving more flexibility to policymakers. This article proposes further to disaggregate the single floor under the itemized deductions into multiple, independent floors under each itemized deduction. This also would lead to greater coherence and flexibility in tax system design. While creating multiple floors would marginally increase complexity for some taxpayers, the costs of such complexity are justified in light of the benefits of more accuracy and coherence.  Associate Professor of Law, Georgetown University Law Center. J.D., Harvard Law School, 2006; A.B., Harvard College, 1998. I am grateful for helpful comments and suggestions from Jennifer BirdPollan, Joshua Blank, Lilian Faulhaber, Victor Fleischer, Daniel Halperin, Louis Kaplow, and Alvin Warren, and also to participants in workshops at Harvard Law School, Georgetown University Law Center, Syracuse University College of Law, University of Washington School of Law, Tulane University Law School, Seton Hall Law School, Rutgers School of Law-Newark, Louisiana State University Law Center, and the Law & Society 2010 Conference. 204 COLUMBIA JOURNAL OF TAX LAW [Vol.2:203

Lessons from the 1986 Tax Reform Act: What Policy Makers Need to Learn to Avoid the Mistakes of the Past

The 1986 Tax Reform Act (TRA86) was designed to improve three aspects of the tax code: efficiency, equity, and simplicity. TRA86 accomplished all three goals in some measure by reducing the standard rates, increasing the standard deduction, and ending various tax expenditures that distributed resources to less efficient production purposes that sometimes served as the proverbial - tax haven. The debate leading up to passage of TRA86 was contentious and, like today, tax reform was seen as being politically impossible. However, TRA86 achieved significant bipartisan support. At the time, TRA86's passage seemed like a great success for tax reform. However, looking at the 2011 tax code, taxpayers would be hard pressed to find the aspects of efficiency, equity, and simplicity that were improved with passage of TRA86.What happened over the past quarter of a century? How quickly did the reforms of TRA86 unravel and why? This paper examines the act's goals of efficiency, equity, and simplicity, to find the lasting successes and failures of TRA86. Now, 25 years later, the federal tax code is again in dire need of reform. The old saying that those who ignore history are doomed to repeat it also applies to tax reform. Those wishing to reform the tax system today would be wise to learn from the past.

Learning The Ropes: An Introductory Tax Return Case

In extant literature, there are few tax return cases appearing in journals. We present a complex case using a realistic scenario that is designed to be an introductory tax return assignment used in an individual federal income taxation course. The case is designed to teach students how to manually prepare a federal income tax return using the actual forms and schedules prepared by the Internal Revenue Service (IRS). This case is timely for two reasons. 1) Often tax return assignments in textbooks involve concepts that a student has yet to learn. For example, a textbook assignment often includes itemized deductions and credits, even though these topics are typically taught towards the end of an individual tax course. 2) In addition, with the availability of information on the internet, students have greater access to solutions to textbook assignments. This case comprehensively examines concepts typically covered in the first three or four chapters of an individual tax text: various types of income, exclusions, personal and dependency exemptions, capital gains and losses, and the standard deduction.

The Inequality of Income Taxation for Resident and Nonresident Taxpayers

The paper provides analyses the difference between income taxation system for resident and nonresident taxpayer, in particular the inequality deduction and exemption. The paper emphasizes the different qualification principles for nonresident alien-taxpayer, the treaty benefits for different countries, and the standard deduction. It is a comparative investigation of tax regulations for nonresident aliens in EU countries, Canada, developing countries, and the United States, the experiences of differential income taxation of nonresident aliens in different countries. The objectives are the analyses of inequality of income tax system for resident and nonresident taxpayer, and different exemption, standard deduction. The paper analyzes the positive and negative externalities of this taxation and concludes that responses to tax rate, politic of government revenue, and treaty for different countries changes are far from fully understood and that there is much to be gained from continued research on this topic.

Revenue and Distributional Effects of the Individual Income and Estate Tax Provisions of Senator Thompson's Plan for Tax Relief and Economic Growth

Republican Presidential Candidate Fred Thompson has announced a tax plan that combines tax cut extensions, additional tax cuts, and an election to pay tax under a new alternative tax system that would substitute a larger standard deduction for all current deductions and credits and have two rates of 10 and 25 percent. Thompson's plan would reduce federal revenues by $6-7 trillion over ten years, amounting to a reduction of almost 20 percent below current projections, and would be highly regressive. This article describes the proposed changes in the individual income and estate tax and examines their implications for revenue and the distribution of tax burdens.

The President's Proposed Standard Deduction for Health Insurance: Evaluation and Recommendations

The President's proposal to replace the current exclusion of employer-paid health insurance premiums with a standard deduction for qualifying health insurance would level the playing field for employment-based coverage and private plans but would risk the loss of insurance for many workers, threaten existing risksharing pools, and unfairly favor the wealthy. This paper evaluates the President's plan, suggests changes that would improve it, and assesses alternatives that would address the plan's shortcomings and improve its likelihood of expanding coverage to many families who now lack insurance.

The Economic Effects of the President's Proposal for a Standard Deduction for Health Insurance

Health care costs continue to rise rapidly in the United States, claiming an increasing share of economic resources. One factor contributing to this rise is the favorable tax treatment for employer-sponsored health insurance, whereby employees pay neither income nor payroll taxes on health care that is provided through their employers. This tax treatment, which amounts to a $300-$400 billion per year subsidy for health insurance, has led to greater reliance on employer-sponsored insurance and lower deductible plans. Moreover, individuals who purchase insurance on their own often receive no tax subsidy. This paper discusses a health tax proposal included in President Bush's FY 2009 Budget that would reduce or eliminate these tax biases through a new standard deduction for health insurance (SDHI). The SDHI would be available to all individuals purchasing qualifying insurance and improve incentives by breaking the link between how much an individual pays for insurance and the value of the tax subsidy. The SDHI would increase the number of individuals with health insurance by roughly six to nine million and reorient the tax subsidy more towards lower-income individuals. The paper also considers alternatives to the SDHI proposal, principally a flat refundable health insurance tax credit.