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 both eliminate the $4,050 personal exemption.
Child Tax Credit
The House bill proposes to increase child tax credit to $1,600 instead of the current $1,000 (phased out at $230k for a married couple). The Senate bill proposed a child tax credit of $2,000 (phased out at $500k for a married couple). Heated negotiation continues with the child tax credit.
Small Business (Pass-through)
Current small business earnings are taxed at the individual level with the individual tax rate. The House bill proposed the maximum tax rate capped at 25%. The Senate proposes a deduction of 23% of qualifying “pass-through” income. As of December 13th, a tentative agreement has been reached for a 20% deduction. 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 passes before the end of 2017, most of the change will take effect on January 1, 2018. The change will not have any impact on 2017 taxes.
Depending on individual or family circumstances, each of the provisions has the potential to benefit or negatively impact. Start tax planning with the proposals in mind and understand how it would affect your business or personal finances. With the help of an experienced CPA, you will be able to navigate through the complex tax systems and keep the most hard-earned money to yourself and your family.
