The anticipation about tax reform now is being satisfied. We’ve got details.
Both the House of Representatives and the Senate versions of federal tax reform are promising big cuts in taxes, especially for the middle class. Both houses of Congress named their bills the “Tax Cuts & Jobs Act.” Corporations and small business also are in line for benefits.
It’s not a done deal yet. Although the House of Representatives passed its tax fix on Thursday (11/16), the full Senate still must vote on it, probably after Thanksgiving. But we finally know what tax-slashing is likely.
What’s in these bills for you?
Here’s a briefing on some significant changes to the tax codes. It skims the surface of this major overhaul, of course. By the way, these revisions will not affect 2017 tax returns.
•Income tax brackets. All are for taxpayers who are married filing joint. With one exception, the bills set figures for single taxpayers at half of the joint amount.
HOUSE — four brackets (married filing joint)
They are: 12%, starting at $0; 25%, starting at $90,000; 35%, starting at $260,000 and 39.6%, over $1 million.
SENATE – seven brackets (married filing joint)
They are: 10%, starting at $0; 25% starting at $19,050; 22%, starting at $77,400; 25%, starting at$140,000; 32%, starting at $320,000; 35%, starting at $400,000; and 38.5%, starting at $1 million.
• Standard deduction –Both House and Senate versions almost double the standard deduction to $24,000 for married filing joint (up from $12,000) and half that, or $12,000, for individuals.
• Child tax credit – It is boosted in both bills to $1,650 from $1,000. The House version recasts it as a new Family Credit and adds another credit of $300 for each parent and for dependents who are not children “to help all families with their everyday expenses,” a summary says.
• Charitable contributions – Both House and Senate keep the itemized deduction for gift-giving to charities and other non-profits.
• Home mortgage interest – Again, lawmakers in both houses are preserving the itemized deduction for mortgage interest on existing home loans. However, the House caps the deduction for newly purchased homes at $500,000 and the Senate ends it at $1 million. That difference will have to be ironed out.
• The deduction for state and local property taxes is at risk. The House is willing to allow it up to $10,000; the Senate bill erases it entirely.
• Your IRA, 401(k)s and other retirement plans are safe in both bills. The Senate proposal would repeal conversions between traditional and Roth IRAs, though.
• Both the House and Senate proposals also abolish the complicated alternative minimum tax. (There will be no tears from taxpayers or tax preparers over that change!)
Let’s just mention three important rewrites for businesses:
• Business tax rates — Corporate tax rate is reduced to 20 percent from the current 35 percent, the largest drop in U.S. tax history. The federal tax on small business income also is cut to no more than 25 percent, but there may be differences and lower rates for “pass-through” entities.
• Both versions allow businesses to write off immediately the full costs of new equipment used in their operations.
• The research and development tax credit is preserved in both bills.
To place the reforms into the tax code, the Senate must pass its version. Then, it and the House version must be reconciled to become one bill. Finally, President Donald Trump must sign it into law.
Feel free to contact EricJohn Ltd. for tax planning ideas in these final two months of 2017.