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After months of waiting and wondering, America finally knows how Congress intends to reform the nation’s tax code.
On Thursday, Senate Republicans released their long-awaited version of tax reform. The Senate plan comes in the wake of a House Republican tax proposal announced earlier this month and advanced by the House Ways and Means Committee on Thursday afternoon.
You can read more about the details of the House tax reform plan in a pair of Money Talks News stories:
In truth, some murkiness remains about exactly how the tax code might change. Differences among Republicans in the Senate and the House mean much wrangling and horse-trading is likely in the coming days and weeks.
Significant areas of agreement between the House and the Senate tax reform plans include:
- A near doubling of the standard deduction
- Preservation of the adoption tax credit
- A cut in the corporate tax rate from the current maximum of 35 percent to 20 percent
- Elimination of the alternative minimum tax
However, the House and Senate versions also include some stark differences that will need to be reconciled if tax reform is to become a reality in this congressional session. Six of those key differences are:
The number of tax brackets
The Senate version of the plan includes seven tax brackets:
- 10 percent
- 12 percent
- 22.5 percent
- 25 percent
- 32.5 percent
- 35 percent
- 38.5 percent
The House version reduces the number of tax brackets to four. In addition, the final Senate bracket is actually a slight reduction from the largest House tax bracket, which now stands at 39.6 percent.
The fate of state and local tax deductions
The new Senate proposal eliminates all state and local tax deductions. By contrast, the House plan maintains the deduction for state and local property taxes, but caps it at $10,000.
The limits on the mortgage interest deduction
Under the Senate plan, you would still be able to deduct mortgage interest expenses on your tax return if you purchase a home with up to $1 million in debt. In effect, there would be no change from the current law.
By contrast, the House plan reduces the amount of qualifying debt to $500,000. The House bill also prevents taxpayers from deducting mortgage interest on a second home.
Whether to repeal the medical expense deduction
There are major differences between the Senate and House plans for the future of the medical expense deduction. The Senate wants to preserve the current deduction, and even enhance it for the blind and the elderly.
Meanwhile, the House wants to scrap the medical expense deduction altogether.
The amount of the child tax credit
The Senate tax plan would raise the child tax credit to $1,650, up from the current $1,000. On the other hand, the House plan raises the credit to $1,600. The House also includes a $300 credit for each parent.
The future of the estate tax
Finally, the Senate plan to reform the nation’s tax code retains the estate tax, but doubles the current exemption, which stands at $5.49 million for individuals.
The House version also doubles this exemption until after the year 2023, when the estate tax would be repealed.
However, as we have previously explained, the estate tax impacts very few people:
For 2017, the estate tax effectively applies to individual estates over $5.49 million. If you’re a married couple, that means you can die with an estate worth about $11 million and pay no federal estate tax. In addition, there are lots of strategies out there, some simple, some sophisticated, to avoid or reduce the tax.
What do you think of the Senate’s tax reform plan? Sound off by commenting below or on our Facebook page.