This past Thursday, on November 16th, 2017, the House passed a major tax reform plan. Although no Democrats voted in favor of the bill, it passed with nine Republican votes in excess of the number needed to push it though. The bill, which is over 440 pages in length, was first introduced on November 2nd, meaning that House members deliberated for only a little over two weeks before taking a vote. Now that the House tax proposal has passed, the Senate will work on its version which will include the repeal of the individual health care mandate of the Affordable Care Act, a provision that was not included in the House plan. Following this, the two groups will try to work out a compromise plan that members of both houses of Congress can agree on.
Some of the most important points of the House tax reform plan include tax cuts for businesses, large and small. The House tax bill proposes a permanent cut to the corporate tax rate from 35% to 20%. According to the plan, corporations would also get certain other tax breaks such as the ability to deduct the full purchase price of capital expenditures for the next five years. On the international front, businesses will be able to repatriate money held oversees at a tax rate of 12% and, from the passage of the bill forward, will only be taxed on money made in the United States.
In addition to the tax benefits it holds for large corporations, the House tax bill will also benefit pass-through entities by lowering the top tax rate for income passed through to the tax returns of business owners. If the provisions of the House bill are accepted, the income from pass-through entities such as LLCs and S-Corporations will be taxed at a top tax rate of 25% rather than the current top rate of 39.6%. The final House tax plan also provides for a low 9% tax rate on the first $75,000 of income for businesses owners with an income of less than $150,000. This provision is accompanied by a five-year phase-in period.
For individual taxpayers, the bill simplifies the tax code by reducing the number of tax brackets to from seven to four. The new brackets would be 12%, 25%, 35% and 39% for married couples who earn more $1 million per year. Most itemized tax deductions such has those for medical expenses, moving expenses and the cost of tax preparation services would go away. Only the tax deductions for charitable contributions and mortgage interest would remain, with the ceiling on the mortgage interest reduced to $500,000 from its current $1,000,000.
One of the main tax advantages lost with the House tax plan is the ability to deduct state and local income and property taxes. The loss of this tax deduction, called the SALT deduction, is especially significant for taxpayers who live in high tax rate states such as New York and California. On the flip side, the bill adds in a new tax credit called the Family Flexibility Credit which amounts to $300 for each taxpayer and spouse over the next five years. In addition, it almost doubles the standard deduction, from 2017 amounts $6,350 and $12,700 for individuals and married couples respectively, to $12,000 for each individual and $24,000 for each married couple
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