Tax reform details finalized in conference report issued by Congress.
Last night, the House and Senate signed off on a bill which resolved the differences between the two versions of the Tax Cuts and Jobs Act that previously passed each chamber. Votes in both houses of Congress are expected next week. Officially, here we go.
The conference report released last night is lengthy -- 503 pages to be exact. It’s closer to the Senate version we discussed earlier, but there are some significant changes. Here are the points we think are most important for you to know now:
- Seven individual income tax brackets would stay, but at reduced rates. The top marginal rate would be 37%.
- The standard deduction would increase to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers.
- The state and local tax deduction would be capped at $10,000 (property tax plus the choice of income or sales taxes, as under current law).
- Deductions for mortgage interest and charitable contributions would be preserved, though the cap on the mortgage deduction would lower from $1 million to $750,000.
- Deductions for medical expenses, the deduction for student-loan interest, the exclusion for graduate students’ tuition waivers, and the ability to issue tax-exempt private-activity bonds would also stay.
- The child tax credit would increase to $2,000 per child. $1,400 of that would be refundable.
- The corporate tax rate would be lowered to a flat 21%. This is a major shift from the multi-bracket structure we have now with a top rate of 35%.
- There would be a 20% deduction for pass-through income with anti-abuse laws.
- Full expensing (100%) fo short-lived capital investment would be allowed. This would include things like machinery and equipment for the next 5 years.
- The corporate AMT would be eliminated.
- Estate tax exemption would be doubled in 2018.
- Obamacare’s individual mandate penalty would be reduced to $0 in 2019. This would effectively repeal the individual mandate.
- The measure also moves the U.S. to a territorial tax system that generally does not subject American companies’ foreign earnings to U.S. taxes. Companies’ current offshore earnings would be taxed at rates of 15.5% for liquid assets and 8% for illiquid assets. Those are higher rates than were in either plan originally.
What happens now
Republicans are advancing this measure through Congress using a process called reconciliation. We’ve discussed it before, but basically, it boils down to preventing a Democratic filibuster in the Senate. But since reconciliation bills cannot, by law, add to the deficit after 10 years, the bill’s individual tax cut will expire after eight years. Corporate tax changes and the repeal of Obamacare’s individual mandate will be permanent.
I expect this will pass the House and Senate now with little issue. Despite earlier objections from key senators, everyone is claiming to be on board now. They’ll vote next week, and then it’s off to Trump’s desk. We’ll keep watching.