You have probably seen a lot of coverage lately about the new tax reform bill making its way through Congress. As of publication, the bill was passed in the House of Representatives and the Senate, bringing it that much closer to reality. However, it is not yet signed into law. Whether you love it or hate it, there are some key factors you need to know.
What Is Included
The House passed its version of the tax reform bill back in mid-November. The proposed House Bill includes:
- A permanent rate change for the top rate for large corporations from 35 percent to 20 percent
- Small business top rate drops from 39.6 percent to 25 percent and a phased-in tax break for businesses that make under $150,000 a year
- New tax breaks for companies including deductions for new equipment costs and a break for bringing money back into the U.S.
- Business tax system becomes a worldwide system rather than a territorial system
- Minimum level of assets for an estate tax increases from 5.5 million to 11 million, and this tax ends in 2024
- Alternative minimum tax removed
- In 2022, the Family Flexibility Credit goes away
- The seven tax brackets turn into four with taxes of 12, 25, 35, and 39.5 percent
- A larger standard deduction and child tax credit along with the added Family Flexibility Credit replaces many of the credits and deductions currently in place, including all itemized deductions except for property taxes, mortgage interest deduction, and charitable deductions
- Deduction for medical expenses, cost of tax preparer, student loan interest, tuition waivers for graduate students, and theft or lost valuables all go away in 2018
- Credits remain for adoption and 401K exemption
According to the JCT, the deficient would increase 1.4 trillion if other ways to offset the cost do not appear, which could be economic growth, other sources of revenue, or cuts to spending. The majority of the tax benefits help businesses rather than individuals.
The Senate passed their bill on Saturday, December 2, at 2 a.m. with a 51-49 victory. The proposed Senate Bill includes:
- A deduction of 23 percent for pass-through taxation for small businesses
- Corporate tax rate lowered from 35 percent to 20 percent with a delay of one year for implementation
- Repeal of the Affordable Care Act’s individual mandate, which required everyone to have health insurance
- Removal of state and local tax deductions
- The alternative minimum tax remains but the exempt income amount increase
- Child tax credit increase from $1,000 to $2,000
- The exemption for estate tax doubles but it does not get phased out
- Increase of the standard deduction amount
- Medical expenses deduction remains in place but the percentage decreases from 10 percent of the adjusted gross income to 7.5 percent for those 65 years and older
- The mortgage deduction remains the same with a cap at $1 million compared to the reduced cap in the House bill at $500,000
- The seven tax brackets remain, but the rates change to 10, 12, 22, 24, 32, 35, and 38.5 percent for each bracket from lowest income to highest income
Many opponents of the bills argue that the tax breaks go to the wealthiest individuals, with many of the lower and middle-class families seeing an increase in their tax burden over the next few years. According to an analysis by PBS, families or taxpayers making $30,000 and under would see an increase starting in 2019, and by 2027, everyone making $75,000 and under would pay more in taxes. The individuals and families making above this amount would see a tax break, although the amount does decrease each year. Based on percentage, the lowest income group ends up with the biggest negative impact, paying 1.6 percent more of their taxes in 2019 and over 10 percent more by 2027.
As of the publication of this blog, the new tax plan is not yet law. Before it becomes law, there are two crucial steps that must happen:
- Conference committee
- Signed by President Trump
Once a proposed bill of law passes through both the House and Senate, it must go through a conference to iron out the differences between the legislation. Although the key areas in both tax reform bills are similar, there are some differences that must be sorted out, including:
- The Corporate tax rate date of change
- Repeal of Affordable Care Act individual mandates
- Sunset of individual tax breaks vs. permanent individual tax breaks
- Repeal of alternative minimum tax
- Maintenance of the current mortgage interest deduction
- Estate tax changes
- Tax brackets
- Tax structure for pass-through businesses
During the conference, the Republican House and Senate leaders meet to craft a single bill that must pass by a simple majority in both the House and Senate. Then, it makes its way to President Trump for signing. President Trump also has the chance to veto it or perform what is known as a “Pocket Veto,” wherein he simply does not sign the bill within 10 days while Congress is in session. Congress still has a chance to pass it after the veto by a two-thirds vote by the originating chamber.
In both of these steps, it is possible for the bill to falter so it never makes it to the light of day. However, in the current political climate with Republican majorities in both the House and Senate, as well as the presidency, it would be unlikely for this to happen. The odds are very high for it to reach the president’s desk before the end of 2017. However, the tax reform bill is highly unpopular with Republican and Democratic constituents around the country, and with 2018 an election year, anything is possible.
What If You Have Tax Debt?
The tax reform does not impact your prior tax debt. Anytime there are changes to tax law, whether minor or large-scale like this bill, it generally does not affect past year taxes. Therefore, any tax debt or outstanding back taxes you currently have will remain the same. You have to take care of them through filing your back taxes and/or paying what you owe.
If you cannot afford to pay your outstanding federal tax debt, you can also negotiate a tax relief settlement through signing up for an Installment Agreement, Penalty Abatement, Offer in Compromise or one of the other tax relief programs available from the IRS.
At Fidelity Tax Relief, we are here to assist you to navigate your tax debt and finally get out from under the thumb of the IRS. Contact us today to talk with one of our tax professionals to determine the best way for you to pay off your tax debt.