How to keep score as Congress rewrites the tax code

Tax season officially starts next month, but congressional action to change many parts of the tax code has put IRS matters at the top of watch lists this month.

The Senate is weighing a roughly $1.4 trillion tax overhaul. Some late changes were made to the bill Friday. The House passed a nearly $1.5 trillion tax bill two weeks ago that differs in key respects.

“The tax reform debate is in full swing, and Americans are waiting to see where the plan lands,” said Kathy Pickering, vice president of regulatory affairs and executive director of The Tax Institute at H&R Block. “Once a law is passed, virtually every taxpayer is going to feel the effect in one way or another.”

Pickering highlighted changes to the standard deduction among several “big ticket” items Congress is considering.

“If that passes, many Americans will keep more of their of money because fewer taxes will be taken right off the top,” Pickering said. “Other highlights include potential new credits to help individuals or families.”

As Congress contemplates such benefits, it also weighs taking back some provisions that help lower tax bills currently. Such changes could affect a taxpayer’s ability to deduct medical expenses, mortgage interest payments and state and local taxes.

A Texas taxpayer posted on Twitter a reminder that rewriting the tax code is fair game for any administration. In a few years, “the tax code will experience whiplash like never before” if Democrats gain control of the White House and Congress, he wrote.

Pickering added one hopeful note. Taxpayers have time to absorb all of this before it strikes their pocketbooks.

“It’s important to remember these changes are expected for 2018, so tax payers won’t feel the impact on their (2017) tax return for the upcoming tax season,” she said.

Which provisions ultimately become part of the tax code depends on how differences between the two Republican-written measures are reconciled. Here are the basics of both bills as of Friday afternoon:

▪ Personal income tax rates: Senate bill retains the current number of brackets, seven, but changes them to 10, 12, 22, 24, 32, 35 and 38.5 percent. Under current law, the top bracket for wealthiest earners is 39.6 percent. The House measure condenses seven brackets to four: 12, 25, 35 and 39.6 percent.

▪ Standard deduction: Used by about 70 percent of U.S. taxpayers, currently $6,350 for individuals and $12,700 for married couples. Senate, House bills both double those levels to $12,000 for individuals and $24,000 for couples.

▪ Personal exemption: Both bills eliminate the current $4,050 personal exemption.

▪ State and local taxes: Senate, House bills end federal deductions for state and local income and sales taxes, but they allow the deduction for up to $10,000 in property taxes.

▪ Tax credits: Senate doubles per-child tax credit to $2,000. House raises per-child tax credit from $1,000 to $1,600, extends it to families earning up to $230,000. Creates a $300 tax credit for each adult in a family, which expires in 2023. Both bills preserve the adoption tax credit.

▪ Home mortgage interest deduction: Senate retains the current limit for the deduction to interest paid on the first $1 million of the loan. House reduces the limit to $500,000, for new home purchases.

▪ Other deductions: Senate bill preserves deduction for medical expenses not covered by insurance but ends deductions for moving expenses and tax preparation. House eliminates medical expense deduction.

▪ Individual insurance mandate: Senate bill repeals the requirement in former President Barack Obama’s health care law that people pay a tax penalty if they don’t purchase health insurance. House bill does not.

▪ Alternative minimum tax: The AMT is aimed at ensuring that higher-earning people pay at least some tax. Senate bill doesn’t repeal it but reduces the number of people who have to pay it. House measure repeals the tax.

▪ Inheritance tax: Currently, when someone dies the estate owes taxes on the value of assets transferred to heirs above $5.5 million for individuals, $11 million for couples. Senate bill doubles those limits but does not repeal the tax. House initially doubles the limits and then repeals the entire tax after 2023.

▪ Corporate taxes: Senate, House bills both cut current 35 percent rate to 20 percent, but Senate has one-year delay in dropping the rate.

▪ Pass-through businesses: Millions of U.S. businesses “pass through” their income to individuals, who then pay personal income tax on those earnings, not corporate tax. Senate bill lets people deduct 23 percent of the earnings and then pay at their personal income tax rate on the remainder. House measure taxes many of the pass-through businesses at 25 percent, plus creates a 9 percent rate for the first $75,000 in earnings for some smaller pass-throughs.

▪ Businesses: Senate, House bills both expand write-offs allowed for companies that buy equipment.

▪ Multinational corporations: Senate, House bills impose a one-time tax on profits that U.S.-based corporations are holding overseas. Senate bill also ends tax advantages for firms moving overseas, and requires corporations to continue paying the business version of the alternative minimum tax. House measure seeks to eliminate tax incentives that encourage some U.S. companies to move overseas.

This story was originally published December 1, 2017 at 4:19 PM with the headline "How to keep score as Congress rewrites the tax code."