What you need to know about the Republican tax plans

With House approval of a major overhaul of the nation’s income tax code last week, congressional Republicans are moving toward the most sweeping changes in tax law since 1986.

But because House and Senate Republicans are moving with unusual speed to pass the bill, it has been difficult to determine who gains and who loses under the GOP plan.

Virtually every study shows that wealthier people will receive larger tax breaks than those in the middle class. The non-partisan Tax Policy Center concluded this week that under the House bill, the "largest cuts in dollars and as a percentage of after-tax income would accrue to higher-income households."

Corporations and sole proprietorships or partnerships will see their taxes drop dramatically. But because of some quirks in the Senate bill, some middle-income Americans may find themselves paying more in taxes sometime in the middle of the next decade.

Here are some of the key questions:

Q: Senate Republicans are ending the mandate that Americans buy insurance policies or face a fine. Doesn't that mean Senate Republicans are taking away a premium tax credit from those who have bought federally subsidized individual insurance policies through the marketplaces created by the 2010 health law known as Obamacare? Isn't that a tax increase on the middle class?

A: Not really. First, the premium tax credit was paid to the insurance companies, not people who bought policies. If you choose not to buy a policy through the Obamacare marketplaces, you do not pay either premiums on the policy or fines to the government. But you risk not having insurance. Those who want to buy individual policies through the marketplaces are still free to do so.

Q: Does the Senate bill raise taxes on middle income people?

A: To avoid a Democratic filibuster, Senate Republicans are relying on a parliamentary maneuver to pass the measure with their 52 GOP votes. But there is major drawback. By using the maneuver, the Senate bill cannot add to the deficit beyond 2027. So to get around that, the Senate bill makes the corporate tax cuts permanent, but ends most individual tax cuts on December 31, 2025. Republicans insist that Congress in 2025 will extend those tax cuts, just as Congress did in 2012 when the tax cuts signed into law by President George W. Bush in 2001 expired after 10 years. But if Congress does not extend the reductions, middle-class people would pay higher taxes in 2027. Watch for Senate Republicans to offer an amendment on the floor to restore those tax cuts.

Q: But don’t other middle and upper-middle class families face a tax increase?

A: The congressional Joint Committee on Taxation concludes 60 percent of taxpayers in all income groups will pay lower taxes in 2019 under the Senate Republican bill. But the study predicts 10.4 percent of households with incomes between $75,000 and $100,000 a year would pay at least $500 more annually in federal taxes.

Q: Why is that?

A: Both House and Senate bills provide incentives for Americans not to itemize their returns and fill out their returns on a single card. They do so by doubling the standard deduction to $24,000 a year for married taxpayers and $12,000 for those who are single filers. By taking the higher standard deduction, Americans could not deduct home mortgage interest, charitable contributions or medical expenses.

Both the House and Senate bills end the $4,050 personal exemption taxpayers can take for themselves and their family. The Senate bill scraps a major deduction 44 million Americans take for paying state and local taxes, including property taxes. If you live in a state with high taxes, such as California or New York, the standard deduction may not be enough to compensate for what you lose by not deducting state and local taxes. The House bill eliminates state and local income and sale taxes, but allows Americans to deduct as much as $10,000 in property taxes.

Q:Any other tax breaks for middle-income people?

A: Yes. The Senate bill expands the child tax credit from $1,000 per child a year to $2,000 a year. The House extends the tax credit from $1,000 per child to $1,600 per child, but that increase ends after five years. Neither the House nor the Senate make the additional credit refundable, meaning low-income families who do not pay income taxes will not be able to take advantage of it.

Q: Why cut the corporate tax rate from 35 percent to 20 percent and drop to 25 percent the tax on sole proprietorships or partnerships currently taxed at the owner’s individual income tax rate, which can be as high as 39.6 percent?

A: The White House Council of Economic Advisers last month argued that cutting business taxes would make U.S. companies more competitive internationally and increase the nation’s gross domestic product. The White House claims the average household income would see an increase in wage and salary income by $4,000 by the end of 2027.

Q: Does anyone question that?

A: Yes. Organizations which champion lower deficits dismiss such projections as “magical economic growth that defy history and all credible analyses.”

Q: What happens to the Alternative Minimum Tax, which impacts roughly five million tax filers in the mostly upper middle income and upper income households?

A: Both bills scrap the AMT, but to comply with Senate budgetary rules, the Senate bill brings the tax back in 2026.

Q: Will the bill add to the publicly held debt, which is money the government owes to those who buy treasury bonds and other government securities?

A: The White House says no, but if they’re wrong the bill could produce staggering debts that will be a huge burden on future generations. House and Senate Republicans approved a budget resolution allowing the tax bill to add $1.5 trillion in publicly held debt during the next decade. During those same years, the non-partisan Congressional Budget Office projects – without any change in tax or spending laws — the government will add nearly $10 trillion to the federal debt. The result could be the highest ratio of debt to gross domestic product since the end of World War II.

The House bill creates four brackets for taxable income:

  • 12 percent: Up to first $45,000 of taxable income for individuals; $90,000 for married couples filing jointly.
  • 25 percent: Over $45,000 to $200,000 for individuals; over $90,000 to $260,000 for married couples.
  • 35 percent: Over $200,000 to $500,000 for individuals; over $260,000 to $1 million for married couples.
  • 39.6 percent: Over $500,000 for individuals; over $1 million for married couples.

The Senate bill creates seven brackets for taxable income:

  • 10 percent: Income up to $9,525 for individuals; $19,050 for married couples filing jointly.
  • 12 percent: Over $9,525 to $38,700; over $19,050 to $77,400 for couples.
  • 22.5 percent: Over $38,700 to $60,000; over $77,400 to $120,000 for couples.
  • 25 percent: Over $60,000 to $170,000; over $120,000 to $290,000 for couples.
  • 32.5 percent: Over $170,000 to $200,000; over $290,000 to $390,000 for couples.
  • 35 percent: Over $200,000 to $500,000; over $390,000 to $1 million for couples.
  • 38.5 percent: Over $500,000; over $1 million for couples.

Source: CNN Money

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