Years ago I was talking to my brother-in-law as he was getting ready to relocate to the United States. He was in the process of negotiating his salary and benefits with his employer and wanted to know what the tax implications of various items were. He was pretty confused about our whole crazy system, but I remember he talked about an “allowance,” which is basically the amount of money that was not taxed in his country because it’s what he lived on. Of course we have something similar here: deductions.
When we do a tax return, we start by figuring out a person’s income. The next step is to figure out what we can deduct from that income before we figure out how much income is taxable. Everyone is entitled to deduct something, and that something is what we call the “standard deduction.”
There are also things we spend money on that we decided should be exempt from tax. If you add those up and the total of all the “items” is more than the standard deduction, you can instead use your “itemized deductions” to reduce your taxable income.
The new tax law took the standard deduction and pretty much doubled it. They also took the list of items that could be itemized and knocked some off the list or limited them. As a result, most people will now be better off using the standard deduction. This will make things a little simpler on my end and if I have done your taxes before, I will be able to let you know if we need to worry about all those “items” anymore.
That’s pretty much the only thing the new law simplified.