A short time ago, the House of Representatives passed the Tax Cuts and Jobs Act by a vote of 227-205. This is a big step forward towards passing comprehensive taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform. The bill now goes to the Senate for more consideration, where the Senate Finance Committee is expected to support its passage later this week.
Introduced on November 2, 2017, and later modified, the bill makes a number of noteworthy changes to the individual and corporate tax codes. The plan, according to the Tax Foundation Taxes and Growth Model, is a pro-growth tax plan that would increase GDP, raise wages, and create more jobs.
“The Tax Cuts and Jobs Act is a pro-growth reform of the U.S. tax code, which would make the code simpler and boost American competitiveness,” said Tax Foundation President Scott Hodge. “Lawmakers have tackled a difficult project; tax reform is not easy, but today’s passage in the House moves us one step closer to accomplishing a once-in-a-generation reform of the tax code.”
Below is a summary of the major provisions of the House version of the package.
- Individual Income TaxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. Rates and Brackets: Consolidates current seven income tax rates into four, while retaining the top marginal rate of 39.6 percent and including an income recapture provision which phases out the effect of the 12 percent bracket for high earners.
- Standard DeductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. : Increases the standard deduction to $12,200 for single filers, $18,300 for heads of household, and $24,400 for joint filers.
- Itemized Deductions: Retains the state and local property tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. , capped at $10,000, while eliminating the remainder of the state and local tax deduction, except for taxes paid or accrued in carrying on a trade or business; limits the mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. to the first $500,000 in principal value.
- Child and Family Tax Credits: Increases child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. value to $1,600, with the phaseout for joint filers beginning at $230,000, while creating a new $300 per-person family tax credit for those not eligible for the child tax credit, to expire after five years.
- Treatment of Pass-Through Income: Caps the pass-through rate at 25 percent and adds a lower minimum rate, with anti-abuse rules.
- Corporate Income TaxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. : Cuts the tax rate to 20 percent, effective tax year 2018.
- Capital Investment: Increases the Section 179 small business expensing cap from $500,000 to $5 million, with the phaseout beginning at $20 million, and maintains current depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. schedules for real property.
- Tax Treatment of Interest: Caps net interest deduction at 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA).
- Business Credits and Deductions: Eliminates credits for orphan drugs, energy, private activity bonds, rehabilitation, and contributions for capital, among others.
- International Income: Moves to a territorial system with base-erosion rules.
- Deemed RepatriationTax repatriation is the process by which multinational companies bring overseas earnings back to the home country. Prior to the 2017 Tax Cuts and Jobs Act (TCJA), the U.S. tax code created major disincentives for U.S. companies to repatriate their earnings. Changes from the TCJA eliminate these disincentives. : Enacts deemed repatriation of currently deferred foreign profits at a rate of 14 percent for liquid assets and 7 percent for illiquid assets.
- Estate TaxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. : Increases exemption to $10 million, indexed for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. , with repeal after six years.