Don't Mess With Taxes

Around this time each year, the Internal Revenue Service releases its annual inflation adjustments for a wide range of tax matters. The 2023 numbers kicked off the ol' blog's annual taxes and inflation series last Oct. 19.

But the House Ways and Means Committee has already tinkered with those expected changes.

The Congressional tax-writing panel has sent a bill to the full House that would increase the standard deduction by $2,000 for single taxpayers, $3,000 for head-of-household filers, and $4,000 for married couples filing joint returns.

Standard deductions for the current 2023 tax year are $13,850 for single and married filing separately taxpayers; $20,800 for heads of households; and $27,700 for married couples who file joint returns, as well as for qualifying surviving spouse.

Increased deductions for just two years: As noted, the IRS soon will announce inflation-related increases to those amounts for the 2024 tax year. Next year is also when the proposed deduction increases will begin.

The increases under the Tax Cuts for Working Families Act (H.R. 3936) would be renamed guaranteed deductions, and would apply to the 2024 and 2025 tax years. The bonus deduction amounts would be adjusted for inflation for tax year 2025.

However, the increased guaranteed deduction wouldn't be available to all taxpayers.

The bill calls for the added amounts to be reduced for taxpayers with modified adjusted gross income of more than $200,000 for single filers, $300,000 for those filing as head of household, and $400,000 for jointly filing couples.

Increased deductions as inflation relief: The original guaranteed deduction bill was introduced by Republican Reps. Nicole Malliotakis of New York and Michelle Steel of California, both of whom serve on the Ways and Means Committee. Their proposal was rolled into the Working Families bill during the Ways and Means markup of the broader tax measure.

Malliotakis and Steel, along with the committee's GOP leadership, argued that the increased standard deduction amounts would help taxpayers deal with recent inflation costs.

The bill helps working and middle-class Americans who generally make too much money to qualify for any type of government program, but who also don't earn enough to be considered wealthy, said Malliotakis during the bill's markup.

The tax deduction bonus, said Steel, will help the millions of taxpayers who claim the standard deduction — that was around 90 percent of filers in 2021, according to the IRS — and should lower their tax bills on 2024 and 2025 tax returns," said Steel.

After passage of the overall tax bill, Ways and Means Chairman Jason Smith (R-Missouri) lauded the bonus deduction component.

"With this provision in place, an American family of four will not pay a cent in federal taxes on their first $68,000 of income," said Smith, giving them more money to "spend as they see fit to address their individual and family needs."

Cost estimate uncertainty: The Congressional Budget Office (CBO) estimates that the full Tax Cuts for Working Families Act would increase the federal deficit by $96.4 million over 10 years.

However, CBO analysts also noted the uncertainty of the projected costs.

"In particular, the estimates here rely on CBO's economic projections for the next decade under current law and on expectations about the way taxpayers might respond to changes in tax law — in this case whether filers of returns for tax years 2024 and 2025 would switch from itemizing their deductions to taking the temporarily increased guaranteed deduction," according to the CBO report.

Dems wanted CTC instead: Costs also are a factor in opposition to the overall tax cut bill.

Those who voted against sending H.R. 3936 to the full House — those being W&M Democrats, as the bill was approved on a party line vote — argued that expanding the Child Tax Credit as was done temporarily to provide families financial relief during the COVID-19 pandemic would be a better expenditure of tax dollars.

"Democrats' expanded Child Tax Credit changed lives in 2021. With full refundability, those with the highest need were finally able to access this support, which in turn, grew the economy and spread opportunity. I'm disappointed we can’t unite on pulling more children from the lifecycle of poverty," said Rep. Richard Neal (D-Massachusetts), ranking member on the Ways and Means Committee.

Whether any of the provisions of the Republican tax measure makes it into law is unclear. The Tax Cuts for Working Families Act cleared the tax panel back in mid-June, but hasn't been considered by the full House, and that's not going to happen in the near future.

The Republican-led House currently is dealing with several issues not related to actual legislation, such as impeaching President Joe Biden and electing a new Speaker.

Such chaos, according to an item in a recent Eide Bailly LLP tax roundup blog post, makes it tough to predict what might happen as far as a year-end tax package.

So, as the saying on and off Capitol Hill goes, stay tuned.

You also might find these items of interest:

• Senators want to enhance the adoption tax credit
• Standard tax deductions in 2023 get nice boost due to inflation adjustments
• You got your last 2021 Advance Child Tax Credit payment. Now what?

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