Currently there are seven federal income tax brackets taxed at 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The House bill consolidates that to four.
12% (on the first $45,000 of taxable income for individuals; $90,000 for married couples filing jointly)
25% (starts at $45,000 for individuals; $90,000 for married couples)
35% (starts at $200,000 for individuals; $260,000 for married couples)
39.6% (starts at $500,000 for individuals; $1 million for married couples)
The is no marriage penalty under this setup. In fact, married couples come out ahead in many instances where one wage earner makes most or all of the money.
The bill raises the standard deduction for singles to $12,000 from $6,350 and it raises it for married couples filing jointly to $24,000 from $12,700.
This will dramatically lower the number of people who itemize deductions, especially when combined with reductions in mortgage interest and state income tax deductions.
Personal Exemptions Eliminated
Today you're allowed to claim a $4,050 personal exemption for yourself, your spouse and each of your dependents. The House bill eliminates that option.
Families with three or more kids may fare worse under the revised code.
New Family Credits and Expansion of Child Tax Credit
The bill creates new $300 credits for non-child dependents and it also increase the child tax credit to $1,600, up from $1,000, for any child under 17. But these credits apply only to taxes paid.
Currently people can get money back. This setup will eliminate fraud but social advocates will scream.
Dependent Flexible Medical Spending Accounts Eliminated
Some employers allowed parents the opportunity to save up to $5,000 of their income in a dependent care flexible spending account. That option is gone.
State and Local Tax Deductions Eliminated
States with high state taxes will howl but those deductions are gone. Again, this chews into the number of people who benefit from itemizing.
Mortgage Interest Deduction Reduced
The bill preserves the mortgage deduction for existing mortgages. But going forward you can only claim a deduction for interest on mortgage debt up to $500,000, down from $1 million today.
The Tax Policy Center estimates the percent of filers who claim the mortgage interest deduction would fall to 4% from 21% because of the higher standard deduction.
The much despised as well a complicated Alternative Minimum Tax is gone. The idea behind AMT was to hit the richest taxpayers. In practice it hit those with incomes between $200,000 and $1,000,000. The Tax Policy Center estimates that elimination of the AMT will reduce revenue by $440 billion in the first decade.
Estate Tax Repealed in 2024
The estate tax today affects those with more than $5.5 million in assets (or $11 million if you leave a spouse behind). That about 0.2% of estates.
There will be lots of bickering over the repeal and some do not think it will survive. The house bill did not repeal the tax until 2024 but it did double the exemption levels.
Corporate Tax Rates
The New York Times notes the plan sticks to President Trump’s goal of a 20 percent corporate tax rate, down from a maximum of 35 percent today.
- The bill will levy a global minimum tax of 10 percent, which would apply to income that high-profit subsidiaries of American companies earn anywhere in the world. The effort is aimed at preventing companies from shifting profits abroad and grabbing back some of the tax revenue on income earned overseas. Those profits are currently not taxed until they are returned to the United States, giving companies an incentive to keep that money offshore since they are taxed at the current corporate tax rate of 35 percent.
- The bill would force companies to pay a one-time, 12 percent tax on liquid assets held overseas, like cash. The tax, which is reduced from the current 35 percent tax rate, would be payable over a period of eight years. For illiquid assets, like equipment or property, the tax rate would be 5 percent.
- It would also force American subsidiaries of foreign-owned companies to pay a 20 percent excise tax on any payments sent back to foreign affiliates.
Small business S-Corporation owners (I am one of those) may benefit from pass-through tax proposals. The New York Times reports:
- Republicans stuck to their promise of lowering the tax rate for “pass through” businesses to 25 percent. But to prevent the rate from becoming a loophole for all sorts of individuals, tax-writers have created a formula they say will ensure that business owners will pay a higher individual tax rate on income that they receive as wages. The formula would be applied based on the circumstances of the business.
- That provision is not enough to satisfy the National Federation of Independent Business, which said in a statement it is “unable to support the House tax reform plan in its current form.”
The lowering of the pass-through rate to 25% may benefit those making more individuals making more than $200,000 or families $260,000. Those are the amounts at which the 35% tax bracket kicks in. Details of how this all works are not available.
As it stands, I will not benefit much, if at all from the legislation, because of the lowering of the overall tax rates.
Not the Final Product
This is not the final product. Lobbying will be intense. Nonetheless, I expect something along these lines will become law.
The bill is a step in the right direction, but it could be much simpler yet.
Mike "Mish" Shedlock