Talking taxes is difficult, leaving many people, including me, glassy-eyed and drooling. So I’ve done my best to breakdown how the House and Senate versions of the recent tax reform bills compare as they head to committee for reconciliation.
Currently, there are seven tax brackets with rates of 10, 15, 25, 28, 33, 35 and 39.6 percent. The House plan shrinks that number to four with rates of 12, 25, 35 and 39.6 percent. The Senate measure keeps the number of personal income tax brackets at seven, change the rates to 10, 12, 22, 24, 32, 35 and 38.5 percent.
Looking at the standard deduction, which refers to the deduction of the amount of income we’re taxed. The current rate is $6,350 for the individual and $12,700 for married couples. The House measure increases this to $12,000 and $24,000 respectively, while the Senate increases the standard deduction to $12,000 and $24,000.
Taxpayers in high-tax states – like California and New York – who itemize their deductions are able to deduct four kinds of non-businesses taxes, including state and local income, real estate, property and sales taxes. These are state and local tax (SALT) deductions Commonly known as state and local taxes (SALT,) the House bill eliminates all deductions expect for a property tax deduction capped at $10,000. The Senate plan repeals SALT deductions when it comes to income and sales tax, yet leaves in place a provision for property tax deductions up to $10,000.
A large concern to many taxpayers is the child tax credit. The current tax code allows for taxpayers to receive up to $1,000 per child under the age of 17. The House plan raises that to $1,600, while the Senate measure increases it to $2,000.
Another major concern is the individual mandate, which is the Obamacare requirement to purchase health care. At present, if you don’t purchase health care but can afford to do so, you could face a fine of either 2.5 percent of the household income or a per-person fee – whichever is higher. Unbelievably, the changes to the individual mandate were not included in the House measure. The Senate bill however eliminates the individual mandate completely.
Commonly called the ‘death tax,’ the federal estate tax is a tax on the transfer of property after someone’s death. At the moment, estates valued at more than $5.4 million in 2017 could be taxed. The House plan would double the estate tax exemption to $11 million for individuals and $22 million for couples, but would repeal it after 2023. Under the Senate plan, the exemption would double.
Then there’s something called the ‘pass-through provision’ for businesses that are sole proprietorship, joint venture, limited liability companies or an S-corporation. The ‘pass-through’ taxation format’s used by the majority of businesses where the profits are counted in the owners’ personal tax returns.
Under current law, ‘pass-through’ businesses are subject to a top rate of 43.4 percent. The House plan reduces the tax to 25 percent and creates a nine percent rate for the first $75,000 in earnings for some smaller businesses. The Senate measure, however, sets up a new deduction of 23 percent for those who qualify. The plan also makes it easier to get this deduction, but will expire after 2025.
On the opposite side from ‘small businesses,’ are the larger organizations, which are subject to a corporate tax rate of 35 percent. Under the House measure, the corporate tax rate would be lowered to 20 percent. The Senate plan would also lower the corporate tax rate to 20 percent, but with a delayed implementation of one year.
Finally, there’s the alternative minimum tax (AMT) which is a supplemental income tax levied on certain taxpayers designed to offset the benefits a high income earner could receive and ensures they pay a minimum tax. The current plan imposes the AMT on taxpayers whose ‘tentative minimum tax’ is higher than the regular tax. The House plan repeals both the individual and corporate alternative minimum tax, while the Senate’s plan leaves the AMT in place, but raises the amount of income to be exempt.
Hopefully, this helps you understand what all the ‘tax reform’ hyperbole is about. As for me, I think I have brain-fluid leaking from my right-ear from thinking too hard.