Update: House Republicans have passed a sweeping tax bill that would cut both corporate and income taxes by $1.5 trillion, bringing the country one step closer to the biggest taxation overhaul in decades.
The House passed the Tax Cuts and Jobs Act in a 227-205 vote, bringing President Trump nearer to his first major legislative accomplishment since he took office in January.
“Today’s vote brings America one step closer to historic tax cuts that will allow Americans to keep more of their hard-earned money,” Ronna McDaniel, chairwoman of the Republican National Committee, said in a statement shortly after the vote. “President Trump and Republicans in Congress are keeping their promise to give workers a raise, support American businesses and grow our economy.”
Some experts say the whopping $1.5 trillion tax cut will benefit many taxpayers. But will some lose out? And what does it all mean for you?
As expected, in order to pay for the tax cuts, lawmakers chose to get rid of or limit many key tax breaks. Some of the items on the chopping block under the Republicans’ plan, which include personal exemptions, deductions for medical expenses, paid student loan interest and paid mortgage interest, could impact millions of Americans.
“It really depends on the individual situation whether they’ll be more helped or hurt,” Mark Luscombe, principal federal tax analyst at Wolters Kluwer, told MagnifyMoney. You can read the entire bill here.
What happens next?
The bill will move for a vote in the Senate, which hasn’t yet voted on its own version of a tax cut plan. Trump has called for lawmakers to pass one cohesive bill by Christmas. Republican lawmakers would like to see the reforms take effect in 2018.
But the tax overhaul has a long way to go. The House and Senate proposals differ on a number of major provisions, which will make it tough for the two bills to be reconciled and spur clashes over tax policy. To see what the Senate has in store, check out this post.
Keep reading for a summary of the tax changes to come and how they might affect your bottom line:
How individual tax brackets will change
The bill compressed the current seven-tier tax system into four tax brackets: 12 , 25, 35 and 39.6 percent. The top individual tax rate remains unchanged at 39.6 percent.
The new bottom bracket of 12 percent is higher than the current bottom bracket of 10 percent but replaces the 15 percent bracket as well. The proposal will also push some in the current 33 percent bracket into the 35 percent. So there will be some shuffling, and its impact on you depends on your earnings picture.
Here’s the breakdown of brackets for married filers:
The income threshold for the 25 percent bracket moves to $90,000, up from $75,900 for married couples. The 35 percent bracket starts at $260,000, and the top tax rate starts at $1 million.
Next, let’s look at tax deductions. Under the plan, some would increase.
Deductions that would be increased
Under the House plan, the standard deduction would be almost doubled. The standard deduction is a dollar amount that reduces the amount of income on which you are taxed.
For individuals, the standard deduction would rise from $6,350 to $12,000. For married couples, it would go up from $12,700 to $24,000.
But personal exemptions, currently $4,050 per person, would now be included in the standard deduction, so the actual increase isn't as big as it seems at first blush. Under the current tax code, taxpayers could claim one personal exemption for themselves and one for a spouse.
The change in personal exemption will likely offset the benefits from the standard deduction for many to some extent. “If they are doubling the standard deduction but eliminating the personal exemption, a single parent with a number of kids could actually be hurt by that on a net basis,” Luscombe said.
Child tax credit
The House bill also proposes to expand the child tax credit, which allows parents to offset expenses of raising children, from $1,000 to $1,600.
The bill also will provide a credit of $300 for each parent with a dependent who is not a child, such as a grandfather or a college student. Those $300 credits expire in five years.
Those credits are seen by advocates as helping some families make up for the loss of personal exemptions.
401(k) contribution limits
Unlike what was suggested in an earlier round of rumors, the Republicans did not call for reducing the contribution limits for 401(k) accounts. Phew.
For 2018, workers under age 59.5 can contribute $18,500 to a 401(k) on a pre-tax basis.
But still, more changes are proposed, with some deductions changed or ended under the proposal.
Deductions that will be eliminated or altered
The House bill keeps the home mortgage interest deduction for existing mortgages. But for newly purchased homes, the home mortgage interest deduction is lowered to $500,000 from the current $1 million debt limit.
It could well put a damper on higher-end home purchases, where half of a $1 million mortgage is not eligible for interest deduction, Luscombe said.
Medical-expense deductions are going away. Right now, individuals can deduct qualified medical expenses that exceed 10% or 7.5% of their adjusted gross income (depending on age). Households with outstanding medical costs and are eligible for the deductions will feel significant effects from the repeal. The provision could have big implications for families with high medical costs during the year.
Student loan interest
The deduction for student loan interest could also be eliminated under the Republican tax reform.
Under current rules, borrowers may deduct up to $2,500 in interest payments on student loans on their federal income tax returns. The loss of the deduction would put a heavier financial burden on hundreds of thousands of college graduates grappling with significant education debt.
The state and local income tax deduction
The Republicans are further calling for an end to the deduction for state and local income/sales taxes.
The IRS allows those who make payments for state and local income taxes to deduct them on their federal tax return. The loss of the deduction is seen by some critics as hurting people in high-income tax rate states, such as New York and California.
But the proposal would keep in place the state and local property tax deduction, although capping it at $10,000.
The estate tax
Republican lawmakers proposed to double the estate tax exemption from $5.49 million to nearly $11 million and eventually do away with it. The estate tax is the tax you pay to inherit property or money from a deceased person.
This means families don’t have to pay taxes on any inheritance under $11 million. The bill calls for repealing the estate tax after six years.
In addition to reducing or eliminating several tax breaks, Republicans hope that the tax cuts will boost the economy, foster business growth, make the U.S. business environment more competitive with other countries’ in terms of tax rates, and even spur wage growth. This, in, turn, would bolster tax revenue, supporters say. But critics fear a surge in the budget deficit, with implications for future generations.