President Trump is looking at his first major legislative victory, promising “massive” and “historic” tax cuts after a reform bill passed both chambers of Congress.
But before a bill can get to his desk, the House and the Senate need to merge their two proposals into one — and that’s the hard part.
The House voted late Monday to start that process, in what’s known as a conference committee.
“We’ll be able to get to an agreement in conference,” Senate Majority Leader Mitch McConnell, R-Ky., said on ABC’s “This Week.” “I’m very optimistic about it.”
But in the pursuit of a lower corporate tax rate, a boost to the standard deduction and a simpler code overall, it’s unclear which popular tax breaks will survive and which will be chopped. Indeed, there are stark differences between the House and Senate bills, and the lobbying will only intensify as negotiators determine what will stay in the final product.
What does all this wrangling mean for you? Here are the tax breaks up for debate as the package moves to conference:
The massive tax overhaul looks to eliminate or trim state and local tax deductions (SALT). Both bills, as currently written, would repeal the deductions for state and local income and sales tax. Further, they would cap property tax deductions at $10,000. These provisions are very unpopular in high-tax blue states like New York and California where those deductions can be more valuable to individual taxpayers.
“We’ll be able to get to an agreement in conference. I’m very optimistic about it.”
Medical Expense Deduction
This area will require significant negotiations during the conference committee process. The House bill repeals the medical expense deduction, while the Senate bill keeps it. The Senate bill even makes the deduction more generous for tax years 2017 and 2018, allowing the deduction to be used if eligible expenses exceed 7.5 percent of a household’s annual gross income (AGI), rather than the 10 percent threshold under current law.
Mortgage Interest Deduction
The House plan limits this deduction to the first $500,000 in principal value. The Senate bill would keep the cap at $1 million.
Graduate Student Income
The House plan treats graduate student tuition waivers as taxable and repeals the deduction for student loan interest. The Senate’s plan does not touch these items. Under current law, student loan interest is considered a tax write-off, until the filer exceeds an AGI of $65,000.
Corporate Rate Reduction Timing
This is one area of agreement for both chambers. The two bills cut the corporate tax rate to 20 percent — the only difference is that the House version makes that rate effective in 2018, while the Senate’s doesn’t kick in until 2019.
Child and Family Tax Credits
The child and family tax credit is more generous under both bills. The House bill increases the child tax credit value to $1,600 from the current $1,000, with the phaseout set at $230,000 in income. The House version also introduces a $300 per-person family tax credit for those not eligible for the child tax credit. That would expire after five years. Meanwhile, the Senate’s bill increases the child credit to $2,000, but the phaseout is set at $500,000. This is another provision in the Senate bill that would sunset in 2025.
Individual Income Tax Rates and Brackets
The House version of the tax bill consolidates seven income tax rates into four, while retaining the top marginal rate of 39.6 percent and including a higher “bubble rate” for very wealthy earners. In the Senate, the proposal keeps the seven brackets, but reduces rates, bringing the top down to 38.5 percent. The Senate’s version does not have a “bubble rate.” The key difference in this section of the Senate bill is that the individual income-tax-rate changes sunset at the end of 2025.
This provision is relatively similar in both bills, roughly doubling the amount of money taxpayers can write off through the standard deduction. The House version has a standard deduction of $12,200 for single filers, while the Senate’s is $12,000. For heads of household, the House version is set at $18,300, while the Senate version is at $18,000. And for joint filers, the House bill gives a deduction of $24,400, while the Senate’s is set at $24,000.
This pass-through income language in the Senate bill is what flipped Sen. Ron Johnson, R-Wis., from a “no” vote to a “yes.” The Senate bill adopts a 23 percent deduction for pass-through income for businesses, including publicly traded partnerships. The provision in the Senate bill is set to expire at the end of 2025. In the House version, the tax rate for pass-through income would be capped at 25 percent.