As Republican lawmakers are close to reconciling the House and Senate version of the tax bill, people are wondering how the new bill will affect them. While it is still too early to know exactly what the final version will look like, there will be winners and losers. As it stands now, corporations and some business owners look to benefit the most. However, high-wage earners living in high tax states, like New York and California, won’t fare as well, due to limitations on state and local tax deductibility. While all the details haven’t been finalized yet, below is a summary of likely provisions:
Corporate tax rates
Corporations benefit as their tax rate goes from 35% down to 21%. However, not all companies currently pay the highest rate, so those that do, such as domestic retailers, will benefit the most.
Many small businesses are set up as S corporations and LLCs. The business income “passes through” to the owner’s tax return and is taxed at the owner’s individual tax rate, which can be as high as 39.6%. The proposal moving forward would allow a 20% income deduction, which would effectively lower the business owner’s top tax bracket to an overall rate of 29.6%. However, it is still unclear whether this proposal will apply to professional service businesses, such as attorneys and accountants.
Income tax brackets
Most taxpayers will see lower overall tax rates as the brackets are reconfigured. The current highest tax rate of 39.6% will be reduced to 37%.
Both the House and Senate bills propose increasing the standard deduction from $13,000 to $24,000 for married couples and from $6,500 to $12,000 for singles.
Many of the largest itemized deductions, such as deductions for state and local income taxes, mortgage interest, and property taxes, will likely be reduced. Due to the reduction in itemized deductions and the increased standard deduction, more taxpayers will forego itemizing their deductions and simply take the standard deduction.
Both bills propose eliminating personal exemptions (currently $4,050 per taxpayer, spouse, and dependents).
Child tax credit
This tax credit puts extra dollars into family’s pockets. Currently, the child tax credit is $1,000 per child. The proposal increases it to $2,000 per child. The credit will be phased out for higher income earners.
Currently a married couple can leave their heirs up to $10.98 million without paying any Federal estate tax. The new proposal doubles this exemption amount.
The mandate requiring everyone to purchase health insurance will be repealed.
Some of the more controversial items, such as taxing graduate school tuition waivers, eliminating medical expense deductions, and eliminating student loan deductions have been removed from the new proposal.
This comprehensive tax proposal will continue to evolve as it moves through Congress. This is a major piece of legislation that will affect the economy for years to come. The exact effects are still unknown. Will it stimulate enough growth to offset its cost? Or will the increased debt stifle the economy and wipe out potential benefits to middle income taxpayers? Will corporations use their tax savings to hire more workers and increase wages? Or will the savings go primarily to their corporate shareholders? What will be the unintended consequences? The true impact is yet to be determined. Stay tuned.
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