It’s finally here! No not Christmas, but that is just around the corner. I’m not talking about tax season either. The “it” I’m referring to is the Republican tax reform plan. House Republicans released their long-awaited tax plan last week and as one might expect there is a lot to digest. So let’s take a look at the some of the significant changes being proposed.
The Big Changes
For starters, the plan calls for reducing the number of total tax brackets from seven to four. It also calls for changing the percentages to 12%, 25% 35% and 39.6%. The standard deduction for single filers would increase to $12,000 and for joint filers to $24,000. Those are two of the most significant changes that would affect all taxpayers. However, several other proposals would also affect millions of Americans, for better or for worse, depending on whom you ask. There has already been a lot of backlash over many of the additional proposals. The biggest concerns so far include eliminating the state and local tax deduction and the medical and student liability deduction. Opponents are also against reducing the cap on the mortgage interest deduction and the plan to repeal the estate tax.
State and Local Tax Deduction
Taxpayers that live in states with high-income tax rates do get some relief by being able to reduce their state and local income taxes from their federal returns. This is a massive boost for residents in California and New York, for example. Under the proposal, taxpayers would lose this deduction, which would cost them a substantial amount of money.
Mortgage Interest Deduction
Homeowners rely on this deduction every year to help reduce their tax bill. Currently, this deduction is capped on loans under $1 million. The new proposal calls for reducing the cap to just $500,000, which means a lot fewer people would qualify, thus raising their tax bill. The real estate industry, as well as appliance manufacturers and even furniture makers, will likely put up a big fight to see that this change is prevented.
Student and Medical Liability Deduction
Medical liability costs taxpayers a fortune every year. This deduction helps ease some of that pain. Under the current rules, anyone that pays medical expenses that exceed 10 percent of his or her income can deduct that amount. For example, if you pay 15 percent of your adjusted gross income for healthcare costs, you can deduct 5 percent from your taxes. However, under the new proposal, this deduction would be cut. The same goes for the student loan liability deduction, which allows a person to deduct as much as $2,500 of their loan interest every year. Many lobbyists will fight these proposals.
Estate Tax Repeal
This is another controversial proposal. On the surface, it affects so few people. Only about 0.2 percent of all estates are subject to this tax in a given year. The wealthy would definitely benefit from this change, and it doesn’t seem like it would hurt other taxpayers. However, could it come at the expense of the middle class? Eliminating these other deductions could be seen as a way to make up for the lost revenue that would occur from repealing the estate tax.
For those who own a small business the latest proposals might be bad news. That’s because many of these companies get taxed on the owner’s personal income. The good news is that many of these businesses will be taxed at a maximum rate of 25 percent. However, some of them would have to prove their status with specific documentation. Others feel that many small businesses would be left out.
As with any proposed changes in the nation’s Capitol, it remains to be seen if these proposals will actually become law. Lawmakers on both sides have already expressed concerns and much more are sure to come. The president would like to see a bipartisan bill reach his desk before the new year, but that could be asking a lot. In addition to the concerns from senators from both sides, many small businesses and several industries are already speaking out against the proposals. That means House Republicans still face an uphill battle in their effort to make their proposals a reality. Stay tuned. This is sure to be another all-out battle in Washington.