The Senate just passed a massive tax bill. Here’s what is in it. By Heather Long,
Washington Post, 12/2/17
The Senate just approved the
largest change to the U.S. tax code in 30 years. Lowering taxes for
American businesses and families is the heart of President Trump's plan to
boost the economy,
although not everyone
gets a tax cut in the plan.
“We are going to be saying Merry
Christmas again, with a big, beautiful tax cut,” Trump said Wednesday at a
speech in Missouri.
The driving force of the Senate GOP
tax bill, dubbed the “Tax Cuts and Jobs Act,” is to cut taxes on businesses.
Lawmakers on the right and left agree that the United States' 35 percent top
tax rate on corporations is too high and not competitive with the rest of the
world. The Senate bill would lower that rate to 20 percent, the biggest
reduction ever for corporations. The big business cut would be permanent, while
the rate reductions for real people are set to expire after 2025.
The Tax Cut and Jobs Act is more than
a tax bill. It makes sweeping changes to health care that
are expected to lead to 13 million Americans dropping insurance, and it opens
up more land to oil drilling in Alaska. It also alters the treatment of state
and local taxes, which could affect local government budgets for
schools and roads.
Senate Majority Leader Mitch
McConnell (R-Ky.) was able to get 51 votes in favor of the bill. The final
version was distributed to senators around 7pm on Friday (you can read all 479
pages here),
leaving little time for analysis and debate before the vote just before 2am
Saturday. No Democrats voted for the bill. Here's a rundown of what is in
the bill:
Big win
for corporations: The tax rate for big businesses
would fall from 35 percent to 20 percent starting in 2019, a large reduction
that would put the U.S. corporate tax rate at a lower level than many other
foreign nations. On top of that, the bill also allows companies to bring
back any money they have stored overseas at a very low tax rate of 14.5
percent. (The House bill's rate for cash repatriations is 14 percent.)
Companies would also be able to write off most of their expenses for new
buildings and other investments for the next five years. Finally, the bill
shifts the tax system on businesses from a worldwide system in which
U.S. companies are taxed on all income earned all over the world to a
territorial system where businesses are mainly taxed on their earnings in the
United States, a change corporations have advocated for many years.
Big win
for (most of) the rich: The top tax rate
for millionaires would fall under this plan (from 39.6 percent to 38.5
percent). The wealthy also get to keep deducting their contributions to
charity, and they benefit from a change that would exempt even more families
from paying the estate tax when they pass property and other inheritance to
kids and relatives. Many mega rich would also benefit from a last-minute change
to the bill to lower taxes even further for so-called "pass through"
businesses like LLCs. Overall, Congress's official scorekeepers say over 80
percent of millionaires would pay less in taxes in the coming
years under this plan (Note: that analysis was not done on the final version of
the plan).
Lower
taxes for most Americans — until 2026: The
bill keeps seven tax brackets, but it cuts the rates at every level and it
raises many of the income thresholds to qualify for the higher bracket. (For
example, the new top rate of 38.5 percent would apply only to married
couples making over $1 million. The top tax rate currently applies to married
couples making over $470,700.) The lower tax rates mean that most Americans —
62 percent — end up getting a tax cut in the coming years, but not everyone
does, because the bill also does away with some popular tax credits and savings (see
list below).
Elimination of MOST
of the state and local tax deduction (SALT): About a third of Americans itemize their tax deductions, and
almost all of those people take the state and local tax deduction. The Senate's
original plan was to scrap SALT entirely, a big knock to people in
high-tax states such as California, New York, Connecticut and New Jersey. But in
the end, there was a compromise to allow people to deduct up to $10,000 in
property taxes.
Raise the
Alternative Minimum Tax threshold (AMT): The
Senate was planning to eliminate AMT (as the House bill did), but a last-minute
change means the AMT remains in the Senate bill. The threshold where AMT begins
to kick in raises only slightly.
A bigger
standard deduction and child tax credit, but the personal exemption goes
away: At the moment, Americans are able to
deduct $4,050 as a “personal exemption” for themselves, their spouse and each
dependent. The Senate bill gets rid of the personal exemption entirely. To
make up for this, the bill expands the standard deduction so the first $24,000
in income for a married couple ($12,000 for an individual) won't get taxed. The
bill also bumps up the child tax credit from $1,000 now to $2,000. The overall
effect is that most people are better off, but not all. AARP has come out
against the bill, claiming it would raise taxes on over a million seniors by
2019, largely because of the various changes to credits and deductions.
Goodbye to
the ability to deduct losses from “fire, storm, shipwreck, or other casualty,
or from theft.”
Goodbye to
the deduction for tax preparation expenses. Republicans
argue it will be much easier for most Americans to fill out their taxes now.
Goodbye to
the deduction for people who bike to work.
Goodbye to
the deduction for moving expenses.
Double the
teacher expense credit. The Senate bill doubles the
amount teachers are able to deduct for buying supplies for their classrooms.
The current amount is $250. The Senate plan raises it to $500. (The House
plan scraps this
credit entirely, one of many differences between the bills.)
The bill
would NOT make any changes the student loan deduction
or the "tuition waiver" for
graduate students would also not change in the Senate bill. (The House bill
does strike these provisions, which has caused concern).
The
medical expense deduction stays. It
even gets MORE generous for 2017, 2018 and 2019.
Many small
businesses get a win, but there's a giant exception: Most businesses in the United States are organized as
“pass through” companies (sole proprietorships, partnerships, LLCs and S
corporations) where the income from the business is “passed through” to the
owners and taxed at their individual tax rate. Under this bill, most
pass-through businesses wouldn't have to pay tax on 23 percent of their
income. The idea is to give mom-and-pop shops a sizable tax break. But there
are limitations. Law firms, doctor's offices and other “service businesses”
that earn over $250,000 wouldn't be eligible for the deduction. Other really
large pass-through businesses would have a limit on how much they can deduct.
The idea is to prevent millionaires from getting a really big tax break.
The
individual health insurance mandate
goes away.
Americans would no longer be
required to purchase health insurance or else pay a penalty. The Senate plan
repeals the “individual mandate.” The Congressional Budget Office, the official
nonpartisan estimator, has predicted that this change would cause health
insurance premiums to rise by about 10 percent a year and prompt 4 million
people to drop insurance by 2019 and 13 million to drop it by 2027.
Drilling
would be allowed in Alaska's Arctic National Wildlife Refuge. The latest version of the bill would make it legal for oil
and gas companies to drill in a part of Alaska's ANWR area that's along the
coast.
People who
sell their homes will have a harder time avoiding taxes. At the moment, the first $250,000 gain on the sale
of a home is tax-free as long as it's your primary residence and you have
lived in the home for two of the past five years. Under the Senate
plan, you would have to live in the home for at least five of the past
eight years.
Only the
richest 1,800 Americans would to pay the estate tax. At the moment, when a person passes away they can
leave up to $5.5 million in property and other assets for their kids or other
heirs without anyone paying tax. Inheritance above that amount is taxed at a 40
percent rate. The Senate plan would double the exemption limit, so any
inheritance up to $11 million for individuals ($22 million for married couples)
would not be taxed. Only about 1,800 families a year would be subject to
the Senate tax threshold (down from
about 5,000 now).
A “Harvard
tax” on big college endowments. Private
colleges such as Harvard with endowments worth over $500,000 per student would
pay a 1.4 percent tax on investment gains every year.
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