How Could a Tax Change Affect You? This Is What the Senate and House Propose By RON LIEBER and TARA SIEGEL BERNARD
On Thursday, Senate Republicans unveiled their tax bill. It differs from last week’s version in the House of Representatives on a number of important issues. For instance, the Senate plan would completely eliminate the ability to deduct state and local taxes; there is no exception for up to $10,000 in property taxes each year, as there is in the House bill.
It’s too soon to predict what, if anything, will come of all this. In the coming days and weeks, we will see which proposals survive as Congress moves toward possible full votes on these or modified bills. In the meantime, here’s a guide to some of the consumer-facing issues under consideration.
Tax Brackets
What’s in place now:
Seven brackets, with a top rate of 39.6 percent, which people pay on income they earn beyond $480,050 for couples filing their taxes jointly.
What the House proposed:
Four brackets, with a top rate of 39.6 percent. But that top rate doesn’t begin until a couple hits $1 million in annual income.
What the Senate proposed:
Seven brackets, with a top rate of 38.5 percent that you pay on income beyond $1 million annually if you’re married or $500,000 if you’re single. The Senate bill’s lowest tax bracket is at 10 percent for individuals, while the House bill had raised it to 12 percent.
Exemptions, Credits, Standard Deductions
What’s in place now:
If you’re single, the current standard deduction is $6,350. Add in exemptions and you’re up to $10,400.
Married without children? That’s $12,700 for the deduction and $20,700 with exemptions.
If you’re married with two kids, the deduction-plus-exemptions figure goes up to $28,700. There is also a $1,000 tax credit per child.
What the House proposed:
The House bill calls for simplification: If you’re single with no children, your standard deduction would be $12,000. If you’re married, it would be $24,000 no matter how many kids you have. The child tax credit, however, would rise to $1,600 per child. There is also an additional $300 credit for each parent and nonchild dependent, though that would expire after 2022.
What the Senate proposed:
The same $12,000/$24,000 standard deductions as the House. Single parents would see their deductions go to $18,000 from $9,300. The child tax credit would rise to $1,650.
State and Local Tax Deductions, and Mortgage Interest
What’s in place now:
You can generally deduct the amount you pay for state and local tax income taxes, including property taxes, on your federal income tax return. You can also deduct the interest you pay each year on mortgage debt up to $1 million, a cap that can cover multiple homes. Plus, you can generally deduct up to $100,000 in interest you pay on a home-equity loan or line of credit.
What the House proposed:
No more state and local tax deductions, though you could continue to deduct up to $10,000 each year in property tax. For people buying in the future (which the bill defines as Nov. 2, 2017, or later), mortgage interest deductions would be allowed only on loans up to $500,000. Moreover, only debt from primary residences would count toward that limit, and you could not include any interest from home equity loans or lines of credit that you took out on that new home.
What the Senate proposed:
No more state and local tax deductions and no exception for property taxes, either. The mortgage interest deduction, however, would survive in its current form.
Medical Expenses
What’s in place now:
For the moment, you can deduct out-of-pocket medical expenses that exceed 10 percent of your adjusted gross income (but not the expenses that amount to the first 10 percent). This is particularly useful for elderly people and others with lower incomes who need regular assistance and care.
What the House proposed:
The House wants to do away with the deduction in 2018.
What the Senate proposed:
The Senate would keep the deduction.
Student Loan Interest
What’s in place now:
Currently, people with incomes below certain thresholds can deduct up to $2,500 of student loan interest each year.
What the House proposed:
The House wants to do away with the student loan interest deduction.
What the Senate proposed:
The Senate would keep things as they are now.
Estate Taxes
What’s in place now:
In general, you pay taxes on inherited property at a 40 percent rate, but current rules waive that tax for estates up to $5,490,000.
What the House proposed:
The House seeks to nearly double that exemption and repeal it altogether after 2024 — a year later than the House first proposed.
What the Senate proposed:
The Senate wishes to double the exemption but has not proposed any full repeal.
Pass-Through Businesses
What’s in place now:
People who own small businesses of various sorts generally pay income taxes based on the normal rate for individual taxes. Often, they are involved in or run partnerships, sole proprietorships, limited liability companies and S corporations.
What the House proposed:
The House bill would create a new 25 percent tax rate for what it refers to as “pass-through” businesses, for a portion of the business net income that passes through to the owners. The proposed rules around this are complicated; see Section 1004 of the House bill summary for more information.
What the Senate proposed:
The Senate’s offering would not leave quite as much money in taxpayers’ pockets as the House bill would, as it gives taxpayers the opportunity to deduct 17.4 percent of domestic qualified business income from a partnership, S corporation or sole proprietorship. See page 17 of the Senate bill summary for more detail.
Adoption Credits
What’s in place now:
In 2017, when an employer pays for up to $13,570 in qualified adoption expenses for an employee, the employee pays no taxes on that assistance. There’s also a separate adoption credit, which generally provides taxpayers with a credit of up to $13,570 per eligible child. Under the current rules, the credit phases out for taxpayers with adjusted gross income between $203,540 and $243,540.
What the House proposed:
The bill had proposed getting rid of the adoption credit altogether, but on Thursday afternoon, the Republican leadership changed its mind and left it intact.
What the Senate proposed:
The Senate would also leave it intact.
Selling Your Home
What’s in place now:
Currently, a married couple filing their taxes jointly can exclude up to $500,000 in capital gains on the sale of a home, as long as they’ve used it as a primary residence for two of the past five years.
What the House proposed:
Taxpayers would need to have lived in the home for five out of the previous eight years — and the tax break could be used only once every five years, down from once every two years. The tax break would begin to phase out for taxpayers whose adjusted gross income exceeded $250,000 (or $500,000 for joint filers).
What the Senate proposed:
The Senate proposes an identical formula as it relates to years in residence and frequency of use. But it allows people who fail to meet the five-year requirement because of a change in employment, health trouble or “unforeseen circumstances” to exclude a fraction of the $250,000 or $500,000 equal to the fraction of the five-year period that they were in residence.
Coverdells and 529 Plans
What’s in place now:
Your money grows tax-free (you can put in $2,000 per year with certain income limits), and then you can withdraw it tax-free to pay for private school from kindergarten through 12th grade (in addition to college). Potential changes to this maneuver were last considered in 2012.
What the House proposed:
The House wants to neuter Coverdells but let people pull up to $10,000 out of 529 plans tax-free to use for private school. (You could still use that same 529 plan to save for college the same way you always have.) Wealthy families can gain a potential tax break of up to $30,000 or so.
What the Senate proposed:
The Senate did not propose any changes.
Losses for Fires and Floods
What’s in place now:
If you’re a victim of a house fire, flood, burglary or similar event, you can deduct those losses.
What the House proposed:
The House did away with these so-called “casualty” deductions. That means you would be out of luck, unless legislators passed a one-time bill offering relief for victims of particular weather or other events that affected a lot of people.
What the Senate proposed:
Starting in 2018, you could only claim a deduction if the loss happened during an event that the president later officially declared to be a disaster.
Alimony
What’s in place now:
Alimony is a deductible expense for people paying it, and those who receive it must pay income taxes.
What the House proposed:
Divorce would become a bit more burdensome for the ex-spouse who pays alimony because it would no longer be a deductible expense. But the party receiving the payments would no longer need to pay tax on the income received. The change would take effect for divorce and separation agreements (and any changes to current agreements) executed after 2017.
What the Senate proposed:
The Senate bill would make no changes to alimony rules.
Moving Expenses
What’s in place now:
As it stands, taxpayers can deduct moving expenses — even if they do not itemize their tax returns — as long as the new workplace is at least 50 miles farther from the old home than the old job location was from the old home. (If you had no workplace, the new job must be at least 50 miles from your old home.)
What the House proposed:
Relocating for a new job? Moving costs would no longer be a deductible expense in 2018.
What the Senate proposed:
The Senate’s bill is similar to the House’s, though it allows some exceptions for members of the military.
Tax Preparation
What’s in place now:
You can usually deduct the amount your tax preparation specialist billed you or any similar tax-related expenses, like software you purchase and the fee you pay to file your forms electronically.
What the House proposed:
Taxpayers would no longer be able to take this deduction. Since the bill aims to reduce the number of taxpayers who itemize (and all the complexity that goes with that), in theory fewer people should require professional tax help (with the exception of wealthier people, who can afford to lose this break).
What the Senate proposed:
The Senate’s proposal is similar to that of the House.
Electric Cars
What’s in place now:
Buyers of qualifying plug-in electric vehicles, like the Chevrolet Bolt or Volt and Tesla’s cars, can sometimes get a tax credit for up to $7,500.
What the House proposed:
The House would do away with the credit.
What the Senate proposed:
The Senate proposed no change.
Riding a Bicycle to Work
What’s in place now:
You can exclude up to $20 each month from your income for expenses related to regular bicycle commuting, as long as you are not receiving other pretax commuting benefits from your employer.
What the House proposed:
The House bill did not propose any changes.
What the Senate proposed:
The Senate would take away this tax break.
Reduced and Waived Tuition
What’s in place now:
Employees of educational institutions who receive reduced tuition — or a waiver — for themselves, spouses or dependents are generally not taxed on that income. This is particularly helpful for certain graduate students; their tuition is waived as part of arrangements in which they teach or perform research at their university.
What the House proposed:
The House bill would treat reduced or waived tuition as income.
What the Senate proposed:
The Senate would keep things as they are now.
Employer-Paid Tuition
At the moment, when employers pay your tuition for continuing education, the amount they pay is not taxable income for you as long as it meets certain conditions and amounts to no more than $5,250 per year.
What the House proposed:
The House would make these tuition payments count as taxable income starting in 2018.
What the Senate proposed:
The Senate would keep things as they are now.
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