Filing your taxes can be confusing enough, try writing tax law. The complications in writing a tax law is one of the reasons the nation has not seen a major revamp of current law since the 1980s. With Republicans controlling both house of Congress and the White House, the party is attempting to rewrite the tax code, promising to simplify it and lower taxes for businesses and the majority of Americans.
But, with only a slim majority in the Senate and using the reconciliation process that requires only a majority to pass a bill in the Senate instead of 60 votes, the Republicans have little margin for error. That’s why many experts believe any final tax plan is likely to look closer to the Senate plan than the House version.
Committees in both chambers are expected to take up some of the work to actually write the bills this week with hopes that votes will take place before Thanksgiving. The process of actually writing the bills may change the current proposals slightly, and as such will impact what any individual or business will pay in taxes, but for now, here are some of the key provisions for both companies and individuals.
Corporate tax rate
The much-discussed corporate tax rate is reduced to 20% in both the House and Senate bills from its current 35%, however, while the House bill would implement the change immediately, the Senate bill would not change the rate until 2019.
To help lower taxes on smaller businesses, both the House and Senate adjust the rates at which “pass-through” businesses pay taxes. It is estimated that as many as 95% of businesses in the U.S. are pass-through entities which, under current law, have their income “pass through” to their owners and taxed at the individual rates. This means some companies are paying tax rates up to nearly 40%. Both the House and Senate bills create a “pass-through” provision that would tax these businesses at the 25% individual rate. There are differences, though.
According to The Hill, “the Senate would establish a 17.4% deduction for pass-through businesses based on the Section 199 domestic manufacturing deduction that would lower the effective tax rate for small businesses in the top tax rate to slightly more than 30%, according to a Senate Finance Committee aide.” Conversely, the House bill sets the 25% pass-through rate for only the first 30% of business revenue, requiring the additional 70% to be taxed at the individual tax rate.
The Tax Policy Center, though, says that only 13% of pass-through businesses paid more than the 25% tax rate, so it could end up being a tax increase for some businesses.
20% excise tax
The excise tax would apply to large, multinational corporations. Under the House plan, companies that move profits and goods to foreign entities would be subject to a 20% excise tax, unless those companies are changed to fall under the jurisdiction of the IRS. According to Business Insider, this would only apply to sales within one company, so a U.S. retailer purchasing goods from a foreign entity would not be subject to the tax. The Senate does not propose an excise tax.
The House and Senate have both included provisions that would allow the immediate expensing of capital investments, with up to $5M in the House bill and $1M in the Senate bill under IRS Sec. 179. It is currently $500,000.
Large corporations with foreign operations would be subject to the offshore businesses tax proposal. The Senate would tax foreign cash holdings at a 10% rate and apply a 5% tax for non-cash holdings. The House plan would tax these as 14% for cash holdings and 7% for non-cash holdings.
The Senate has not decided on how carried interest will be handled, but under the House plan, businesses would be required to hold assets for three years to qualify for a 23.8% capital gains rate, triple the current one-year timeframe.
Business interest deductibility
Under the Senate tax plan, the interest deduction would be restricted to 30% of adjusted taxable income, but would allow interest not allowed as a deduction to be carried forward indefinitely. The House version limits companies to 30% of EBITDA, but doesn’t apply it to small businesses.
There are also some specific business proposals. Forbes.com produced the following chart to explain them:
One of the primary goals of both House Republicans and President Donald Trump is to simplify the tax filing process. To do that, the House reduced the number of tax brackets from seven to four, with rates of 12%, 25%, 35%, and 39.6%. The Senate keeps seven brackets, but lowers rates across the board to 10%, 12%, 22.5%, 25%, 32.5%, 35%, and 38.5%.
The Joint Committee on Taxation said that 8.3% of taxpayers will pay more taxes in 2019 and 21.9 percent in 2023 under the House bill.
State and local deductions
Currently, taxpayers can deduct state and local taxes on their federal taxes. To help keep the overall increase to the federal deficit at $1.5 trillion (which the Senate must do to pass the tax plan under the rules of reconciliation), both the House and Senate bills have made changes to this popular deduction to try and reduce costs. The Senate bill would eliminate it entirely, while the House would cap it at $10,000 and apply it only to property taxes.
The estate tax, also known as the “death tax,” has been a major source of conflict between Democrats and Republicans. Both chambers’ bills make adjustment to the tax. Currently, a 40% tax kicks in on estates over $5.6M for individuals and $11.2M for couples. The Senate plan would increase those amounts to $10M for individuals and $22M for couples while the House would apply the tax on estates over $10M for individuals and $22M for couples, but phase it out completely after six years.
Child tax credit
Both the House and Senate bills increase the child tax credit from the current amount. The House would increase it to $1,600 per child, while the Senate would raise it to $1,650.
Currently, each taxpayer is allowed a $4,050 deduction for themselves, a spouse, and any dependents. But the House and Senate eliminate this deduction, but proponents argue that the higher child tax credit makes up for part of it. In addition, the House would create a $300 credit for non-child dependents for the next five years along with a $300 “family flexibility” credit for each spouse. In addition, the income limits at which a taxpayer starts to lose the child tax credit will be increased from $75,000 to $115,000 for single taxpayers and $110,000 to $230,000 for married taxpayers.
The Senate bill includes no additional credits, but raises the income levels before the credit is phased out to $500,000 for individuals and $1M for married couples filing jointly.
Alternative minimum tax
Long a criticism of Republicans, both the Senate and House bills eliminate the alternative minimum tax, which requires higher-earning individuals to calculate their taxes twice using different methods and then pay the higher amount. It currently affects roughly 5 million filers.
Both the House and Senate plan to roughly double the standard deductions to $12,000 for individuals and $24,000 for married couples filing jointly.
Major medical expenses
For individuals hit with high medical bills, current law allows taxpayers to claim expenses above 10% of their taxable income that is not reimbursed by an insurance company. The Senate plan continues this deduction, but the House bill eliminates it, according to The Hill.
Mortgage interest is a large deduction for many taxpayers. For many, under both plans there would be no major changes. The House would allow mortgage interest deduction for only the first $500,000 on new mortgages and no deduction for second mortgages or home equity loans. The Senate would apply the mortgage interest on only the first $1M on new mortgages and eliminate it entirely on home equity loans.
Student loan interest
Changes to student loan interest deductions could impact trucking as, under the House tax plan, students would no longer be allowed to deduct this interest. This would impact potential drivers who take out student loans to pay for driver training school. The Senate makes no change to this deduction.
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