Proposed Tax Bill: What You Need to Know

Proposed Tax Bill: What You Need to Know

by Jane Haskins, Esq., November 2017

Both the U.S. House of Representatives and the Senate have passed tax reform legislation, and that means that individuals and businesses may be taxed differently starting in 2018. Before that happens, though, the two houses of Congress must reconcile the House and Senate versions of the “Tax Cuts and Jobs Act" and it must be signed into law by President Trump.

While the two tax bills are alike in many ways, there are some important differences, and the challenge now is to develop a single piece of legislation that meets budget restrictions and can win approval in both houses of Congress. While it's still to early to tell for sure whether tax reform will become law, or what it will ultimately look like, it's not too soon to begin planning for the way individual tax reform might affect your household.

Analysts say most people will pay less in taxes if the legislation becomes law, but some will end up paying more. Many of the individual tax cuts are permanent in the House legislation, but in the Senate bill they expire within the next 10 years. This means your taxes may go up in the future, depending on your situation and the version of the legislation that ultimately passes. And If you own a small business—even a sole proprietorship—you may also be affected by proposed changes to the way businesses are taxed.

Here are some key ways individual tax reform may affect you:

Tax rates. The House bill reduces the current seven individual tax brackets to four. In the Senate version, there are still seven brackets, but the top and bottom rates are lower than they are now.

Alternative minimum tax (AMT). The alternative minimum tax would be repealed. The AMT requires some tax filers to calculate their tax liability using both regular tax rules and the stricter alternative minimum tax rules and pay the greater amount.

Personal exemptions. Currently, exemptions reduce your taxable income by $4050 for each member of your household. Both the House and Senate propose eliminating personal exemptions. However, a larger standard deduction and expanded tax credits mean that many families will either pay about the same amount or come out ahead.

Standard and itemized deductions. Both the House and Senate bills nearly double the standard deduction in 2018. For joint filers, the deduction would increase from its current $12,700 to $24,400 in the House version or $24,000 in the Senate version. For individual filers, the deduction would go from $6350 now to $12,200 in the House bill or $12,000 in the Senate bill.

Taxpayers typically take the standard deduction if their itemized deductions (such as home mortgage interest, state and local taxes and charitable contributions) total up to less than the standard deduction amount. A higher standard deduction means fewer people will itemize, potentially cutting down on household paperwork and making tax filing easier.

The House and the Senate legislation also limits the kinds of itemized deductions you can take. If you have used the following itemized deductions in the past to lower your tax bill, you may find yourself paying more in the future:

  • Mortgage interest. Currently, you can deduct interest on up to 2 mortgages, up to a combined value of $1 million. The Senate wouldn't change this rule, but in the House bill, you can only deduct interest on a mortgage of up to $500,000, and the mortgage must be for your primary residence. Interest on home equity loans would no longer be deductible under either version of the legislation. These changes would apply to all mortgages taken out after November 2, 2017. You could face a big tax impact if you are buying a house in an expensive part of the country. Changes to the mortgage interest deduction are opposed by real estate and home building industry groups who say it will discourage construction and home buying.
  • State and local taxes. Both the House and Senate bills eliminate income, sales and personal property tax deductions. They also limit your property tax deduction to $10,000. These changes have been opposed by legislators in places like New York and New Jersey that have expensive housing and high property and/or income tax rates.
  • Medical expenses. Currently, you can deduct the portion of your medical expenses that exceed 10 percent of your income. The House bill eliminates this deduction, while the Senate version keeps it. The Senate bill also repeals the Affordable Care Act's individual mandate that requires people to obtain health insurance or pay a penalty, starting in 2019. Eliminating the medical expense deduction hurts people who have high medical expenses relative to their income.

Income adjustments. These lower your taxable income, but you don't have to itemize deductions to take advantage of them. Two often-used income adjustments would be eliminated under the House legislation, but not the Senate bill.

  • Student loan interest. People who are repaying student loans can currently deduct $2500 of their interest payments each year.
  • Alimony. You can currently deduct the alimony you pay to your ex, but your ex has to report it as income. Under the House tax bill, people who divorce after 2017 won't report alimony as income or take a deduction for it. Family lawyers have been critical of this change, which is not part of the Senate tax bill.

Tax credits

While deductions reduce the amount of your income that is taxable, tax credits directly reduce the amount of tax you owe.

  • Both bills expand the child tax credit from its current $1000 per child and make it available to taxpayers at higher incomes. In the House version, the credit is $1600 and it begins to phase out at an income of $115,000 for single filers and $230,000 for married couples. The Senate bill includes a $2000 credit and makes it available to families earning up to $1 million. The increased credit amount is not refundable, so it won't help low-income families who don't owe any taxes.
  • The House bill also includes a new family tax credit of $300 for each dependent over 17, plus you and your spouse if you file jointly. This credit expires in 5 years.

A bipartisan committee of House and Senate legislators is currently working to reconcile the competing legislation. Republicans hope to pass a tax reform bill later this month and send it to the president for his signature before Christmas. If you want to voice your opinion, you can contact your legislators.

If you are not sure how these changes will impact you, you should consult with your tax advisor. If you don't currently have a tax advisor, LegalZoom offers legal and tax accounting advice to assist you with navigating through these tax changes.