FIRST: THE IMPORTANT FINE PRINT - Be aware of the 'doubled standard deduction.'
"To simplify the tax rules, the additional standard deduction and the personal exemptions for taxpayer and spouse are consolidated into this larger standard deduction."
Here's how that math works. Let's say you are single with no dependents, and you have a moderate income. Currently, you get to take the standard deduction ($6,350) and one personal exemption ($4,050). If you are 65 or older, you also get to take an additional standard deduction ($1,250). That adds up to $10,400, or $11,650 if you're over 65.
The Republican plan would replace all these provisions with a single deduction of $12,000 ($24,000 for married couples.) That's a 15% increase — except for seniors, who get a 3% increase.
And then your first dollar of taxable income would be subjected to a 12% tax rate, instead of the current 10%. But don't worry — the framework says "additional tax relief," as yet unspecified, will emerge for you during the committee process.
(See below for updated information about this.)
For married couples, all the relevant amounts are doubled under the current tax code and under the Republican proposal, so the percent changes would be the same.
If you have children, your fate is uncertain. The plan would abolish the $4,050 exemption you get to take for each of your dependent children. But it would also increase the child tax credit — by an unspecified amount. Once that amount is specified, you'll be able to figure out whether you face a tax increase or a tax cut or what.
Meanwhile, taxpayers who itemize their tax deductions for things like mortgage interest and state and local taxes would pay tax on more of their income under the Republican plan. The proposal says "most" itemized deductions would be abolished anyway, but those for mortgage interest and charitable giving would be retained.
Currently, you get to take the personal exemption even if you also itemize deductions, but you get to take the standard deduction only if you forego itemized deductions. Combining these provisions into a single, standard deduction would mean itemizers lose their personal exemption and get nothing back — meaning they'll typically pay tax on an extra $4,050 of income if they're single, or $8,100 if they're married.
Late in the day on Friday, December 15, 2017 the Republican leadership released the final details of their tax reform bill, after a week of hammering out compromises in the conference committee. They're expected to vote on it early in the week before Christmas.
Here are the highlights and most important provisions.
A massive tax cut for corporations: Starting on Jan. 1, 2018, big businesses' tax rate would fall from 35 percent to just 21 percent, the largest one-time rate cut in U.S. history for the nation's largest companies. The House and Senate bills originally had the big-business tax rate falling to 20 percent, but Republicans were not able to make the math work to keep the rate that low and start it right away in the new year, so they compromised by moving the rate to 21 percent. It still amounts to roughly a $1 trillion tax cut for businesses over the next decade. Republicans argue this will make the economy surge in the coming years, but most independent economists and Wall Street banks predict only a modest and short-lived boost to growth.
A new tax cut for the rich: The final plan lowers the top tax rate for top earners. Under current law, the highest rate is 39.6 percent for married couples earning over $470,700. The GOP bill would drop that to 37 percent and raise the threshold at which that top rate kicks in, to $500,000 for individuals and $600,000 for married couples. This amounts to a significant tax break for the very wealthy, a departure from repeated claims by Trump and his top officials that the bill would not cut taxes on the rich. The new tax break for millionaires goes beyond what was in the original House and Senate bills, with Republicans seeking to ensure wealthy earners in states such as New York, Connecticut and California don't end up paying substantially higher taxes as a result of the bill.
You can deduct just $10,000 in state, local and property taxes: One of the most controversial parts of the GOP tax plan is the push to greatly scale back how much state and local taxes Americans can deduct on their federal income taxes. Under current law, the state and local deduction (SALT) is unlimited. In the final GOP plan, people can deduct up to $10,000 (married couples are also limited to just $10,000). The House initially restricted the $10,000 deduction to just property taxes, but the final bill allows any state and local taxes to be deducted, whether for property, income or sales taxes. The move is widely viewed as a hit to blue states such as New York, Connecticut and California, and there are concerns it could cause property values to fall in high-tax cities and leave less money for public schools and road repairs.
Most Americans will pay less in taxes until 2026. The final plan lowers the tax rates for each income level and nearly doubles the standard deduction. The result is that the vast majority of Americans will see their tax bills drop next year. Trump is fond of saying the "typical" family will save $2,000, but the reality is the amount will vary greatly depending up the size, location and circumstances of each family. The bill will also increase the number of Americans who owe nothing in taxes from 44 percent today to 47.5 percent after the plan tax effect on January 1, 2018. But all of the individual tax cuts are scheduled to go away after 2025. Republicans opted to make tax cuts for families temporary and reductions for businesses permanent.
FOR SINGLE FILERS
10%: $0 to $9,525 of taxable income for an individual
12%: $9,526 to $38,700 individual
22%: $38,701 to $82,500 individual
24%: $82,501 to $157,500 individual
32%: $157,501 to $200,000 individual
35%: $200,001 to $500,000 individual
37%: over $500,000 individual
FOR JOINT FILERS:
10%: $0 to $19,050 for married joint filers
12%: $19,051 to $77,400 joint
22%: $77,401 to $165,000 joint
24%: $165,001 to $315,000 joint
32%: $315,001 to $400,000 joint
35%: $400,001 to $600,000 joint
37%: Over $600,000 joint
Under the final version of Republican plan, there would still be seven federal income tax brackets — but at slightly lower rates and adjusted income ranges. The brackets proposed are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Working-class families get a bigger child tax credit: Thanks to a late push by Rubio and Sen. Mike Lee (R-Utah), the child tax credit would be more generous for low-income families and the working class. The current child tax credit is $1,000 per child. The House and Senate bills expanded the child tax credit, with the Senate going up to a maximum of $2,000 per child. The final bill keeps the $2,000-per-child credit (families making up to about $400,000 get to take the credit), but it also makes more of the tax credit refundable, meaning families that work but don't earn enough to actually owe any federal income taxes will get a large check back from the government. Benefits for those families were initially limited to about $1,100, but through changes Rubio and Lee pushed for, it's now up to $1,400.
The individual health insurance mandate goes away in 2019: Beginning in 2019, Americans would no longer be required by law to buy health insurance (or pay a penalty if they don't). The individual mandate is part of the Affordable Care Act, and removing it was a top priority for Trump and congressional Republicans. The final bill does not start the repeal until 2019, though. The Congressional Budget Office projects the change will increase insurance premiums and lead to 13 million fewer Americans with insurance in a decade, while also cutting government spending by more than $300 billion over that period. Some Republicans hope to make other changes to health care to prevent insurance costs from rising dramatically by the time the repeal kicks in.
You can pass your heirs up to $22 million tax-free: In the end, the estate tax (often called the “death tax” by opponents) would remain part of the U.S. tax code, but far fewer families will pay it. Under current law, Americans pass on up to $5.5 million tax-free (that threshold is $11 million for married couples). The House wanted to do away with the estate tax entirely, but some senators felt that was too much of a giveaway to the mega-rich. The final compromise was to double the threshold, so now the first $11 million that people pass on to their heirs in property, stocks and other assets won't be taxed (and yes, that means $22 million for married couples).
“Pass through” companies get a 20 percent reduction: Most American businesses are organized as “pass through” companies in which the income from the business is “passed through” to the business owner's individual tax return. S corporations, LLCs, partnerships and sole proprietorships are all examples of pass-through businesses. In the final GOP bill, the majority of these companies get to deduct 20 percent of their income tax-free, a large reduction that mirrors what was in the Senate bill. The changes, however, expire after 2025. The National Federation of Independent Business initially opposed the House version, arguing that it didn't do enough for small businesses. But the NFIB later endorsed the House and Senate plans. Service businesses such as law firms, doctor's offices and investment offices can take only the 20 percent deduction if they make up to $315,000 (for married couples).
No corporate “AMT” tax: The final GOP bill gets rid of the corporate alternative minimum tax, a big relief to the business community. The Senate included the corporate AMT in its version of the bill, but the House did not. The corporate AMT makes it difficult for businesses to reduce their tax bill much lower than 21 percent. CEOs complained that this was a backdoor tax that would make them less likely to build new plants, buy more equipment and invest in more research, since the corporate AMT made the tax credits for those investments essentially null and void.
Fewer families will have to pay the individual AMT: The AMT for individuals started in 1969 as a way to prevent rich families from using so many credits and loopholes to lower their tax bill to almost nothing. But what started out as a way to prevent the wealthiest Americans from tax dodging started to hit more and more families over time. The AMT kicks in now for individuals earning over $120,700 and married couples earning over $$160,900. Under the final Senate bill, that threshold is lifted to $500,000 for individuals and $1 million for married couples.
The mortgage interest deduction gets smaller: Under the current tax code, taxpayers can deduct any interest they pay on up to $1 million worth of mortgage loans. House Republicans tried to cap that at $500,000 for new loans (existing mortgages are unaffected by the plan) but in the final version of their, Republicans have settled on a $750,000 cap.
The final bill costs $1.46 trillion: Republicans decided it would be all right to go into debt up to $1.5 trillion to fund the tax cut. In the end, they nearly hit that mark. The official estimate -- released Friday evening alongside the bill -- came in at $1.46 trillion.
What is NOT changing:
The bill keeps in place the student loan deduction, the medical expense deduction and the graduate student tuition waivers. The House bill got rid of these popular deductions, but the Senate bill kept them, and the final bill even makes the medical deduction a bit more generous (dropping the threshold to take the deduction from expenses over 10 percent of income to expenses over 7.5 percent of income for 2017, 2018 and 2019. After that, the medical deduction threshold reverts to 10 percent). In the end, Republicans decided it was better to allow millions of middle-class families to continue using these breaks if they qualify for them.
Retirement accounts such as 401(k) plans stay the same. No changes to the tax-free amounts people are allowed to put into 401(k)s, IRAs and Roth IRAs.
Churches, synagogues, mosques and other nonprofits (the Johnson Amendment stays in place) can't get political and endorse candidates in elections. Trump and conservative Republicans wanted to “totally destroy” (Trump's words) the Johnson Amendment, which has been in place since 1954 and prevents religious institutions and nonprofits from getting involved in elections via fundraising or endorsements. The House bill included a repeal of the Johnson Amendment, but Democrats were able to get the Senate parliamentarian to determine that including the repeal in the bill didn't comply with the rules of the Senate.
About 70% of Americans claim the standard deduction when filing their taxes, and their paychecks will almost certainly increase — albeit slightly — if the tax plan is enacted.
In 2017, the standard deduction for a single taxpayer is $6,350, plus one personal exemption of $4,050.
The GOP proposal would combine those into one larger standard deduction for 2018: $12,000 for single filers and $24,000 for joint filers.
WHAT CAN YOU DO NOW?
Pay your 2017 state income tax in full.
It's possible that the state and local income tax deduction will be axed or reduced in the upcoming tax bill.
Taxpayers who make estimated tax payments have until January 15 to pay their fourth quarter 2017 taxes, but you could save more by making that final payment before the end of the year.
Prepay your property taxes for next year.
Deducting the full amount of your current property tax bill in 2017 might provide a larger tax benefit if your tax rate goes down next year under the new plan, TaxAudit says.
If your property tax bill is greater than $10,000, you'll also be able to deduct more of it by paying next year's bill early.
The alternative minimum tax (AMT), which prevents wealthy taxpayers from using too many tax breaks, might be eliminated.
"The current AMT may make your state and local income tax and property tax deductions less beneficial if you are subject to AMT," the TaxAudit team says. "However, even if subject to AMT in 2017, you may benefit more by taking these deductions in 2017 rather than possibly losing those deductions entirely or in part in 2018."
Most of the people affected by the AMT earn over $500,000, according to Tax Policy Center. It is more likely to affect those who are married, have large families, or live in high-tax states.
If you've been planning to buy a car, do it before the end of the year.
Buying a car before the end of the year might be a smart idea for taxpayers in states with no state income taxes who itemize and claim the sales tax deduction, according to TaxAudit.
The purchase also provides a deduction on vehicle registration fees, which will likely be eliminated under the new bill.
Contribute to charities.
December is the season of giving. But if the holiday spirit is not enough to inspire you to donate, then there is also a tax incentive.
If you think your itemized deductions next year might not exceed the proposed new higher standard deduction, you might want to think about making your 2018 charitable contributions this year, TaxAudit says.