Well, that was fast!
Just six weeks after lawmakers and the public got their first glimpse of the first draft of a tax overhaul bill, a final version was released Friday (12/15) and set to be voted on either today or tomorrow and sent to President Trump for his signature.
The individual provisions would expire by the end of 2025, but most of the corporate provisions would be permanent. This should not be understated.
Another important note: The bill would not affect 2017 taxes, for which you will start filing your returns in a month or so.
Here are key changes to U.S. tax law for individuals and business that have emerged:
FOR INDIVIDUAL FILERS
1. Lowers (many) individual rates: The bill preserves seven tax brackets, but changes the rates that apply to: 10%, 12%, 22%, 24%, 32%, 35% and 37%. (initially the top bracket was to remain at 39.6%, the reduction to 37% was a late addition).
Today’s rates are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
Here’s how much income would apply to the new rates:
— 10% (income up to $9,525 for individuals; up to $19,050 for married couples filing jointly)
— 12% (over $9,525 to $38,700; over $19,050 to $77,400 for couples)
— 22% (over $38,700 to $82,500; over $77,400 to $165,000 for couples)
— 24% (over $82,500 to $157,500; over $165,000 to $315,000 for couples)
— 32% (over $157,500 to $200,000; over $315,000 to $400,000 for couples)
— 35% (over $200,000 to $500,000; over $400,000 to $600,000 for couples)
— 37% (over $500,000; over $600,000 for couples)
2. Nearly doubles the standard deduction: For single filers, the bill increases it to $12,000 from $6,350 currently; for married couples filing jointly it increases to $24,000 from $12,700.
The net effect: The percentage of filers who choose to itemize will drop, since the only reason to do so is if your deductions exceed your standard deduction.
3. Eliminates personal exemptions: Today you’re allowed to claim a $4,050 personal exemption for yourself, your spouse and each of your dependents. Doing so lowers your taxable income and thus your tax burden. The tax plan eliminates that option.
For example: A “typical” family of four in 2017 who did not itemize would receive a standard deduction of $12,700 plus exemptions totaling $16,200 for a total reduction in taxable income of $28,900 ~ in 2018 this typical family will receive a standard deduction of $24,000
4. Caps state and local tax deduction: The final bill will preserve the state and local tax (SALT) deduction for anyone who itemizes, but it will cap the amount that may be deducted at $10,000. Today the deduction is unlimited for your state and local property taxes plus income or sales taxes..
5. Expands child tax credit: The credit would be doubled to $2,000 for children under 17. It also would be made available to high earners because the bill would raise the income threshold under which filers may claim the full credit to $200,000 for single parents, up from $75,000 today; and to $400,000 for married couples, up from $110,000 today.
6. Lowers cap on mortgage interest deduction: If you take out a new mortgage on a first or second home you would only be allowed to deduct the interest on debt up to $750,000, down from $1 million today. Homeowners who already have a mortgage would be unaffected by the change.
The bill would no longer allow a deduction for the interest on home equity loans. Currently that’s allowed on loans up to $100,000.
7. Curbs who’s hit by AMT: Earlier bills called for the elimination of the Alternative Minimum Tax. The final version keeps it, but reduces the number of filers who would be hit by it by raising the income exemption levels to $70,300 for singles, up from $54,300 today; and to $109,400, up from $84,500, for married couples.
8. Preserves smaller but popular tax breaks: Earlier versions of the bill had proposed repealing the deductions for medical expenses, student loan interest and classroom supplies bought with a teacher’s own money. They also would have repealed the tax-free status of tuition waivers for graduate students.
The final bill, however, preserves all of these as they are under the current code. And it actually expands the medical expense deduction for 2018 and 2019.
9. Exempts almost everybody from the estate tax: Unlike the House bill, the final bill does not call for a repeal of the estate tax.
However, it essentially eliminates it for all but the smallest number of people by doubling the amount of money exempt from the estate tax — currently set at $5.49 million for individuals, and $10.98 million for married couples. Even at today’s levels, only 0.2% of all estates ever end up being subject to the estate tax. Note: Massachusetts still has a $1,000,000 threshold.
10. Slows inflation adjustments in tax code: The bill would use “chained CPI” to measure inflation, which is a slower measure than is used today. The net effect is your deductions, credits and exemptions will be worth less over time — since the inflation adjusted dollars defining eligibility and maximum value would grow more slowly. It also would subject more of your income to higher rates in future years than would be the case under the current code.
FOR BUSINESSES AND CORPORATIONS
11. Lowers tax burden on pass-through businesses: The tax burden on owners, partners and shareholders of S-corporations, LLCs and partnerships — who pay their share of the business’ taxes through their individual tax returns — would be lowered by a 20% deduction.
The 20% deduction would be prohibited for anyone in a service business (accountants, doctors, investment brokers, lawyers, etc.) — unless their taxable income is less than $315,000 if married ($157,500 if single).
12. Slashes corporate rate: The bill cuts the corporate rate to 21% from 35%, starting next year. The bill would also repeal the alternative minimum tax on corporations. Remember, the individual AMT remains but the threshold was increased.