12 Tax Breaks That Might Actually Help

So, Congressional Republicans want tax cuts.

That's nothing new. By now it's a staple of the party philosophy and a major part of its 2016 platform. Indeed, one of the major distinctions between Democratic and Republican politics is the centrality of tax cuts to the right wing economic message.

The devil, as they always say, is in the details. In this case, what few details we have seem to say that the coming tax cuts won't do anything for the average American.

Although the House hasn't released any specific proposals for 2017, both Speaker Paul Ryan and President Donald Trump have released individual plans in the past. Ryan's plan, released last year and titled A Better Way, lavishes its tax cuts on the wealthy. Under this document more than 96% of gains would go to individuals earning more than $1 million per year.

Trump's proposals during the presidential campaign were no better. By giving away an average tax cut of $387,000 to those earning more than $1 million, Trump's plan concentrated its gains overwhelmingly at the top.

Those with incomes above $1 million would see their after-tax income rise by 14.3% according to an analysis by the Center on Budget and Policy Priorities. Those who earn within the median income (the $50,000 to $75,000 bracket) would see an increase of only 1.5%.

With no reason to assume that either Ryan or Trump have significantly changed their priorities, it's safe to assume that the coming income tax cuts will have little impact on the average American.

But, they could. The tax code is a fantastic resource for both helping to smooth some of the rough edges of the free market, and it probably works as a way to encourage or disincentivize behavior. What are some tax breaks that might actually help the middle or lower class? Here, with the help of Professor of Tax Law Charlotte Crane at the Northwestern University Law School, are 12 that help a lot more Americans.

Editors' pick: Originally published April 12.

Lower-Bracket and Payroll Tax Cuts
Lower-Bracket and Payroll Tax Cuts

Everyone pays Medicare and Social Security taxes of at least 7.65%, which fall lightest on high earners by design. These payroll taxes only reach the first $127,200 of income, giving a de facto boost to every dollar above that threshold.

And most people (65%) pay income tax. A median-income, married household pays an average $6,863 in taxes (13% of income).

Well, sometimes the simplest solutions are the best. If we want tax cuts that will help the most Americans, start with the taxes paid by the most Americans. Cut the payroll tax by reforming it not to be intentionally regressive, and pass income tax cuts that have a greater proportional effect on lower brackets.

Really, this is easier than it often seems to be.

Greater Standard Deductions
Greater Standard Deductions

One idea frequently raised ( see Trump's own proposals) but rarely acted on with any force is to raise the standard deduction taken by most tax payers.

This is a very good idea.

About 70% of taxpayers will take the standard deduction, which cuts their taxable income. It essentially shields a certain portion of their income from taxation (the first $6,300 for single people, the first $12,600 for married couples).

Since taxable income is reduced, the taxpayer gets pushed into a lower bracket. Increasing this would overwhelmingly benefit the middle- and lower-classes since they're the least likely to itemize their taxes and the ones most likely to benefit from an extra few thousand dollars of deductions.

Rental Deductions
Rental Deductions

Years ago Congress created a tax deduction for the interest paid on a home mortgage. This was intended to incentivize homebuying, and while its impact on the real estate sector is debatable, there's no question that it has made housing somewhat cheaper for millions of Americans. (For example, a homeowner with a $200,000 mortgage at a national- average rate of about 4% would effectively pay an interest rate of 2.76% after the tax break.)

That's fine, except… nearly half of all Americans are renters now, and millions of them spend 30 to 50% of their income on housing alone. Doesn't it make sense to help them too?

If we want to extend tax relief that reaches more people, one of the best things the IRS could do is transform the "mortgage deduction" into a "housing deduction." Let's show the renters some love.

Greater Student Loan Deductions
Greater Student Loan Deductions

Here's a pie-in-the sky fantasy.

America somewhat desperately needs to encourage spending, entrepreneurship and (frankly) adulthood among its youngest adult cohort. That same group of adults currently carries more than $1 trillion in student loans. The economy needs them to spend money for which they need to have money… money that they send to the government every month.

This plan feels like it writes itself.

If Republicans really want to help out a huge number of people, and boost their numbers among the under-35s, take the cap off the student loan interest deduction. Much, much better yet, allow graduates to deduct their monthly payment. Their educations help make the entire country vastly richer… the least we can do is not tax them for it.

Entrepreneurship Deductions
Entrepreneurship Deductions

Forget what you've read about all those tech geniuses in their California garages. U.S. entrepreneurship is at the lowest point it's been in decades. That hurts everybody.

With fewer businesses starting up fewer new ideas enter the marketplace. Job churn goes down as new companies don't create positions and everyone else suffers due to the business lost when entrepreneurs don't need to buy computers, desk chairs, office supplies and more.

Entrepreneurship is good for everybody even, and this is critical, when the startup fails.

So let's use the tax code to incentivize it. Create breaks for people who start a new company and others for people who work for one. Carve out a special deduction, for example, for all W-2s generated by a business that has existed five years or less.

After all, those leaders and workers have all taken a risk on jobs that might pop like a bubble next month. They need all the incentive they can get. Speaking of which…

End the Self Employment Tax
End the Self Employment Tax

In a nation that prides itself on individuals and entrepreneurs (see above), few phrases should seem so antithetical as "self-employment tax," but there it is.

You see, while payroll taxes take 7.65% out of every employee's paycheck what many people don't realize is that everyone actually owes 15.3% in total FICA. It's just that your employer chips in the other half.

Well, for those who are self employed there's no one to make that contribution, so striking out and working for yourself means an automatic 7.65% tax increase. (An increase which is in absolutely no way, shape or form compensated by the related deduction those taxpayers can take on their 1040.)

America wants to encourage inventors, leaders, artists and risk-takers. It needs to do so, but it also punishes them with a hefty tax increase the minute they strike out on their own. This one has been a no-brainer for a very long time.

Sales Tax Deduction
Sales Tax Deduction

One of the taxes that falls heaviest on the poor is also the one which most people think the least about. Sales taxes are collected at the state and local level, and all but five states in America have them in one form or another.

The sales tax is regressive. For the taxpayer, it's a flat tax, which is to say that no matter my income it will cost X additional cents to buy this book. That hurts poor people the most, since for them that extra price accounts for a larger share of their income. 

We rarely think much of the sales tax since it's paid in small bits here and there, but it adds up. A 6% sales tax, for example, literally means a 6% reduction in almost all purchasing power.

We know how much the sales tax takes from functional income, and we know that it hurts poor people the worst. So let's build a tax deduction around it. Let everyone below an income threshold deduct their state's sales tax. Every Michigan citizen at or below the cutoff would get a 6% deduction, for example. 

Expanded Childcare Deductions
Expanded Childcare Deductions

This has been discussed often in public debate, but it bears repeat mention. Crane recommended it as one of the "more meaningful subsidies" that the government could launch.

The costs of childcare in the United States have exploded. In New York alone daycare averages over $25,000. At the same time, the number of two-income households has spread as more and more families discover that they simply can't get buy on one parent's income alone. This isn't a problem for families with six-figure incomes, but for everyone else these costs represent a very real problem.

The IRS could help. The creation of a refundable child care credit would be invaluable for families struggling to meet these bills, as it would create a pot of money dedicated specifically to that purpose.

Making it income targeted, that would just be icing on the cake.

Tax Preparation Credits
Tax Preparation Credits

"We need to stop trying to develop highly articulated rules that are technically correct," Crane said, "and should focus on developing administrable rules, even if some aspects are arbitrary."

These highly articulated, highly specific rules have led to a U.S. tax code that is monumentally complex, so much so that the average taxpayer simply can't understand it. Throw the slightest wrinkle into the mix and suddenly that 1040-EZ looks like a gilded invitation to your own personal audit.

The IRS (through no fault of its own) is no help either, as multiple savage budget cuts by Republican lawmakers have forced it to reduce its assistance to only four months per year and only on the most basic questions possible. In other words, the government has created a system impossible to understand and then blown up the help line.

The upshot is that Americans spend 8.9 billion hours per year and an average of $273 per individual tax return just getting all of this right. Well, one of the best things that the government could do is try and make those taxpayers whole. Congress created the system, Congress should refund the money it costs to comply with that system. A targeted tax credit (not the existing deduction) should do the trick.

Greater Employment Relocation Incentives
Greater Employment Relocation Incentives

We have written often on this site about the question of employer/employee misalignment. Although the economy has created many jobs over the past several years this growth simply hasn't reached many parts of the country. It's a recovery concentrated on the cities and within certain sectors.

While macroeconomic policy can and should do more to help spread the prosperity, that's a long-term solution to a short-term crisis. The IRS can help in the more immediate future.

Significantly greater employment relocation incentives would help workers who want to move where the jobs are. Although that money wouldn't arrive until the following year it would allow workers to spend their savings in the knowledge that they'd get much more of it back a little bit down the line.

It would allow people to invest more in themselves and help the economy overall by aligning some workers better with where the opportunities are today, not just where we hope they'll be five years from now.

Less Leniency on Misclassification
Less Leniency on Misclassification

Also recommended by Crane, this would be a way to help American workers overall without setting foot in a single shop or board room.

Misclassification is when a business improperly claims that an employee is an independent contractor for the purposes of pay, taxes and benefits. Although hard to pinpoint, some estimates by the Department of Labor suggest that up to 30% of major employers misclassify at least some of their employees. The result is billions of dollars in lost revenue for the government, as well as higher taxes, fewer benefits and reduced workplace protections for the employees.

The IRS could crack down on this. Tighter rules about issuing 1099's (the independent contractor pay sheet) instead of W-2s (the employee form), along with more rigorous audits of employer tax returns could go a long way to discouraging companies from playing games with this system. After all, it only takes a few severe audits for somebody to learn their lesson.

More Higher Education Breaks
More Higher Education Breaks

When it comes to higher education tax breaks, there are three huge winners.

First, the students. Anything that makes it easier to pay tuition and buy books, and take out fewer loans, will help out America's millions of college students.

Second, the parents. It's hard enough to handle college tuition when costs have gone up by nearly 70% since 2006 alone. Doing so in an era of stagnating salaries and increased worries about the next recession, that's even worse.

It should be easier. It can be easier. A college tuition tax deduction wouldn't change the world for the average family, but it would make things a little easier.

And in that difference is everything, because the thing about education is that when we can get more kids in school then all of America ends up ahead.