Is the Federal Standard Deduction in United States fair?

V. Kumar By V. Kumar, 13th Mar 2011 | Follow this author | RSS Feed
Posted in Wikinut>Money>Tax

There has been a moderate increase in the amount of standard tax deduction available to the tax filers in the United States who do not wish to itemize their deductions. In times of rising unemployment and restricted earning opportunities, is the current regime of standard deduction really fair to those who are not so well off ?

Personal Income tax regime in United States

Personal income tax regime in United States has many components, like tax rate, tax exemption limit, standard deduction, phase outs of exemptions and deduction, itemized deductions and earned income tax credits. Whether the tax is fair or not will depend on how the net tax burden is distributed among different economic segments of the society.

Is it fair ?

Fairness demands that those earning less should pay lesser taxes, while those earning more should contribute more. In other words, tax should be paid depending upon the capacity to pay.

How much is the Standard Deduction allowable in 2010 ?

For the year 2010, Standard deduction in United States envisages a minimum standard deduction of $ 950 for dependents and a maximum of $ 5700 for single filers, $ 8400 for head of households and $ 11,400 for married filing together as well as qualifying widows and widowers. Standard deduction is a lump sum deduction provided in lieu of itemized deduction in respect of items like medical expenses, charitable donations and taxes. Notably, this standard deduction comes along with two other major tax components, personal exemption and earned income tax credit (EITC).

How much does it benefit the not so well off ?

For a not-so-well-off worker earning around $ 15000 per annum, standard deduction reduces her taxable income to $ 9300. If you remove the personal exemption too, only $ 5600 is left taxable. And against the tax of $ 560 or less that may be payable on it, EITC may provide a refund of around $ 457 even if the person has no dependents, leaving a tax liability that is close to nil. With every dependent, this liability will reduce further, making EITC a negative tax or subsidy. If that dependent is a child then the EITC refund can reach up to $ 3050 in case of a single child and $ 5666 in case number of dependent children is three or more. In addition there is also the Child Tax Credit that reaches up to a maximum of S 1000 on fulfillment of various conditions.

Thus the whole scheme of personal income tax is reasonably fair, as far as the low income segment of society is concerned. The same can also be said of standard deduction, which ensures that the tax liability of a low wage earner is reduced even if that person has not made any payments that could be claimed as an itemized deduction. Moreover, in case the low wage earner has actually made payments which can be claimed as itemized deduction and the total amount of such payments exceeds the standards deduction, then that person retains the option of claiming itemized deduction instead of standard deduction.

Can it be improved further ?

Thus the scheme of itemized deduction actually benefits the lower income persons. No doubt, the scheme can still be improved further, for example, by increasing the standard deduction to a figure like $ 8,000. However, this may require reducing the EITC, which may not be fair, as EITC is linked with dependents, a fairer proposition. Another option could be to link the standard deduction too with the number of dependents instead of providing $ 950 for every dependent person with no earned income.

While it may be possible to improve the scheme of standard deduction further, one must accept it as a fair tax proposition.

Tags

2010 Standard Deduction, Dependent Standard Deduction, Earned Income Tax Credit, Income Tax, Limits Of Standard Deduction 2011, Standard Deduction, Tax, Tax Deductions, Unites States Tax, Us Tax

Meet the author

author avatar V. Kumar
I am a free lance author who writes for the sake of expressing myself. I like to share what I know and learn from the experiences of anyone willing to share it.

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Comments

author avatar Rathnashikamani
4th Apr 2011 (#)

Money all the way and an informative article is here!

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author avatar V. Kumar
4th Apr 2011 (#)

Thanks.

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