We are now one step closer to a new tax plan for 2018 as the House and Senate versions have passed in their individual chamber. Now, it’s time for both chambers to iron out the differences between both plans to pass the final tax reform bill to meet the self-imposed Christmas deadline. How will the potential tax reform bill affect you? Let’s see!
Similarities Between Both Plans
Some changes are the same with both bills. This means the House and Senate will not have to reach an agreement on several of the items mentioned below. If the final bill passes and President Trump signs the bill into law, these provisions will remain intact.
State and Local Property Tax Deduction
You will be able to deduct up to $10,000 in state and local property taxes paid.
Under the current tax code, you can also deduct your local income tax and sales tax paid as well. This reduction will affect taxpayers that live in high-tax states and cities.
Standard Deduction Limits Will Rise
If you’re one of the 25% of Americans that currently file an itemized tax return, you may find yourself having to file a standard (non-itemized) tax return instead. With the new tax bill, experts estimate that only 5% of Americans will be able to itemize.
How’s this possible?
The standard deduction amount is doubling.
You can currently itemize when your deductions exceed $6,350 as an individual and $12,700 as a married couple. In 2018, you will need $12,000 (single) or $24,000 (married) to itemize.
Raising the standard deduction can actually be a benefit to everyone as you will pay fewer taxes. Currently, if you are a single person that makes $24,000 a year, you pay federal income tax on the $17,650 of your salary ($24,000-$6,350= an adjusted gross income of $17,650). With the increased deduction, you will now only pay tax on $12,000. Potentially, your tax bill will drop $1,000 because your taxable adjusted income is lower.
Personal Exemption is Eliminated
As a tradeoff for the higher standard deduction, both tax plans eliminate the personal exemption. Currently, you get a $4,050 for you and each person listed on your return. A family of four would have a personal deduction of $16,200 that would lower their taxable income. Under current tax law, the personal exemption is in addition to the standard or itemized deduction.
This same family of four (assuming they don’t itemize) would be able to automatically deduct $28,900 from their gross income under the current tax law. Because deductions are being eliminated, the same family of four will only be able to deduct $24,000 in 2018. Their adjusted gross income will be $4,900 more in 2018 because of the changes.
Eliminating the personal exemption will mostly affect families with multiple children. To help offset the potentially higher tax bill, lawmakers are planning to raise the child tax credit. But, families with children will more than likely see their bill go up in many instances.
What Are The Differences Between Both Plans?
Even though the Senate plan resembles the House tax plan to get enough votes to pass, there are still several key differences that must be settled in committee before the final draft is presented to both chambers of Congress for approval.
Here are a few of the key differences:
The Total Number of Tax Brackets
The House plan calls for 4 tax brackets ranging in size from 12% to 39.6%. Meanwhile, the Senate plan keeps the existing the 7 brackets but reduces the witholding percentage for several brackets (10, 12, 22, 24, 32, 35, and 38.5% instead of the current 10, 15, 25, 28, 33, 35, 39.6%).
When The Corporate Tax Cut Takes Effect
Both plans call to reduce the corporate tax rate from 35% to 20%, the only question is when. House leaders want the change to immediately go into effect in 2018, but the Senate doesn’t want the rate to go down until 2019.
The Obamacare Individual Mandate
As a surprising twist, the Senate is calling for the removal of the Obamacare Individual Mandate, the House plan keeps the Mandate.
If lawmakers side with the Senate’s position, you will no longer have to pay a tax penalty for not having adequate health care. To complement the mandate’s removal, the Senate plan also lets you deduct medical bills not covered by insurance (a current itemized deduction).
Home Mortgage Interest Deduction
The House tax plan caps the home mortgage interest deduction at $500,000 while the Senate keeps the limit at $1,000,000. Either way, you must be able to itemize your return to deduct your home mortgage interest.
Other Individual and Corporate Taxes
There are also differences on other unique taxes that high-earning individuals and corporations might pay. For example, the House plan calls for a complete elimination of the AMT (Alternative Minimum Taxes) while the Senate increases the exemption amount by 40%.
You will also see key differences in the between the estate tax (death tax), the corporate repatriation tax, net operating loss carrybacks, and tax treatment on interest to name a few. To say the least, achieving tax reform is still going to be a tough fight.
How Soon Can The Tax Reform Bills Become Law?
By glancing at the differences, you can tell it won’t be an easy fight in the House or Senate to pass the final tax reform product. If the bill cannot pass one of the chambers, lawmakers have to go back to the drawing board like they did with healthcare reform. The Senate tax plan barely passed on a 51-49 margin as all Democrats voted “no” including one Republican senator, Bob Corker.
While passage isn’t guaranteed in the House, the tougher battle appears to be in the Senate.
The goal for both chambers is to introduce and pass the reform before Christmas. If the bill passes both chambers, President Trump can sign it into law and it will be the most notable tax reform package in 31 years!