It will be a busy week on Capitol Hill as lawmakers push towards a vote yet this week on tax reform.
Both the Senate and the House have passed tax reform bills, but there are differences between the two bills that must be resolved before final legislation can reach the President’s desk for signature. Likely, the current tax reform will be the most substantial changes to the U.S. tax system in the last 30 years.
Break down the deductions
Here’s how the latest tax reform legislation could affect you:
Standard Deductions:
Both the House bill and Senate bills nearly double the standard deduction level to $12,000 for the individual (up from $6,350) and $24,000 for couples (up from $12,700).
Itemized Deductions – Taxes
Both the House bill and Senate bill disallow state, local, and sales taxes deduction. Both allow property tax deduction up to $10,000.
Itemized Deductions – Mortgage Interest
The Senate bill retains the current limit for mortgage interest deduction up to $1 million dollars. The House bill proposed a reduced limit of $500,000.
Personal Exemption
Both the House and Senate plans eliminate the $4,050 personal exemption.
Child Tax Credit
The House bill, on the one hand, proposes to raise child tax credit from its current $1,000 to $1,600, with the phasing starting at $230,000 for couples. The Senate bill, on the other hand, proposes a credit of $2,000, phasing out only at $500,000 for couples. The result is that negotiations remain contentious, with both sides trying to find an agreement on how to proceed on the child tax credit.
Small Business (Pass-through)
Earnings from small businesses are currently subject to individual taxation at the individual tax rate. The House bill suggested capping the highest tax rate at 25%. A 23% deduction of eligible “pass-through” income is what the Senate is proposing. A 20% deduction has been tentatively agreed upon as of December 13. From a real estate perspective, 61% of investments would qualify for this deduction.
Corporate Tax Rate
In all likelihood, the corporate tax rate will be lowered from the current 35% to 21%.
Reform takes effect
Should tax reform pass before the end of 2017, most of the changes will take effect on January 1, 2018. The change will not have any impact on 2017 taxes.
Each of the provisions may have a positive or negative effect, depending on the circumstances of the individual or family. Start tax planning with the proposals in mind and understand how it would affect your business or personal finances. You and your family will be able to preserve most of your hard-earned money by navigating the complicated tax systems with the assistance of a qualified certified public accountant.
