House Republicans Have a Bold Strategy to Boost the Standard Deduction

Think you're paying too much in taxes? So do House Republicans, who are pitching a temporary increase in the standard deduction. Meant to relieve Americans hit hard by inflation, the Tax Cuts for Working Families Act would add a "bonus" deduction on top of the standard deduction used by most Americans. In a closely divided Congress, what are the odds this bill faces?

What is the standard deduction?

The standard deduction is a popular way for Americans to reduce their taxes, but may not be intuitive to all taxpayers. How does this line item on your tax return save you hundreds of dollars each year? And why doesn't everyone use it?

When calculating your annual tax bill, deductions can make a big difference in what you owe Uncle Sam. Certain expenses, such as state and local income taxes and mortgage interest, are excluded from your taxable income. Taxpayers can choose to itemize, or calculate all of their qualifying expenses for the year, or they can opt to take the standard deduction. As with all tax strategies, consult with a tax professional to understand which option is best for you.

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For many Americans, the standard deduction is the clear choice for saving the time and headache of calculating their qualifying deductions. If those deductions don't add up to more than the standard deduction, which is $27,000 for joint filers in 2023, it often makes sense to elect to take the standard deduction. Some taxpayers can maximize their tax savings by calculating their qualifying expenses one by one, so you should know what expenses qualify and how much of a deduction you can recognize. However, an estimated 90% of Americans use the standard deduction.

The Tax Cuts for Working Families Act

Recent legislation introduced in the House would expand the standard deduction and give it a new name as the "guaranteed deduction." The increase would be temporary, but would mark a significant reduction in the taxable income of many Americans.

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The bill calls for a "bonus" deduction that taxpayers can claim in 2024 and 2025, which would sit on top of the current standard deduction. That bonus would amount to $4,000 for joint filers and surviving spouses. Head of household filers and single filers would be eligible for a bonus of $3,000 and $2,000 respectively.

The bill also provides for the bonus deduction to be increased in line with inflation for the 2025 tax year. Additionally, joint taxpayers with income of over $400,000 and single filers with income over $200,000 will not be eligible for the bonus. Dependents will also not be able to claim the bonus deduction.

Can it pass?

House Republicans have largely embraced the Tax Cuts for Working Families Act. Originally introduced by Committee on Ways and Means chairman Jason Smith (R-MO), the bill will likely pass the Republican-controlled House. The measure will likely garner broad support from the Republican party, as Republicans continue to focus on the effects of inflation on middle class Americans.

Support for the bill may be harder to find in the Senate, where Democrats hold a slim majority. However, the measures of the bill are relatively moderate and could earn the buy-in of some centrist Democrats. Only a handful of defectors would be required to pass the bill through both chambers of Congress and land it on President Biden's desk.

The standard deduction is one way for Americans to cut down their tax bill, and it's used by the vast majority of taxpayers. The Tax Cuts for Working Families Act would increase the standard deduction through a so-called "bonus guaranteed deduction" of up to $4,000 in 2024 and 2025. The political fortunes of the proposal are mixed and will hinge on bipartisan support for the legislation, so don’t count on a lower tax bill just yet!