There has been no comprehensive tax reform in the United States for over 30 years. The last time, Ronald Reagan was president. Dan Rostenkowski (Democrat from Illinois) chaired the House Ways and Means Committee, and Oregon Senator Bob Packwood chaired the Senate Finance Committee.
Springwater’s Terry Donahe remembers it well, because he served as an intern for the Senate Finance Committee and had an opportunity to watch the process over the summer of 1986.
Donald Trump was elected a year ago, in part because he promised meaningful tax reform. He has been pushing both Speaker of the House Paul Ryan and Senate Majority Leader Mitch McConnell to develop a plan and get it on his desk before the end of the year.
Last week the House Ways and Means Committee released their proposal, called the “Tax Cuts and Jobs Act.” Here’s a brief summary of what it means to the average American.
Income Tax Rates
There are currently seven income tax brackets. The House bill proposes four brackets.
The bill would raise the standard deduction from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 for married couples filing jointly. If this were to become law, fewer people would itemize their deductions.
The personal exemption (currently $4,500) would be eliminated.
Child Tax Credit
The child tax credit would increase from $1,000 to $1,600 for a child under age 17. Also, the income level at which the credit phases out would increase from $75,000 to $115,000 for single parents and from $110,000 to $230,000 for married parents.
The bill would create two $300 tax credits – one for non-child dependents and another spousal credit if the spouses file jointly. These credits would be in effect for 5 years and they would be non-refundable.
Dependent Care Assistance Accounts
Parents will no longer be able to exclude from income up to $5,000 in a dependent care flexible spending account.
State and Local Tax Deductions
These deductions would be eliminated.
The bill would limit the deduction for property taxes to $10,000.
Taxpayers would be able to deduct the interest on new mortgages of up to $500,000. Existing mortgages would not be affected by the bill.
It would no longer be possible to deduct medical expenses, tax preparation fees, alimony payments, student loan interest and moving expenses.
Alternative Minimum Tax
The AMT would be eliminated.
The federal estate tax would be repealed in 2024. The exemption level would double to $11 million per person.
The current version of the House bill makes no changes to retirement plans such as 401(k) and IRAs.
The House bill would result in a $1.5 trillion increase in the federal debt over 10 years.
Springwater will continue to monitor this legislation and the Senate’s companion bill.