House Republicans released a plan to overhaul the nation’s tax code on Thursday.
If approved in the Senate and signed into law by the president, it would be the first major tax overhaul in more than a generation. The plan, called the The Tax Cuts and Jobs Act, would compress the number of tax brackets, and dramatically slash taxes for corporations and other businesses. It would also reduce some popular middle class tax breaks, and entirely eliminate the estate tax.
But this is only the beginning, and the proposed tax changes are not set in stone. There’s likely to be a lot of push back from House and Senate Democrats, and various business groups in the coming weeks as they digest the bill’s provisions, experts say. And the final tax bill could be quite different. Chief among legislators’ questions will be how to deal with expected budget shortfalls. The tax cuts could amount to reduced revenue of as much as $5 trillion over the next decade, according to reports.
Here are highlights from the plan:
Fewer tax brackets. The bill reportedly decreases the number of tax brackets to four, instead of the current seven. The rates would be 12%, 25%, 35%, and 39.6%. Individuals earning over $500,000 and married couples earning $1 million or more annually would be subject to the highest tax rate, as opposed to those earning, respectively, $418,000 and $470,000 or more now, according to the Wall Street Journal.
If approved in the Senate and signed into law by the president, it would be the first major tax overhaul in more than a generation
Increase in bottom tax rate. The bottom tax rate would increase to 12% from 10%, made up for by an increase in the standard deduction, which is the basic tax credit individuals and families receive if they don’t itemize their taxes.
Changes in standard deduction. The standard deduction for an individual taxpayer would nearly double to $12,000, and $24,000 for families. A standard deduction is an untaxed amount of income that individuals and families automatically get from the Internal Revenue Service if they don’t itemize taxes. It reduces your total tax amount for the year
Lower taxes for (some of the) middle class. Those in the middle class, earning up to $45,000 annually, would see their federal taxes go down to 12% from the current 15% rate.
Mortgage deduction cut. The mortgage interest deduction would be slashed in half for home loans up to $500,000, instead of the current $1 million limit.
End of alternative minimum tax. The alternative minimum tax, an extra tax for high income earners to make sure they don’t abuse tax loopholes, would end.
Lowered corporate tax rate. The corporate tax rate would be slashed to 20% from its current top rate around 35%. Many small businesses, known as pass-through entities, would see their top rate drop to 25%. Businesses with overseas operations would have a new 12% tax on overseas profits. Currently their profits aren’t taxed until they’re brought back to the U.S.
Elimination of death tax. Wealthy taxpayers would be eligible for a special break: the plan would eliminate the death tax for all estates by 2024. Currently there is a 40% federal tax on estates over $5.46 million.
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Many state and local income tax deductions axed. The plan would eliminate state and local income tax deductions credit estimated to be worth $1.3 trillion over the next decade, but would allow property tax deductions up to $10,000. The state tax deductions are a flash point predominantly to residents of Democrat-leaning, high-tax states California, Connecticut, New York, and New Jersey.
More changes in deductions. The bill would eliminate itemized deductions for medical care costs, and get rid of the current interest rate deduction for student loans, as well as a deduction for adoption costs, according to the Wall Street Journal. That could be problematic for people with large healthcare bills during the year, and those with student loan debt.
No change to retirement account taxes. The tax plan won’t make major alterations to the popular 401(k) or IRA retirement savings deductions for workers, loopholes that lawmakers said earlier they were considering reducing.