The Tax Cuts and Jobs Act is now law

Posted by Sanket Shah | General | Saturday 23 December 2017 12:36 pm

The Tax Cuts and Jobs Act is now law.

The House and Senate approved the bill on Dec. 19. It passed 227-203 in the House with no Democratic votes and 12 Republican “no” votes. The Senate then passed the bill 51-48 along strict party lines, with one Republican senator, John McCain, not voting.

Because of minor changes in the bill made by the Senate, the House was required to pass the bill again before sending it to the president. The House gave final approval on Dec. 20 by a 224 to 201 vote. Again, the bill received no Democratic support and was opposed by 12 Republicans. President Donald Trump signed it on Dec. 22.

Here we compare some of the major provisions of the new law with the previous tax code.

 

Individual Income Tax Rates

 

The bill maintains seven individual income tax brackets, but changes the tax rates and thresholds. See the charts below.

Previous law: These are the tax brackets that individual taxpayers will use when filing taxes in 2018 for the 2017 tax year.

Single Filers

Tax Bracket

Taxable Income 

10 percent

Up to $9,325

15 percent

$9,326-$37,950

25 percent

$37,951-$91,900

28 percent

$91,901-$191,650

33 percent

$191,651-$416,700

35 percent

$416,701-$418,400

39.6 percent

Over $418,400

 

Married, Filing Jointly

Tax Bracket

Taxable Income 

10 percent

Up to $18,650

15 percent

$18,651-$75,900

25 percent

$75,901-$153,100

28 percent

$153,101-$233,350

33 percent

$233,351-$416,700

35 percent

$416,701-$470,700

39.6 percent

Over $470,700

 

New law: These will be the brackets that individual taxpayers will use in 2019 for the 2018 tax year. This new rate structure is temporary. It takes effect with the 2018 tax year, but will not apply after 2025 — unless Congress takes further action.

Single Filers

Tax Bracket

Taxable Income 

10 percent

Up to $9,525

12 percent

$9,526-$38,700

22 percent

$38,701-$82,500

24 percent

$82,501-$157,500

32 percent

$157,501-$200,000

35 percent

$200,001-$500,000

37 percent

Over $500,000

 

Married, Filing Jointly

Tax Bracket

Taxable Income 

10 percent

Up to $19,050

12 percent

$19,051-$77,400

22 percent

$77,401-$165,000

24 percent

$165,001-$315,000

32 percent

$315,001-$400,000

35 percent

$400,001-$600,000

37 percent

Over $600,000

 

Individual Alternative Minimum Tax

The AMT is a parallel tax system with a separate set of rules that some taxpayers must follow when calculating their tax liability. As its name implies, the AMT is an alternative to the regular tax system and requires taxpayers earning above a certain amount to calculate their taxes twice and pay the highest amount.

Because it follows a separate set of rules, the AMT disallows some tax preferences – such as state and local tax deductions and dependent exemptions – but provides for a larger AMT exemption amount.

Previous law: For the 2017 tax year, the AMT exemption amount for single filers is $54,300 and begins to phase out at $120,700, and for joint filers, it is $84,500 and begins to phase out at $160,900, according to the IRS.

New law: The AMT exemption amounts will increase to $70,300 for single filers and $109,400 for joint filers and will phase out for those taxpayers at $500,000 and $1 million, respectively, according to the nonpartisan Tax Policy Center’s (“TPC”) analysis of the bill. These changes will end after 2025.

Standard Deduction

The standard deduction is the amount that you can deduct from your income before calculating your tax liability if you do not itemize your deductions.

Previous law: The standard deduction for married filing jointly is $12,700 for tax year 2017; $6,350 for single taxpayers; and $9,350 for heads of households, according to the IRS.

New law: The standard deduction for married filing jointly would increase to $24,000 for joint filers; $12,000 for single taxpayers; and $18,000 for heads of households, according to the TPC analysis. The increased deduction ends after 2025.

Personal Exemption

A personal exemption is the amount that you can deduct from your income for every taxpayer and most dependents claimed on your return.

Previous law: $4,050 per person, which means a married couple with two dependents would receive a personal exemption of $16,200.

New law: The personal exemption is eliminated. The exemption returns after 2025.

Child Tax Credit

Previous law: Married couples filing jointly who earn less than $110,000 can receive a tax credit of up to $1,000 for each child under 17 years old that they claim as dependents on their tax returns ($55,000 is the threshold for married couples filing separately; $75,000 for single, head of household, and qualifying widow or widower filers).

New law: The credit would increase to up to $2,000 per child, and the first $1,400 would be refundable according to the TPC analysis, meaning the credit could reduce your tax liability below zero and you would still be able to receive a tax refund. The cut off for the tax credit would increase from $110,000 to $400,000 for married couples filing jointly. The expanded credit ends after 2025.

State and Local Tax Deductions

Previous law: Taxpayers who itemize their taxes can deduct state and local property and real estate taxes, and either state and local income or sales taxes.

New law: The SALT deduction will be capped at $10,000. The deduction limit ends after 2025.

Mortgage Deductions

Previous law: Taxpayers who itemize their taxes can deduct interest payments on mortgage debt of up to $1.1 million. That includes up to $100,000 of home equity debt.

New law: For current mortgage holders, there is no change. But the deductible limit drops to $750,000 for new debt incurred after Dec. 31, 2017. Also, homeowners may not claim a deduction for existing and new interest on home equity debt, beginning Jan. 1, 2018. The mortgage deduction changes expire after 2025.

Medical Expense Deduction

Previous law: Taxpayers who itemize their taxes can deduct medical expenses that exceed 10 percent of their adjusted gross income, or AGI, according to the IRS.

New law: Taxpayers can deduct medical expenses that exceed 7.5 percent of AGI in 2017 and 2018, but the new deduction level ends Jan. 1, 2019.

Limits on Itemized Deductions

Previous law: Itemized deductions may be limited, and total itemized deductions may be phased out (reduced), if your adjusted gross income for 2017 exceeds $313,800 for married couples filing jointly or qualifying widows ($261,500 for single filers, $287,650 for heads of household and $156,900 for married couples filing separately), according to the IRS.

New law: The itemized deduction limits are repealed through the 2025 tax year.

Inflation Rate Measure

Previous law: The IRS uses the Consumer Price Index for urban consumers to adjust tax bracket thresholds and other tax provisions for inflation. That includes such provisions as the standard deduction, the personal exemption, earned income tax credit and the alternative minimum tax, as the TPC explains.

New law: The IRS would switch to an inflation index known as the chained CPI. As we have written, chained CPI is considered a more accurate measure, but rises somewhat more slowly than the traditional CPI. That would mean bracket thresholds and tax credits, for example, would rise more slowly. That could have the effect over time of pushing more people into higher tax brackets and reducing the purchasing power of tax credits.

Capital Gains Tax Rate

Capital gains are the profits realized from the sale of assets such as stocks or real estate.

Previous law: The profits on the sale of assets held for more than one year are eligible for a tax break. The 2017 tax rates this way for the profits gained from the sale of such assets: “For 2017, the long-term capital gains tax rates are 0, 15, and 20 percent for most taxpayers. If your ordinary tax rate is already less than 15 percent, you could qualify for the zero percent long-term capital gains rate. For high-income taxpayers, the capital gains rate could save as much as 19.6 percent off the ordinary income rate.”

New law: No changes.

Estate Tax

Previous law: A top rate of 40 percent applies in 2017 to estates valued at more than $5.49 million (nearly $11 million for couples), according to the IRS.

New law: The top rate of 40 percent would apply to estates valued at more than $11.2 million ($22.4 million for couples). The increased levels expire after 2025.

Corporate Taxes

Previous law: The top corporate rate was 35 percent.

As with some high-income individual taxpayers, corporations are also required to calculate their tax liability using the corporate alternative minimum tax — a parallel system that reduces or eliminates some deductions and tax credits. After calculating tax liability using both the regular corporate income tax system and the corporate AMT, corporations pay the higher of the two amounts.

New law: The top rate would be 21 percent, and the corporate AMT would be repealed, to the final tax bill.

Pass-Through Business Taxes

Previous law: Businesses organized as sole proprietorships, LLCs and partnerships don’t pay corporate tax rates. Instead, the owners pay individual income taxes on their share of business income – they’re called pass-through business taxes. Those tax rates are the same as the individual income tax rates.

New law: Business owners can take a 20 percent deduction on their pass-through business income, with limits for those earning above $157,500 (single) and $315,000 (married, filing jointly).

 

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House vs. Senate: The Tax Changes Up for Debate

Posted by Sanket Shah | General | Monday 18 December 2017 4:24 pm

House and Senate Republicans have arrived at a broad agreement to resolve the differences between their tax overhaul bills. How the two versions vary, and details that have emerged about the final bill:

For Individuals


Both bills would lower individual tax rates over all. But to comply with Senate budget rules, the individual tax cuts in the Senate bill would expire after 2025. The final version of the bill will still have to comply with the rules, so it’s likely that the bill will also let major provisions expire.

Current

House

Senate

Number of tax brackets Seven Four Seven Expires after 2025
Top rate 39.6% 39.6% with a 45.6% “bubble rate” for some top income 38.5% Expires after 2025
Starts at: $426,700 / $480,050
(singles/couples)
$500,000 / $1 million $500,000 / $1 million Expires after 2025
Alternative Minimum Tax Alternative income tax calculation for high-income taxpayers Repeals Keeps, but increases exemption so fewer will pay it Expires after 2025

The cuts would shrink over time for everyone but the wealthiest in both bills. The highest earners would still receive a boost in after-tax income by 2027 because they would benefit more from the corporate tax cuts, which would not expire in either bill.

Change in after-tax income
in the House and Senate bills

Income

In 2018/2019

In 2027

Lowest quintile Less than $25,000 +0.4%

+0.3

+0.1%

–0.1

Second quintile $25,000 – 48,600 +0.9

+0.9

+0.1

0

Middle quintile $48,600 – 86,100 +1.4

+1.4

+0.5

+0.1

Fourth quintile $86,100 – 149,400 +1.7

+1.6

+0.7

+0.1

80th-90th percentile $149,400 – 216,800 +1.6

+1.6

+0.4

+0.2

90th-95th percentile $216,800 – 307,900 +1.3

+1.7

+0.2

+0.2

95th-99th percentile $307,900 – 732,800 +2.0

+3.1

+1.4

+0.4

Top 1 percent $732,800 and up +2.4

+1.8

+2.6

+1.1

Top 0.1 percent $3,439,000 and up +2.5

+0.8

+3.0

+1.7

Source: Tax Policy Center. Data for the Senate plan in 2018 is not available.

For Families

Both versions would repeal the personal exemption in favor of a higher standard deduction and expanded tax credits for families. While the child tax credit is slightly larger in the Senate bill, and people with higher incomes would be eligible, it expires after 2025. The new family tax credit in the House version would benefit more types of people, but it expires even sooner.

Current

House

Senate

Personal exemptions $4,150 per taxpayer and dependent Repeals Repeals Expires after 2025
Standard deduction $6,500 / $13,000
(singles/couples)
$12,200 / $24,400 $12,000 / $24,000 Expires after 2025
Child tax credit $1,000 $1,600 $2,000 Expires after 2025
Family tax credit None $300 for taxpayer, spouse, other dependents Expires after 2022 $500 for non-child dependents Expires after 2025
Credits phase out starting at: $75,000 / $110,000
(singles/couples)
$115,000 / $230,000 $500,000 Expires after 2025

Both bills include new restrictions for those claiming the child tax credit. Unde the House bill, children would be required to have a Social Security number to be eligible for the child tax credit, and parents would have to have one to receive the refundable portion of the credit. The Senate bill would require each child to have a Social Security number to claim the refundable portion.

For High-Tax States and Homeowners

The Senate initially included a full repeal of the state and local tax deduction in its bill but later changed it to match the House version, retaining a $10,000 limit for property tax deductions.

Current

House

Senate

State and local tax deduction Income or sales and property taxes are deductible Repeals all but the property tax deduction up to $10,000 Repeals all but the property tax deduction up to $10,000 Expires after 2025
Mortgage interest deduction Can deduct interest payments on up to $1 million of debt Limited to payments on $500,000 of debt, repeals for home equity debt Repeals for home equity debt Expires after 2025
Residences: Principal and one other residence Principal residence No change

The House bill would scale back the mortgage interest deduction, cutting it by up to half. Both bills would repeal the deduction for home equity loans.

For Wealthy Estates

Both bills would scale back the tax, so only larger estates would be affected. But that change expires under the Senate bill, bringing the threshold back to its current level after 2025. The House bill would fully repeal the estate tax after 2024.

Current

House

Senate

Estate tax Top rate of 40% on estates above $5.6 million Increase threshold to estates above $11.2 million, then repeal after 2024 Increase threshold to estates above $11.2 million Expires after 2025

For the Sick

The House bill would repeal the deduction for medical expenses, a tax break most important to low-income individuals with high out-of-pocket health care costs, though some House Republicans support retaining it in some form.

Current

House

Senate

Medical expenses deduction Can deduct out-of-pocket expenses in excess of 10% of adjusted gross income Repeals Expands by reducing threshold to 7.5% of income Applies to 2017 and 2018
Individual mandate Penalty for not having health insurance No change Repeals

But the Senate plan would repeal the Affordable Care Act’s individual mandate, a requirement that everyone must buy insurance or pay a tax penalty. The move could save lawmakers $338 billion, but it would be a significant blow to the Affordable Care Act, resulting in an estimated 13 million more people without insurance and higher average premiums. Lawmakers have said that it is likely that the repeal will be included in the final bill.

For Education

The Senate bill would leave in place several education tax breaks that are repealed or changed in the House bill. It also would double a deduction for teacher expenses that the House bill would repeal.

Current

House

Senate

Education credits American Opportunity Tax Credit, Lifetime Learning Credit and Hope credit Consolidates and slightly expands the A.O.T.C. No change
Student loan interest deduction Can deduct up to $2,500 Repeals No change
Graduate student tuition waivers Tuition waivers are not treated as taxable income Repeals No change
Deduction for classroom expenses $250 deduction Repeals $500 deduction Expires after 2025

Both bills would expand the use of 529 college savings plans to include private school tuition for elementary and high school students. The House plan would also allow an account to be opened for a child in advance of birth.

For Individual Business Owners

The two versions differ on how to tax “pass-through” business income that is currently taxed at the individual rate of the business’s owners. The House bill sets a lower top rate with an exception for professional service businesses like in law or accounting. The Senate bill creates a new deduction for pass-through income.

Current

House

Senate

Top pass-through rates Top rate of 39.6% Top rate of 25% with the exclusion of professional service income 23% deduction, phasing out for professional service income beginning at $250,000 Expires after 2025

For Businesses

The sprawling corporate changes would be permanent in the bills, which both include a top corporate tax rate of 20 percent.

Current

House

Senate

Top corporate tax rate 35% 20% 20% Delayed until 2019
New investment purchases Complex rules for deducting over many years Five years of full expensing Five years of full expensing, then phased out over five more years
Section 179 expensing Small business expensing limited to $500,000 Increases limit to $5 million Increases limit to $1 million
Business interest deduction Generally fully deductible Caps deduction at 30% of income (including depreciation) Caps deduction at 30% of income (excluding depreciation)
Alternative Minimum Tax Alternative income tax calculation for businesses Repeals No change

In a last-minute change to its bill, the Senate also maintained the corporate Alternative Minimum Tax, a decision that has resulted in blowback from several industries.

The Senate bill also makes fewer changes to corporate tax breaks like energy tax credits and private activity bonds.

Current

House

Senate

Orphan drug tax credit Credit for 50% of qualifed testing expenses Repeals Reduces credit rate to 27.5%
Renewable electricity tax credit Credit for wind power production, phasing out by 2020 Scales back the size of the credit No change
Private activity bonds Tax-exempt bonds used to fund low-income housing and other projects Repeals No change

For Multinational Corporations

Both bills would move from the current worldwide tax system, in which income earned abroad is taxed in the United States, to a territorial system in which only domestic profits would be taxed. They each would use different mechanisms to prevent companies from shifting profits abroad.

Current

House

Senate

Taxation of multinational companies Worldwide system with deferral and credit for taxes paid abroad Modified territorial system with new foreign payment excise tax Modified territorial system with new anti-abuse tax
One-time repatriation tax 7% (14% for cash) 7.5% (14.5% for cash)

 

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