• Basic Membership Access to Journal, Shadow Stock portfolio & monthly updates for stock screens
  • A+ Investor Full access to AAII.com, Journal, and a power data suite for investment ideas
  • AAII Platinum Full access to all of AAII's model portfolios and premium services at a significant discount
  • Dividend Investing Newsletter and model portfolio that focuses on dividend growth
  • AAII Growth Investing Find secular growth stocks poised for outperformance regardless of macroeconomic conditions.
  • Retirement Investing Discover trusted strategies for every stage of retirement. Get actionable insights and resources for smart retirement planning.
  • Sentiment Investing A research-driven newsletter with 10+ signals decoding sentiment across retail and institutional behavior.
  • Stock Superstars Report Get stock ideas inspired by the market's leading professionals
  • VMQ Stocks For the value investor looking to harness academic research in an actively managed portfolio
  • Bits and Bips Newsletter delivering insights on linking traditional finance, macro trends and cryptocurrency opportunities to help investors build stronger, more diversified portfolios.
All premium products come with free basic membership.
Explore All Membership Options
Join Now
Dispatches Tax Strategies

The Impact on the Standard Deduction of the Tax Cuts and Jobs Act

Larger standard deductions make it harder to itemize deductions. This is a double-edged sword.

by Charles Rotblut | December 2023

Charles Rotblut leads a class in AAII's new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

The Tax Cuts and Jobs Act (TCJA) led to a sharp increase in the usage of the standard deduction. Slightly more than two-thirds (68.0%) of all returns filed for 2017—the last year prior to the TCJA taking effect—claimed the standard deduction. In comparison, 87.3% of all individual tax returns filed in 2020 claimed the standard deduction, according to the Internal Revenue Services (IRS).

The reason for the change was the large increase in the deduction instituted by the TCJA. The law raised it from an originally inflation-adjusted amount of $13,000 to $24,000 in 2018.

The TCJA also altered how inflation adjustments are determined. The consumer price index (CPI) was replaced with the chained CPI. The chained CPI factors in potential differences in consumer choices if one item or service rises faster in price than another. This results in the chained CPI calculating a slower rate of price increases.

Figure 1 shows how the standard deduction has changed since the TCJA went into effect. Between 2018 and 2021, the deduction rose by a cumulative $1,100. The cumulative increase between 2021 and 2024 is $4,100. The 2024 inflation adjustment of 5.4% will raise the standard deduction for married joint filers to $29,200. (It will be $14,600 for single filers.)

FIGURE 1 Changes in the Standard Deduction (2018–2024)

Larger standard deductions make it harder to itemize deductions. This is a double-edged sword. Taking the standard deduction eliminates the need to fill out IRS Schedule A (Form 1040). This simplification comes with the trade-off of having a higher hurdle to claim various deductions, including charitable donations. Taxpayers still benefit from the larger standard deduction if it is higher than the deductions they would otherwise claim.

Keep in mind that the standard deduction along with many income tax brackets, exemptions and other deductions are set to return to their pre-TCJA levels (though still adjusted for inflation) after 2025 without congressional action.

Discussion

ROBERT A from NC posted over 2 years ago:

It's amazing how much the tax code jerks us around. Anyone paying attention will certainly change the way they do things, such as making tax-deductible donations. Even medical treatment is either crammed into the current year or put off to the next. I don't think this is the sort of government the Founders intended to create.


DAVE G from TX posted over 2 years ago:

"This simplification comes with the trade-off of having a higher hurdle to claim various deductions, including charitable donations." @ Charles, I'm not sure how it is any different if a person has $30,000 of deductions and the SD is $20,000 + $10,000 from filling out Sch A or the SD is $30k and the person doesn't fill out Sch A because it would not make a difference? I think it is just a bias on the taxpayer's behalf if they think they are getting $30,000 of deduction from Sch A, or losing it when the SD is $30k.


CAROL B from CO posted over 2 years ago:

I don't really view the standard deduction as a simplification because I still need to complete Schedule A to compare the resulting deduction against the standard deduction. Also, there is the possibility that even though the Schedule A deduction is larger than the standard deduction, taking it will result in a higher state income tax amount, depending on how one's state income tax is calculated. Ask me how I know. The trade-off difference between federal and state taxes wasn't significant, but just something to be aware of.


RICHARD E from TX posted over 2 years ago:

The constant change in the tax code makes it difficult to figure out how much tax you are going to need withheld. Then some income is taxable and other income is only partially taxed. I suspect today I will withdraw money from my IRA solely to boost the amount I have paid in before the end of the year. Thanks for the reminder that tax year 2025 changes the levels back to the unboosted standard deduction.


You need to log in as a registered AAII user before commenting.
Create an account

Log In

Get your free copy of our special report analyzing the tech stocks most likely to outperform the market.
Download the FREE Report Here: