One of the biggest stories in politics this fall has been the Republican efforts to pass overhauls to the United States tax code. Both the House tax reform bill and its corresponding Senate draft have a number of different potential effects on employers and employees alike, including specific changes that could affect tax returns.
Here are just a few examples of how the passage of the bill could affect everyday Americans.
Reorganized tax brackets
The Republican tax plan calls for changing the number of tax brackets in the federal income tax system to four from seven. The four brackets would have taxation rates of 12, 25, 35 and 39.6 percent.
The lowest rate (12 percent) in this new system is higher than the current lowest tax rate (10 percent). The highest proposed tax rate would remain the same, but apply to single taxpayers with an income of $500,000 or more and married couples earning $1 million or more. Under the current system, that 39.6 percent taxation rate applies for single taxpayers earning $418,401 or more and married couples earning more than $470,701.
The new brackets would be as follows:
- 12 percent: Single filers making up to $45,000 and married filers making up to a combined $90,000.
- 25 percent: Single filers making $45,000 to $200,000 and married filers making a combined $90,000 to $260,000.
- 35 percent: Single filers making $200,000 to $500,000 and married filers making a combined $260,000 to $1 million
- 6 percent: Single filers making more than $500,000 and married filers making more than a combined $1 million.
Increased standard deduction
The Republican tax plan includes an increase in the standard deduction to $12,000 for individual filers and $24,000 for married couples filing jointly. The current deductions are $6,350 and $12,700 for individual and married filers, respectively.
Changes to state and local tax deductions and mortgage deductions
The new tax bill proposes some significant overhauls to state and local tax deductions. In this plan, taxpayers would be able to deduct their local and state property taxes, but there would be a $10,000 deduction cap. However, they will not be able to deduct state and local sales and income taxes.
In addition, the new tax plan calls for capping deductions for mortgages at $500,000. Currently, homeowners are able to deduct mortgage interest payments up to $1 million. This is a retroactive stipulation, meaning it will not affect current homeowners, but all future buyers after the bill goes into effect.
Elimination of the estate tax
The Republican tax plan calls for an initial increase of the estate tax deduction from $5.49 million to $11 million, meaning wealthy families will be able to transfer twice as much money to their heirs without it being taxed. In addition, the estate tax would be entirely eliminated under the plan by 2024. Under current laws, a 40 percent estate tax applies to all estates over the deduction threshold.
For more information about how the Republican tax bill could affect your taxes moving forward, contact us today at MCG Solutions.