(WSJ 12/16/17) After months of debate, Republicans late Friday released the details of their plan to overhaul the U.S. tax code for businesses and individuals. Here’s how it would affect individual filers, including those with a pass-through business. For its effect on all businesses, see here.
The core of the tax bill is in line with versions that passed the House and Senate: cuts in individual income-tax rates, fewer allowed itemized deductions but a bigger standard deduction, and big benefits to high-income business owners and heirs to large estates. Middle-income households will get tax cuts that are set to expire, and some households, particularly upper-middle-class residents of high-tax states, would likely pay more than they do now.
NEW TAX BRACKETS AND RATES
The highest-earning Americans will get a tax rate of 37%, which is lower than today’s 39.6% and lower than the top rate in each of the bills that passed the House and Senate.
DEDUCTIONS AND EXEMPTIONS
The plan increases the standard deduction while adjusting several other deductions and credits.
Standard Deduction
• Current for 2018: $13,000 (married); $9,550 (head of household); $6,500 (single)
• Proposed: $24,000 (married); $18,000 (head of household); $12,000 (single)
Personal Exemption
• Current: $4,150
• Proposed: Repealed
Child Tax Credit
• Current: $1,000, starts phasing out for married couples at $110,000 in income; $75,000 for others
• Proposed: $2,000, $1,400 of which is refundable; starts phasing out at $400,000 in income for married couples, $200,000 for nonmarried households.
State and Local Taxes
Rather than fully repeal the deduction as planned, Republicans cap it at $10,000 to address concerns from high-earning residents in high-tax states.
• Current: Deductible for taxpayers who itemize, with limits
• Proposed: Caps at $10,000 amount that can be deducted
Mortgage-Interest Deduction for Both Primary and Second Homes
• Current: Itemized deduction on loans up to $1 million
• Proposed: Itemized deduction on loans up to $750,000
Alternative Minimum Tax
• Current: A parallel tax system that disallows personal exemptions and state deductions for high-earning households
• Proposed: Preserves the AMT but significantly narrows it
Medical Expenses
• Current: Itemized deduction for expenses above 10% of income
• Proposed: Reduces that income percentage to 7.5% for all in 2017 and 2018
Student-Loan Interest
• Current: Above-the-line deduction, meaning it can be used to show a lower income
• Proposed: No change
Graduate Student Tuition Waivers
• Current: Not taxable
• Proposed: No change
Alimony
• Current: Deductible for people making alimony payments
• Proposed: Not deductible to the payer for agreements signed after 2018
ESTATE TAX
• Current: 40% on estates over $5.6 million per individual
• Proposed: 40% on estates over $11.2 million per individual
CAPITAL GAINS AND DIVIDENDS
• Current: Top rate of 23.8%
• Proposed: No change
PASS-THROUGH BUSINESSES
Republicans propose a 20% income deduction for so-called pass-through businesses such as partnerships and S corporations, which pay taxes through individual returns. That is lower than the 23% deduction in the Senate bill, but when combined with the lower top tax rate on ordinary income, it equates to a nearly identical 29.6% top rate on that income for pass-throughs. The bill also includes some version of House language letting pass-through firms qualify for a tax break based on their capital investment.
• Current: Pass-through business taxes based on individual income tax rates and brackets
• Proposed: Business owners get a 20% deduction for pass-through income; phases out for some businesses starting at $315,000 of income for joint filers
HEALTH INSURANCE
• Current: Penalty for failing to have health insurance
• Proposed: No penalty
529 PLANS
• Current: Proceeds from such tax-free accounts can be used for post-secondary education
• Proposed: Proceeds can be used for K-12 and for post-secondary education
WSJ: https://www.wsj.com/articles/what-the-republican-tax-plan-means-for-you-1513380487
