When President Donald Trump revealed a broad framework for his tax plan in late September, one thing was clear: Sweeping changes to the tax code could be on the way.
Last week, House Republicans took the next step by unveiling their tax proposal, which is now being marked up by the House Ways and Means Committee. Here are a few of the biggest changes — and one thing that’s being left untouched.
4 TAX BRACKETS INSTEAD OF 7
Trump’s plan had previously mentioned reducing the number of tax brackets from its current seven to three, and the new Republican plan largely reiterates that. Lawmakers proposed 12 percent, 25 percent and 35 percent tax brackets, while retaining the top 39.6 percent rate for the country's highest earners: married filing jointly couples who earn more than $1 million and single filers who earn more than $500,000.
A HIGHER STANDARD DEDUCTION
As previously outlined by Trump, the standard deduction would go up from $6,350 to $12,000 for individual filers, and from $12,700 to $24,000 for married couples filing jointly.
A LOWER MORTGAGE INTEREST DEDUCTION
Currently, homeowners can claim a deduction for the mortgage interest they pay on the first $1 million of their home loan. The new proposal caps that to the first $500,000 for new homes, although existing homeowners are allowed to maintain their current deductions.
ELIMINATING OR LIMITING VARIOUS OTHER DEDUCTIONS
Under the new proposal, medical expense deductions and student loan interest deductions would go away, while state and local property tax deductions would be limited to $10,000.
DOUBLING THE ESTATE TAX EXEMPTION
Currently, federal law allows taxpayers to give away $5.49 million in inheritance without having to pay estate taxes. The new proposal nearly doubles that exemption to $10 million, and would repeal the estate tax completely starting in 2024. Note, the full repeal only affects the estate tax. There would still be a gift tax after a yearly $14,000 exclusion and lifetime $10 million exclusion.
A NEW FAMILY TAX CREDIT
This new credit would increase the current Child Tax Credit from $1,000 to $1,600 and offer an additional $300 tax credit for each parent in the family and any non-child dependents, like an aging parent.
A LOWER CORPORATE TAX RATE
The current bill proposes lowering the current corporate tax rate from 35 percent to 20 percent. (The new rate would be 25 percent for personal service corporations companies in the health, law, engineering or other service based fields.)
NO CHANGES TO 401(K) PLANS
One concern leading up to the release of the new plan was whether legislators would change the tax-advantaged status of 401(k) plans or further limit contributions to retirement accounts. So far, however, these two retirement account rules are being left in place.
Taxpayers should expect more changes to come, however, as Senate Republicans are currently working on their own draft for tax reform that could be released this week. But Republican leaders are hoping a bill will reach the president's desk by Christmas — which means 2018 could prove to be a very different tax year for Americans.
This article is not intended as legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.