This article was last updated on December 20
[Latest update] Republican lawmakers in the House and Senate have now passed a combined tax reform bill along party lines for President Trump’s Tax Reform measures under the Tax Cuts and Jobs Act. See the table below that contrasts changes from earlier versions in each chamber versus what is in the final bill that goes to the President for signing into law. These tax reform changes are aimed at building on Trump’s promises (per prior updates below) to streamline the US tax code, cut several itemized deductions and lower large corporate and small business taxes.
|Category||House Republicans Bill||Senate Republicans Bill||Reconciled Final Bill for Trump|
|Tax Brackets & Rates|
(see the updated 2018 tax brackets under the final/reconciled bill)
|Go from seven to four tax rates and brackets: 12%, 25%, 35% and 39.6%. For single filers, corresponding income brackets will be up to $45,000, $200,000, $500,000 and $500,000+. For married people, those brackets will be up to $90,000, up to $260,000, up to $1 million and over $1 million. Bill also includes a 6% surtax or "bubble rate" that applies to those with AGI over $1 million ($1.2 million for couples)||Keeps seven individual income tax brackets per current tax model (vs 4 in House tax plan), but the 12% bracket would replace 15% bracket. Top rate cut to 38.5% vs 39.6% currently in place. Individual tax cuts would sunset after 2025||Maintains 7 individual tax rate brackets - 10%, 12%, 22%, 24%, 32%, 35% and 37 % - which will start in tax year 2018 and expire by the end of 2025 (like bush-era tax cuts). The top rate is a 2.6% fall from the current top rate of 39.6% and raises income thresholds to over $500,000/$600,000 (single/married)|
|Standard Deduction and Personal Exemption||Nearly double standard deductions to $24,000/$12,000 (married/single filers). ; Elimination of personal exemption||Same approach as house to nearly double standard deduction thresholds. Single parents would get a $18,000 standard deduction. Personal exemption eliminated. These would only be in place till 2025, after which these deductions and exemptions would return to current levels||Standard deductions doubled to $24,000/$12,000 (married/single filers). Elimination of personal exemption until 2025|
|Child Tax Credit (CTC)||Raise to $1,600 from current $1,000. Increases income thresholds ($115,000/$230,000) for the CTC eligibility to allow more families to claim the credit. Add a new $300 family tax credit for each parent and non-child dependent.||Increase CTC to $2,000. This is much higher than House tax plan bill. Offers a $300 per year “flexibility credit,” equivalent to the family tax credit||The CTC is key provision for selling tax reform to middle to lower income families. Senate provisions to double to $2,000 per child from $1,000 were adopted. A $500 credit was also added for non-child dependents. However will have income and deductibility restrictions whereby it would only be refundable up to $1,400 and start to phase out at $200,000/$400,000 in income. The higher CTC would expire by 2025.|
|Eliminated Itemized Credits and Deductions||State & local income and sales taxes (SALT) deduction, Medical & long-term care expenses, Moving expenses, Alimony payments, Tax Preparer fees, Student loan interest and Teacher classroom expenses||Senate plan was modified to allow up to $10,000 in state and local property taxes (SALT) deductions on tax payer's federal IRS returns||Senate provision adopted to limit state and local property taxes (SALT) deductions to $10,000 in on tax payer's federal IRS returns. Final bill also has several provisions that eliminate a slew of tax breaks such as deductions for moving expenses and tax preparation costs|
|Reduced Itemized Credits and Deductions||Reducing the following deductions: Mortgage interest (limit to $500K loans vs current $1M limit), Property taxes (limited to $10,000)||Senate plan would keep mortgage interest deduction for loans up to $1,000,000||Mortgage interest deduction for existing homeowners will remain in place ($1 Million). For new homes, taxpayers will only be able to deduct interest on up to $750,000 in mortgage debt|
|Kept Itemized Credits and Deductions (current)||Keeps Charitable contribution deduction (qualifying categories to be streamlined) and reinstated Adoption tax credit (worth up to $13,750) which was originally cut||Keeps child and dependent care credit, keeps charitable donations deductions and Medical & long-term care expenses deductions (lowers threshold back to 7.5%) and education relief deduction for graduate students||Retains tax breaks for charitable donations, child and dependent care credit, education relief, and Medical & long-term care expenses deductions (lowers threshold back to 7.5% for next 2 years, before going back to 10% from 2020)|
|Earned Income Tax Credit (EITC)||No change and preserved at (current levels)||No change to the EITC credit and preserved as is||EITC will remain unchanged|
|401(k) Retirement Plans||No Changes or impacts (see 2017 and 2018 plan limits)||No changes or impacts to current levels. Also the final Senate bill scraps an earlier proposal that looked to eliminate the pre-tax retirement account catch-up contributions for those over 50||No change to retirement plan thresholds or tax deductibility|
|Estate and Death Tax||Double the estate or death tax exemption to $11 million. This tax would then be fully phased out and eliminated after six years (2024)||Doubles the exemption for the estate tax but does not fully eliminate it like House bill proposal||Doubles the exemption for the estate tax per Senate provision, but estate (or death) tax remains in place|
|Alternative Minimum Tax (AMT)||Eliminated entirely from 2018||Following last minute negotiations to pass the Senate bill the AMT will be partially retained via raising the amount income exempt from AMT (vs a full repeal until 2026). The idea behind this is to address vote optics and ensure that business wealthy individuals pay some level of AMT||Senate provision generally adopted by eliminating the corporate alternative minimum tax, but keeps individual AMT. The individual AMT income exemption threshold will be raised to reduce the number of tax payers subject to this tax|
|Corporate Taxes||Permanently cut the federal corporate tax rate to 20 percent (from 35 percent) from 2018. Immediate write-off for new equipment and preserves R&D tax credit||Same as house and will stay in place permanently. But will delay the tax cut until 2019. Similar to House plan with regard to treatment of new equipment write-off and R&D credit||Cuts corporate tax rate to 21% from the current 35% rate. Change would take effect from 2018|
|Small Business Taxes||Lower the maximum rate to 25% on small business income for pass through like entities (e.g. sole proprietorships, partnerships and S-corporations). |
Provides a new small business tax rate of 9 percent for businesses earning less than $75,000 in income. The benefit is phased out as taxable income exceeds $150,000 and fully phased out at $225,000.
|Will reduce the burden on pass-through businesses by adding a small business deduction equivalent to 23 percent of pass-through income (this was originally 17.4%, but raise to lower impact on deficit)||20% business income deduction for the first $315,000 in income earned by pass-through businesses. The first $75,000 of pass through income would be subject to an 8% tax rate|
|Global & International Taxes||Remove double taxing of foreign income, provide a lower one-time repatriation tax rate for returned overseas/offshore corporate funds (Illiquid assets would be taxed at a 7% rate, liquid assets like cash which would be taxed at a 17% rate). Any incentives that promote overseas job creation will be removed to support US job creators||Also eliminates global double taxation. Will provide a one time repatriation tax to eliminate “lock-out effect” by making it simpler and less onerous for American multinationals to repatriate bring foreign earnings||Eliminates double taxation of foreign income and moves US to a territorial system in line with other western countries. Also has a higher one time repatriation tax rate than Senate and House bills where companies would pay 15.5% on cash assets and 8% on non-cash assets|
|Capital Gains||No change to current rules||No changes to personal CGT. But Senate has now repealed provision that taxed employee stock options when they vested instead of when they were exercised||No changes to current CGT structure. Exclude controversial first in first out stock sales change to appease investment groups who strongly opposed this rule|
|Social Security||No change to tax treatment of SSI income||No changes likely||No changes to treatment of social security income|
|Obamacare Penalty||No change to current Obamacare penalties (individual mandate) for 2017 or 2018||Includes provision to repeal Obamacare’s individual mandate (health care penalty)||Incorporates Senate provision for individual mandate repeal beginning in 2019. Would still be in effect for nein the final bill. Saves $330 billion, but CBO estimates 13 million Americans would be uninsured in 10 years as a result|
Some key updates to date include: (these are regularly updated as information is released)
- The final tax bill will be signed into law by the President. However he may wait until the New year to sign the bill to ensure that automatic spending cuts are not triggered in 2018 due to the increased deficit resulting from the tax bill.
- House and Senate Republicans via conference committee have pulled together a reconciled bill that will now go for a final official vote prior. It has been crafted to ensure Senate approval where the Republican majority is far slimmer than in the House. The reconciled tax bill is expected to pass and go to the President for signature by Christmas.
- Senate Republicans have passed their version of the tax reform bill 51-49, but have had to make several adjustments on the fly to appease several Senators. Further changes will likely be made as the House and Senate members go to “conference” to develop a reconciled bill that can be sent to the President
- The House GOP has passed its version of the tax bill – generally along party lines (227 to 205) – but likely to see significant changes after Senate updates and creation of a single reconciled bill for final passage
- Not one Democrat has voted for the tax bills. Hence final passage of the bill will have to be entirely along party lines. The Senate, where the Republicans only hold a delicate two seat majority, will likely have more influence on what the final/reconciled bill will look like
- The Senate has added a provision to repeal the Obamacare penalty (individual mandate) into their tax reform bill. This is designed to get support from more GOP members and to cut the overall cost of the bill. House republicans have indicated they would support this provision in the final bill
- The Senate’s bill also has provisions to expire various items of their tax reform proposal (e.g AMT repeal and standard deduction increases) by 2025 in order to comply with Senate budgetary rules
- The child credit has been increased significantly to help lower income families. This is an important change as other items in the bill will likely be of more benefit (at least in the short term) to corporations and affluent Americans
See the comments below for reader reviews of the GOP tax proposals. Also please share this article and connect via Facebook or Twitter to get the latest updates and news related to Trump and GOP tax reform proposals.
[Oct 2017 update] President Trump and the “Big Six” group of Republican leaders have announced long awaited details on the Presidents tax reform package/framework. Details are still high level, but here are the key points or guiding principles the President has stipulated for his tax reform package/framework:
Moving from seven to three tax brackets -12%, 25% and 35%. The tax free threshold or “zero tax bracket,” will be $12,000 for single filers and $24,000 for married filers. This was achieved by doubling the standard deduction from current levels. The Alternative Minimum tax (AMT) and Estate Tax will be eliminated, which will benefit the highest income earners the most.
The Presidents tax reform framework eliminates most itemized deductions like the popular deductions for State and Local taxes. But charitable giving and mortgage interest deductions will remain unchanged for all taxpayers. There are also signs that Trump will significantly increase the child tax credit to help working families. It is unclear what will happen to the Earned Income Tax credit (EITC) for next year.
Businesses would also see some benefits under the tax reform plan via a lowering of the corporate rate to 20 percent and the pass-through business rate (for S-Corps) to 25 percent. A potential 10% one-time repatriation tax would also be enacted to encourage US owned companies to bring back assets and corporate profits to the US from their overseas subsidiaries.
It will take some time for Congress to work through the Presidents tax reform framework/guideline and develop concrete proposals (including how cuts will be funded) and and I expect several concessions and modifications to be made before a final tax reform bill is signed. But given the pressure on the Republican controlled Congress to pass major legislation I do think this will get done this year.
[June 2017 update] With the focus on repealing and replacing Obamacare, the Republican controlled Congress and Presidency have not had much time to enact their tax reform plans outlined below. Based on recent news the Trump administration however is still targeting this year to get some kind of tax reform package enacted. But until a unified health care bill is passed or indefinitely put on the back burner, tax reform won’t get the focus it needs. There are however some potential signficant tax changes/roll-backs under the proposed health care reform bills such as:
- Remove the individual mandate, which imposes a tax or penalty for not having health insurance in a given year
- Provide tax credits ranging from $2,000 to $14,000 based on age, filing status and income levels to help cover the cost of obtaining private health insurance
- Removal of the 3.8 percent additional tax on investment income for individuals making $200,000 or more ($250,000 for couples). This was used in part to fund Obamacare subsidies
Again, the above tax changes are tied directly to passage of a unified health care bill – both the house and senate currently have different versions. If the health bill is unable to pass Congress then tax payers will need to rely on the proposed tax reform package for any future tax breaks or credits.
[Updated April 2017] Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn have provided more details and updates to President Donald Trump’s campaign tax proposal (see previous updates below). This includes the following:
- The updated tax proposal eliminates all itemized and regular deductions (including items like home office deductions, state and local) that are part of the current tax code, except for mortgage interest and charitable deductions.
- The standard deduction will be doubled to offset the elimination of other deductions and is line with goals to simplify the tax filing process and usage of itemized deductions.
- Repealing the alternative minimum tax (AMT), 3.8% health care investment tax imposed under Obamacare and the the estate tax (a.k.a.“death tax”)
- Trump’s tax plan still has 3 tax rate brackets (vs. 7 today), but the levels have changed from the prior proposal. They will now be 10%, 25% and 35%. This also means that the top tax bracket rate of 39.6% will be eliminated.
- No taxes will be due on the first $13,000/$24,000 (single/married standard deduction) of income.
- The Tax plan includes, but no numbers were provided, tax relief for families with child care expenses.
- Business Taxes – The corporate rate will fall to 15% and there will be a one repatriation tax on funds companies hold overseas.
- Assumption is that higher economic growth will offset lower tax revenues. However details for this spelled out over the next year as the tax reform package is worked through Congress.
While the plan does appear to have tax breaks for the rich (eliminate investment and estate taxes), the administration is saying that other tax changes would ensure the plan would largely help the middle class. More to come, but please share your thoughts below.
[Feb 2017] With President Donald Trump and Republicans controlling the House and Senate, we are likely to see a number of tax changes in the year ahead if his campaign plans and promises hold. As with everything else, the Trump administration was light on the details but here is what we do know about the proposed Trump tax plan:
- Federal tax rates and brackets would be simplified down to three versus the seven today. Those with a taxable income between $0 and $37,500 ($0 to $75,000 for married filers) would be subject to a 12% tax rate, taxable income between $37,500-$112,500 (or $75,000-$225,000 for married filers) would be subject to a 25% rate. While those with taxable income above $112,500 ($225,000+ for married filers) would be subject to a 33% federal tax rate.
- The standard deduction would more than double to $15,000 for single filers to $30,000 for married couples filing jointly while ending personal exemptions. This increase along with the lower tax brackets would see federal taxes due go down for most Americans.
- Itemized deductions would be capped at $100,000 for single filers and $200,000 for married couples filing jointly. This is down from current levels and in line with Trump’s goal to simplify tax rules and prevent the rich from taking legally gray deductions.
- To promote small business investment Trump would eliminate the 3.8 percent tax on net investment income on people with incomes (MAGI) of over $200,000 for single filers and $250,000 for married filers. The tax rates on long-term capital gains would be kept at the current 0%, 15% and 20%. In a hit to hedge fund managers, there is also a proposal to taxing income from carried interest at ordinary income tax rates.
- A full repeal the alternative minimum tax (AMT) and the estate tax. Under current law, estates valued at more than $5.45 million are subject to a 40% tax rate. Cutting the AMT and estate tax would stand to benefit higher income earners the most.
- The individual mandate (or Obamacare tax as some call it) would also be repealed in 2017, meaning that penalties would not result if people don’y have health insurance.
- The corporate/business tax rate will be lowered from 35% to 15% to become more competitive globally. To encourage the repatriation of earnings being kept by American multinationals in overseas banks, subject to lower local corporate tax rates in those countries, the Trump administration will only subject these funds to a lower 10% corporate repatriation tax rate.
[Update Mar 2017] Following a meeting with business leaders President Trump announced that a major release on details behind his tax reform package is on tap for the coming weeks. Details will be provided covering “comprehensive tax reform both the business side of the tax ledger as well as the individual rates,” according to follow up comments from press secretary Sean Spicer. No exact date was given for release of this information, but Trump indicated it would be “over the next two or three weeks [end of February]…and would be phenomenal in terms of tax….with significant tax reductions.” He went on to say that the tax reforms he is proposing (see below) will, “… lower the overall tax burden on American businesses big-league“. However, until the Obamacare repeal and replacement bill is resolved, it is unlikely we will see much more on tax reforms. My guess is that it will take till Summer before we see more details on the Trump tax reform plan.
While they may get passed by Congress, a lot of Trump’s tax changes won’t go into effect until 2018, since 2017 tax rates and brackets have already been established. Further, the House Republicans (under Paul Ryan) also have an alternative tax plan which while also looking to cut corporate and personal taxes, is not as aggressive as the proposed Trump tax plan.
So in order to get wide scale tax reform passed across all branches of government there will need to be some sort of compromise tax plan agreement. The Trump administration also hasn’t laid out any real plan to pay for these tax cuts and proposed no net spending reductions to offset his tax plan’s $7 trillion cost.
Under a Trump tax plan middle class tax payers would likely see modest tax savings, while those in highest income ranges would actually see the most in savings given the lowering of the highest marginal tax rate, increase in standard deduction and repeal of the AMT. Under proposed Clinton plans middle income earners saw more tax savings while higher income earners were taxed more heavily.