November 1, 2020
Results from the 2017 tax reform
The Tax Cuts and Jobs Act (TCJA) of 2017 was primarily a reform of corporate taxes. The USA had the highest tax rate on corporate income of any developed nation, and that rate was dramatically reduced.
A secondary goal was simplifying the tax reporting for most taxpayers. To that end, the standard deduction was roughly doubled, so that more taxpayers could skip the paperwork of itemizing their deductions. Many deductions were eliminated, and one of the most important, the deduction for state and local taxes (SALT), was capped at $10,000 per tax return. That limit made it even more likely that a taxpayer’s itemized deductions would be less than the standard deduction.
The goal of slashing the number of itemizers was achieved, accord- ing to a new analysis of the IRS’ “Statistics of Income” by Martin Sullivan, published in Tax Notes in
September. Before the TCJA, nearly 31% of taxpayers were itemizing. In 2018, just 11.4% took the trouble to document all their deductions. The phenomenon was most pronounced for those whose income was less than $500,000. At the top income levels above $10 million, 92% still itemized, down from 97.1%.
The dollar value of all itemized deductions, expressed as a percent- age of adjusted gross income (AGI), fell from 12.2% to 5.6% in 2018. As one might expect, in percentage terms the greater declines were in the lower income brackets (See Figure One), but they were fairly represented across all the brackets. As most of the highest-income taxpayers still itemized, their total deductions declined less. The author attributed most of that to the cap on the SALT deduction.
Charities were very afraid that the loss of a strong tax reward for giving
would result in a drop of philanthrop- ic support. The data for 2018 do show a decline in claims for the charitable deduction, but it is far less than the decline is generally (see Figure Two). The larger decline is at the lower income levels where the standard deduction is much more likely to be the better choice for the taxpayer, masking the actual level of charitable support. For the top income levels, charitable donations as a percentage of adjusted gross income were almost unchanged.
The largest change in the itemized deduction matrix was for the SALT deduction, which fell from 5.7% of AGI to 1.3%. Top taxpayers had been reducing their AGI by 7.4% for the SALT deduction, roughly the same as their charitable contributions. In 2018, their SALT deduction fell to 0.5% of AGI.