House Republicans recently passed a bill that would significantly change the tax code. Here are some of the major changes:
1. Tax Relief for the Middle Class…Maybe.
The bill doubles the standard deduction, to $12,200 from $6,350 for single filers, and to $24,400 from $12,700 for married couples.
Sounds great, right? But the bill eliminates the personal exemption, which is $4,050.
Most middle-class families will benefit from the increased standard deduction. But larger families could be in a worse position because of the loss of personal exemptions.
2. Goodbye itemized deductions…For the Most Part.
If you rarely take the standard deduction and instead itemize deductions on your Schedule A, there will be a lot fewer deductions to choose from. The only deductions taxpayers can itemize are: (1) mortgage interest, (2) charitable deductions, and (3) real estate taxes.
And even the mortgage interest and real estate tax deduction will be limited. The real estate tax deduction will be limited to $10,000, hurting taxpayers living in areas with high property taxes (like New Jersey and New York). The mortgage interest deduction will be limited to the first $500,000 financed, halving the current limit of $1,000,000. This means more taxpayers will be better off taking the standard deduction, rather than itemizing.
3. Let’s Get Territorial.
U.S. corporations—like U.S. individuals—are taxed on their worldwide income. If a U.S. company does business in a foreign country, it not only pays tax in that foreign country but also pays U.S. tax on that income as well. There are various deductions and credits to help eliminate the double taxation, but it makes things rather complex.
The tax plan would move towards a territorial system, meaning U.S. companies only pay tax on money earned in the U.S.
4. Tax Bracketology
There are 7 marginal income tax rates: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. That’d change to four under the bill. Only the 12%, 25%, 35%, and 39.6% brackets would remain.
5. Few Will Miss the Alternative Minimum Tax
Some individuals and business not only need to calculate their regular income tax liability, but also must calculate their Alternative Minimum Tax. As the name implies, AMT made sure all were paying a fair minimum tax. In reality, AMT is unwieldy and wildly complex. There’s no doubt its elimination will simplify the tax code.
6. Your Children Just Got Richer—If You Are Already Really, Really Rich.
One of the more controversial aspects of the bill is its elimination of the estate tax. The estate tax only comes into play if you have around $5.5 million in assets. In reality, you’d need more than that to be affected by the estate tax because there’s an entire industry around mitigating its impact.
There’s no doubt the elimination of the estate tax will benefit the rich—you need to have tens of millions if not hundreds of millions for it to have a real impact—but the U.S. will not be losing out on much revenue if it’s eliminated. Most taxpayers are smart enough and plan well enough to avoid it, so the U.S. actually collects little from it.
7. Making U.S. Businesses More Competitive
The House bill also cuts the corporate tax rate from 35% to 20%. Republicans argue this will make U.S. businesses more competitive with international companies in lower tax jurisdictions. They also argue the corporate cut will benefit the middle class. Whether this theory will play out in the real world is yet to be seen.
8. It’s Not All Good News For Businesses
For businesses holding money and other assets overseas, it’s not all good news. Businesses have been able to avoid U.S. taxation by failing to repatriate profits back to the U.S. But under the bill, money and other assets held overseas would be subject to a one-time tax of 7% or 14%, depending on the asset type.
9. Passthroughs Get Help Too
Sole Proprietorships, s-corporations, partnerships, and other pass-through entities will get tax relief as well. The bill reduces the tax rates for these businesses to a maximum of 25%.