Biden's Itemized Deduction Plan

Democratic presidential nominee Joe Biden has released an outline of his tax plan should he win the 2020 election. Part of that plan involves significant changes to the tax rules governing itemized deductions for higher-income taxpayers. Biden’s plan would generally cap the value of itemized deductions at 28%, even for taxpayers in higher income tax brackets. Because Biden’s plan also includes reinstating the 39.6% income tax bracket for the highest earners, the cap would impact taxpayers in the 32%, 35%, 37% and 39.6% income tax brackets. For example, if a taxpayer had $30,000 in itemized deductions, the deduction amount would be capped at 28% even if the taxpayer fell in the 37% income tax bracket.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about Biden’s proposed cap on itemized deductions.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: Let’s face it—taxes are going to have to increase somewhere. Tax revenues are down dramatically given the across-the-board relief provided in the wake of Covid-19. Imposing a 28% cap on the value of itemized deductions would impact only the highest earning taxpayers who remain able to take advantage of itemized deductions after the 2017 tax reform legislation significantly curtailed their value. It’s a smart plan that avoids a tax hike for middle class America.

Byrnes: This plan would do nothing but punish successful Americans for being generous in supporting our charities. Charitable foundations need money more than ever right now. We should be taking steps to encourage charitable giving by increasing the tax incentives for making charitable donations. Biden’s plan would impose a penalty on taxpayers who give to charity—which is the exact opposite of what we want.

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Bloink: Capping the value of itemized deductions doesn’t penalize anyone. It’s a way to make sure the super-rich aren’t able to use itemized deductions to avoid paying their fair share in income taxes. 90% of Americans get zero benefit from itemized deductions because of the way the 2017 tax reform package was structured. Almost every middle-class American now uses the standard deduction. Itemized deductions provide a benefit for the rich and it makes complete sense to limit the value of that benefit given our current economic situation.

Byrnes: The math is simple. A taxpayer in the 33% tax bracket who earns $10,000 and donates the entire amount to charity would only be entitled to a deduction valued at $2,800---but would owe $3,300 in taxes. That means it would actually cost the taxpayer $500 to make the donation. The itemized deduction cap would discourage giving by Americans who are most able to help others in need.

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Bloink: This plan doesn’t raise taxes. Wealthy Americans are able to manipulate their finances to gain the significant tax benefits of itemizing. They’re the taxpayers with the most expensive homes in expensive neighborhoods. That means it’s more likely that they’ll have substantial state and local tax liability, as well as mortgage interest, to get them over the standard deduction hurdle so that itemizing makes sense. Once they gain the benefit of itemizing, they can make substantial donations to pet projects and reduce their tax liability to almost nothing. This type of strategizing isn’t available to ordinary taxpayers. It’s a loophole for the rich that we need to work on closing and Biden’s plan does just that.

Byrnes: We need to think about who we’re really hurting by a proposal like this. If higher income taxpayers are penalized for giving to charity, we’re hurting Americans who rely on charities for help. It’s a poorly thought out plan that will never become law even if Democrats do win control in November.