Written By: Brittany Mercer

Associate Editor, American Journal of Trial Advocacy

On November 2, 2017, House Republicans rolled out their plan to overhaul the U.S. Tax Code.[1] The proposed changes, if passed, would be the biggest reform to the Tax Code since the 1980s.[2] The new plan, titled the Tax Cuts and Jobs Act,[3] would affect all Americans as well as corporations. The plan makes changes to everything from tax brackets to the standard deduction.[4]

What’s in the new plan? The first big change would reduce the current number of marginal tax brackets from seven to four.[5] Currently, tax rates are set at 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.[6] The new marginal tax brackets under the House plan would be 10%, 25%, 35%, and 39.6%.[7] The chart below outlines the amount of income that would be applied at each rate.

Marginal Rate	25%	35%	39.6%
Individuals	$45,000	$200,000	$500,000
Families	$90,000	$260,000	$1,000,000

[8]

In addition to reducing the number of tax brackets, under the new plan, the standard deduction doubles to $12,000 for individuals and $24,000 for couples.[9] Under the current law (effective for tax year 2018), the standard deduction for a single individual is $6,500 or $13,000 for a married couple.[10] In addition, a taxpayer may take a personal exemption of $4,150 for each qualifying person, including oneself.[11] For a family of five, this works out to $33,750 or $10,650 for a single person. Under the new plan with a higher standard deduction, more Americans may choose the standard deduction, rather than itemize their tax return.

The House plan also provides for an increase in the child tax credit (from $1,000 to $1,600),[12]  and 401(k) plan benefits would remain the same.[13] The House plan also reduces the current corporate tax rate from 35% to 20%.[14] In addition, American companies with subsidiaries abroad would also pay a 10% tax on any profits those subsidiaries make overseas.[15]

What are we losing? The new proposed plan would completely eliminate the student loan interest deduction[16] and the deduction for medical expenses.[17] The loss of these deductions would affect college graduates and families without insurance or those paying significant out of pocket expenses for medical treatment. The plan also called for an elimination of the current deduction for any state and local taxes paid, but significant pushback caused the drafters to allow a deduction up to $10,000.[18] In addition, the new plan phases out the estate tax after 6 years, repeals the alternative minimum tax on the highest earners, and caps the mortgage interest deduction to the first $500,000 of your mortgage (current ceiling is one million).[19] The plan also eliminates the personal exemption.[20] Finally, the plan creates a new tax rate (25%) for many “pass through” businesses like sole proprietorships, S-corporations, and partnerships.[21] Currently, the profits of these businesses are taxed at the owner or partner’s individual rate. A revised version of the bill also added back the adoption tax credit that was initially eliminated and created a provision to allow military families to deduct moving expenses.[22]

What does all this mean? The proposed tax plan would raise the national debt by $1.5 trillion over the next decade.[23] The new plan could hurt families with multiple children because they will not be able to take as many personal exemptions and deductions under the new plan.[24] On the other hand, the new plan would increase the amount of deductions single filers and married couples without children would receive.[25]

The Senate plan. To complicate matters, on November 9, 2017, the Senate Finance Committee rolled out their own plan with some significant differences from the House plan.[26] The Senate plan would keep all seven current marginal rates, the medical expense deduction, and repeal the state and local tax deduction (known as “SALT”) but preserve a deduction up to $10,000 for a property tax deduction.[27] In addition, the Senate plan would not only keep the estate tax deduction, but it would double the exemption.[28] This means that in 2018, only estates of more than $11.2 million would be taxed.[29]

Like the House plan, the Senate version also reduces the corporate tax rate to 20%, but, under the Senate plan, this rate would not be effective until 2019.[30] The Senate plan would also keep the student loan interest deduction,[31] as well as the mortgage interest deduction.[32] Both the House and Senate plan leave the current law governing your 401(k) in effect.[33] Currently, individuals may contribute up to $18,500 of their pretax income to a 401(k) plan.[34] Moreover, while the House plan provides for a child tax credit of up to $1,600 per child, the Senate plan would allow a child tax credit of up to $1,650 per child.[35] The Senate plan also provides for a $500 credit for every non-child dependent whereas the House plan only allows for a $300 non-child dependent credit.[36]

What happens next? Lawmakers from both the House and Senate will vote on the bills and ultimately make more changes before a final copy lands on the President’s desk.[37] Congress is anxious to get something finalized before the end of the year.[38] Taxpayers should contact their respective representatives to voice their opinions on the proposed plans and stay tuned as a final tax reform bill should be out in the near future.

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[1] Alan Fram & Andrew Taylor, Big GOP tax bill would cut rates-but also popular rates, AP News, (Nov. 2, 2017) https://apnews.com/42faf033aedc4a0dac74003c544149b6/GOP-tax-plan-would-slash-corporate-rate,-help-wealthiest.

[2] Id.

[3] The Tax Cuts and Jobs Act, H.R. 1, 115th Congress (2017) https://waysandmeansforms.house.gov/uploadedfiles/bill_text.pdf.

[4] Id.

[5] Fram & Taylor, supra note 1.

[6] Rev. Proc. 2016-55, 2016-139 I.R.B. 7-9.

[7] Fram & Taylor, supra note 1.

[8] Id.

[9] Id.

[10] Rev. Proc. 2017-58, 2017-178 I.R.B. 13.

[11] Id. at 16.

[12] Alicia Parlapiano, Six charts that help explain the Republican tax plan, The New York Times (Nov. 2, 2017), https://www.nytimes.com/interactive/2017/09/27/us/politics/six-charts-to-explain-the-republican-tax-plan.html.

[13] Tax Plan: 401(k) plans, vital retirement savings tool, stay the same, USA Today (last updated Nov. 2, 2017 1:11 PM), https://www.usatoday.com/story/money/2017/11/02/tax-plan-401-k-plans-vital-retirement-savings-tool-stay-same/825019001/.

[14] Fram & Taylor, supra note1.

[15] Id.

[16] Kelli B. Grant, Student loan interest deduction is on the chopping block, CNBC (last updated Nov. 2, 2017 2:22 PM), https://www.cnbc.com/2017/11/02/student-loan-interest-deduction-is-on-the-chopping-block.html.

[17] Fram & Taylor, supra note 1.

[18] Id.

[19] Id.

[20] Parlapiano, supra note 12.

[21] Fram & Taylor, supra note 1.

[22] Herb Jackson, Tax Reform: Senate version of bill will delay corporate tax cuts one year, USA Today (last updated Nov. 9, 2017 5:37 PM), https://www.usatoday.com/story/news/politics/2017/11/09/tax-reform-senate-version-bill-delay-corporate-tax-cuts-one-year/848002001/.

[23] Fram & Taylor, supra note 1.

[24] Parlapiano, supra note 12.

[25] Id.

[26] Lauren Fox, Senate Republicans unveil their own tax plan, CNN (Nov. 10, 2017 11:20 AM) http://www.cnn.com/2017/11/09/politics/senate-tax-plan-republicans/index.html.

[27] Id.

[28] Id.

[29] Danielle Kurtzleben, CHART: How the Republican tax overhaul would affect you, NPR (Nov. 2, 2017 4:50 PM) https://www.npr.org/2017/11/02/561639579/chart-how-the-tax-overhaul-would-affect-you.

[30] Id.

[31] Id.

[32] Id.

[33] Id.

[34] Id.

[35] Kurtzleben supra note 29.

[36] Id.

[37] Susan Davis, GOP Senators unveil competing tax overhaul, NPR (Nov. 9, 2017 3:00 PM) https://www.npr.org/2017/11/09/563095268/gop-senators-unveil-competing-tax-overhaul.

[38] Id.