U.S. House Passes Tax Bill – What does it mean for you?
Joe O'Connor, CPA
The U.S. House of Representatives passed a tax bill last week that represents the largest re-write of the tax code in over 30 years. There are numerous changes included in the bill that impact everyone from high net worth individuals to the average American. So, the important question everyone wants to know is, how does the new tax bill affect me? Well the good news is, here is a summary for you, the American taxpayer. Although the House passed its bill, the Senate needs to pass its version of the bill as well. The House and Senate would then need to reconcile their differences before sending it to the President to sign into law.
The House bill reduces the number of individual tax brackets from seven to four. A tax bracket is the group you fall into at which a percentage applies to calculate the tax you owe based on your income. The new tax brackets in the bill are 12%, 25%, 35%, and 39.6%. The top tax rate of 39.6% remains the same. A comparison of the House bill tax brackets to current law is shown at the table included.
In addition to the tax brackets, various other tax deductions and credits for individuals would be impacted under the bill. A few examples are represented below.
- The standard deduction increases to $24,000 for joint filers and $12,000 for individual filers, this is up from $12,700 and $6,350. For example, if you are single and made $100,000, you would get to reduce your income by $12,000, and your taxable income would be $88,000.
- The deduction for personal exemptions is repealed. Personal exemptions are deductions you get for every person included on your tax return, such as spouses and dependents. In 2017, the deduction was $4,050 for each personal exemption.
- The child tax credit increases from $1,000 to $1,600 per child.
- The deduction for state and local income tax is eliminated.
- The deduction for real estate taxes is capped at $10,000.
- Student loan interest deduction is eliminated.
- Medical expenses are no longer deductible.
- Mortgage interest would still be deductible, but only up to the amount on acquired debt up to $500,000, down from $1 million.
The bill has a significant impact on corporations as well, reducing the top corporate tax rate to 20% from 35%. For pass-through income, such as income from sole proprietorships, LLCs, S Corporations, or partnerships, a certain portion would be treated as business income and taxed at a maximum rate of 25%. Under current law, pass-through income is taxed at the individual tax rates as noted above.
Hopefully, this article introduced you to the tax reform bill that is making its way through the U.S. Congress, and the potential impacts on you. We will be following the progress in the coming weeks.