After reconciling differences between the House and Senate bills, Republicans have reached an agreement on the final tax bill, moving one step closer to tax reform.
Republican leaders released some of the details of the final tax bill, the “Tax Cuts and Jobs Act,” late Friday afternoon. If both chambers pass the final bill, it will be the largest tax code overhaul since the Reagan years.
At a press conference following the release of the tax bill, House Ways and Means Chairman Kevin Brady said that April 15 next year would be “the last time you will file under this monstrous, broken tax code.”
Votes on the tax bill could start as early as Dec. 18, with an aim to get the bill on Trump’s desk before Christmas.
Here are the key highlights of the final bill:
1. Cuts the corporate income tax rate to 21 percent in 2018
The plan reduces the corporate tax rate from 35 percent to 21 percent, which is higher than the 20 percent included in the original House and Senate tax bills. The rate cut will take effect in 2018, rather than 2019, as the Senate bill initially proposed.
The plan allows all businesses to immediately write-off the full cost of new investments including equipment. It also eliminates the corporate alternative minimum tax (AMT).
2. Offers 20 percent deduction for pass-through entities applicable to the first $315,000 of joint income
This deduction is provided to all pass-through entities organized as S corporations, partnerships, LLCs, and sole proprietorships. For small businesses with income above $315,000, the bill generally provides a deduction for up to 20 percent on business profits. The provision reduces the effective marginal tax rate to no more than 29.6 percent. Under the existing tax code, pass-throughs are taxed at 39.6 percent.
To avoid individuals abusing the lower tax, the bill has strong safeguards so that wage income does not receive the lower marginal effective tax rates on business income.
3. Reduces individual tax rates
The bill lowers individual taxes and sets the rates at 0 percent, 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent.
The proposed top marginal tax rate for individuals is lower than the Senate bill’s 38 percent and the current top rate of 39.6 percent.
In addition, the bill nearly doubles the standard deduction for individuals from $6,350 to $12,000 and for married couples filing jointly from $12,700 to $24,000.
4. Doubles the child tax credit
The bill expands the child tax credit from $1,000 to $2,000 for both individuals and married couples filing jointly. The tax credit will be fully refundable up to $1,400 and starts to phase-out for families with income over $400,000.
5. Allows deduction for state and local taxes (SALT) up to $10,000
The bill will enable deductions up to $10,000 and give taxpayers the option to choose among sales, income and property taxes.
6. Lowers the current mortgage interest deduction
The bill would allow the deduction of mortgage interest for newly purchased homes (first or second home) up to $750,000, which is below the current $1 million cap.
7. Repeals Obamacare’s individual mandate
In line with the Senate plan, the bill eliminates Obamacare’s individual mandate in the final bill. The individual mandate provision requires most Americans to have a basic level of health insurance coverage or else pay a tax penalty.
8. Expands the medical expense deduction
The bill extends the medical expense deduction for the next two years for medical expenses exceeding 7.5 percent of gross income. This will rise to 10 percent beginning in 2020.
The House version called for repealing the deduction. The final bill, however, keeps the deduction and lowers the threshold to 7.5 percent, which is a significant reversal from the original plan.
For graduate students, the final bill continues to exempt the value of reduced tuition from taxes. 529 savings accounts, which are currently used for college expenses, will now be available for expenses at K-12 private schools, including religious schools.
There will be no changes to 401(k)s and individual retirement accounts (IRAs). The bill also increases the exemptions amount from the alternative minimum tax to reduce the complexity of the tax code.
9. Keeps the estate tax (death tax) but doubles the threshold
In line with the Senate’s proposal, the final bill keeps the estate tax and doubles the threshold for the value of inheritance to $11.2 million. In addition, the bill continues and expands the deduction for charitable contributions.
10. Moves away from worldwide taxation system for corporations
The bill moves from a worldwide taxation system—which taxes income earned anywhere in the world—to a territorial system, only taxing income earned inside the home country.
The existing worldwide tax system double-taxes the foreign income of U.S. companies as soon as these earnings are repatriated. In other words, the U.S. companies have to pay U.S. tax on top of what they already pay in foreign countries.
By contrast, in a territorial tax system, the companies would be taxed on their U.S. income only and would be exempt from paying taxes on most or all foreign income. This system would make it easier for U.S. companies to compete internationally.
As a transition to the territorial system, there will be a one-time tax payable on profits U.S. multinationals have already accumulated overseas. According to media reports, the corporate repatriation rates would be 15.5 percent on cash and 8 percent on illiquid assets. These are higher than original rates proposed by the House and Senate.
