(Author's note: Updated after official release of the bill, link at the bottom.)
House Republican leaders have released their tax bill, called the Tax Cuts and Jobs Act. Here's how the new House tax bill, as currently proposed, is expected to impact your taxes:
What happens to tax rates? The bill proposes four tax rates (not three, as had been anticipated): 12%, 25%, 35%, and 39.6%, which will be indexed for inflation:
12%: $0 - $45,000 for individuals ($90,000 for married taxpayers)
25%: $45,001 - $200,000 for individuals ($260,000 for married taxpayers)
35%: $200,001 - $500,000 for individuals ($1 million for married taxpayers)
39.6%: $500,001+ for individuals ($1,000,001+ for married taxpayers)
We currently have seven (7) tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The rates for 2018 - absent tax reform - are here.
Do we keep the standard deduction?
Yes. The standard deduction would double to $12,200 for individuals, $18,300 for head of household (HOH) and $24,400 for married couples.
What about the additional standard deduction and personal exemptions?
Nope, those are "consolidated into this larger standard deduction" - meaning they disappear.
What happened to the mortgage interest deduction?
Current mortgages would be grandfathered - meaning they won't be affected - but mortgages for new homes would be capped at $500,000 for purposes of the deduction.
Can I still sell my house and get tax-favored treatment?
Yes, depending on how long you plan on staying. The "two of five" rule that excluded up to $250,000 ($500,000 for married taxpayers) in capital gains from the sale of your home would be changed to "five of eight." That means that you must have owned and resided in the house for at least five of the last eight years in order to qualify for the exclusion. Additionally, the rules would limit the use of the exclusion to one sale every five years (instead of one sale every two years).
What happened to the state and local income tax deduction?
Gone. The proposal would eliminate the state and local income tax deduction.
What about the property tax deduction?
It remains in place but will be capped at $10,000 under the proposal. This was originally slated for elimination but put back in after Republicans in high tax states made noise and voted against the budget proposal.
What happened to the charitable donation deduction?
Nothing, it remains in place. Bonus? The mileage rate for charity will finally be indexed for inflation (it's been 14 cents per mile since the Clinton era).
What about other deductions?
Gone. The deduction for medical expenses has been eliminated, as have the deductions for student loan interest, tax prep expenses, moving expenses, unreimbursed employee expenses, and alimony.
What about the child tax credit?
The child tax credit would be increased to $1,600 per child under 17, with an additional $300 credit for each parent as part of a consolidated family tax credit. The credit is currently $1,000 and is refundable.
Is the adoption tax credit still available?
No. Other credits that disappear include the Lifetime Learning Credit, Work Opportunity Credit, and the employer-provided child care credit.
Does the earned income tax credit (EITC) stick around?
Yes.
Can I keep my 401(k) plan?
Yes. There are no changes to tax breaks for retirement accounts, including 401(k) plans and IRAs.
Do I still have to pay the Obamacare individual mandate?
Yep. It's still in play. There are no specific health care related tax moves (beyond yanking the medical expense deduction) in the bill.
Did the Alternative Minimum Tax (AMT) stay put?
No, the AMT would be eliminated under the proposal. The AMT is a secondary tax put in place in the 1960s to prevent the wealthy from artificially reducing their tax bill through the use of tax preference items. (Click here to find out more about the AMT.)
My small business is entitled to tax relief under the plan, right?
It depends on the nature of your business. Under the proposal, businesses conducted as sole proprietorships, partnerships, and S corporations would be taxed at a rate of 25%. However, businesses that offer "professional services" like doctors, lawyers, accountants, designers, and consultants wouldn’t qualify for the reduced rate. Other business owners can choose to categorize 70% of their income as wages (and pay the individual tax rate) and 30% as business income (taxable at 25%) OR fix the ratio of wage income to business income based on capital investment.
What about corporate tax relief?
Corporations which do not pass through their income pay tax on profits at the corporate level. The bill lowers the corporate tax rate to 20%.
What happens to multinational corporations?
Some companies, like Apple, are stockpiling assets overseas since bringing the funds over to the U.S. would be taxable. The bill would impose a one-time "repatriation" tax of 12% on accumulated offshore earnings.
What about the federal estate tax?
The exemption amount will double to $11 million per person; currently, the federal estate is imposed on estates which exceed $5.49 million, or nearly $11 million per married couple. The federal estate tax will completely disappear after 2024. The step up in basis will remain in place.
You can review the bill here (downloads as a pdf).
So, that's all simple, right?
