President Donald Trump and Republican lawmakers plan to overhaul the tax code will see homeowners lose key tax breaks while corporate giants gain massive reductions in their bills.
The plan reduces the current seven tax brackets for individuals to 12 percent, 25 percent, 35 percent, and 39.6 percent.
Mark Luscombe, principal federal tax analyst at Wolters Kluwer CCH in suburban Chicago, told USA Today that the 39.6 percent bracket was notable.
“They had been saying the focus would be on middle-class tax cuts,” he said. “They probably stuck that in to skew the cuts more to the middle class.”
That 39.6 percent bracket would kick in above $1 million in income for married couples, or $500,000 for others. Also, a core element of the GOP plan would be a major downsizing of the many deductions that have cluttered up the nation’s tax code over the years.
Many individual write-offs would disappear, though the charitable-donation deduction would be retained and homeowners would keep at least some of their key breaks.
Deductions that would be eliminated include those for state and local income taxes, casualty losses and medical expenses, though current law only allows medical write-offs greater than 10 percent of income. Also, the plan would scrap the personal exemption, USA Today reported.
Deductions for alimony payments and moving costs would also be repealed. In addition, the bill would scale down some higher-education benefits, including the interest deduction on student loans and a deduction for tuition expenses.
To compensate, the House Republican proposal would roughly double the standard deduction, which would benefit about 70 percent of Americans who utilize this tax break rather than itemizing deductions separately.
The new standard deduction would jump to $12,000 from $6,350 for single taxpayers, with a rise to $24,000 from $12,700 for married couples filing jointly. It would be indexed for inflation, meaning the 2018 amount for married couples, for example, actually would be set at $24,400.
The two key housing write-offs — affecting mortgage interest and property taxes — would change for some people. Existing homeowners still would be able to deduct their mortgage interest, as is currently the case. But future homebuyers would be limited to deducting interest on up to $500,000 in debt, down from a current cap of $1 million, Luscombe noted.
The mortgage-interest changes would apply to housing loans incurred after Nov. 2. This deduction would be limited to primary residences only — compared with one primary residence and one other home, under current law.
So someone buying a property for $550,000 and making a $50,000 down payment could still write off interest in full on the remaining $500,000 debt.
The property-tax deduction is another key item, especially in states like New Jersey and Illinois, where rates are high, and those like California where seven-figure home values are common.
Under the proposal, homeowners would be able to deduct up to $10,000 a year in state and local property taxes.
The proposal also would curtail Americans’ ability to avoid taxes on housing capital gains, according to a USA Today analysis.
Currently, people can skirt taxes on up to $250,000 of gains (singles) or $500,000 of gains (married couples) if they both own and use a residence for at least two of the prior five years.
The new plan would require homeowners to own and use a personal residence for five of the previous eight years. Also, this break would phase out for singles earning above $250,000 and couples making in excess of $500,000.
The proposal would preserve the existing credit for child and dependent care. This tax break assists families in the care of children and older dependents such as disabled grandparents.
It also retains the Earned Income Tax Credit, a popular break for low-income individuals.
While the tax-reform plan retains that top 39.6 percent bracket, it still offers some big potential breaks for the rich. Most significant is the eventual repeal of the estate tax, or “death tax,” which applies to less than 1 percent of Americans, after six years.
It also would immediately double the estate-tax exemption or exclusion amount, which is currently slightly above $5 million.
Tim Steffen, director of advanced planning for Baird Private Wealth Management, told USA Today that he doesn’t expect this tax will be repealed ultimately.
“Estate taxes are viewed as a tax only on the rich, and that’s not exactly a sympathetic group,” he said.
Also, the bill would repeal the Alternative Minimum Tax, a parallel tax system designed to ensure that nobody can use so many exemptions, deductions, credits and the like to avoid paying taxes.
“Congressional Republicans have taken great pains to spin their tax scheme as great for the middle class, but a few marginal changes don’t change the fact that their plan is fundamentally a massive giveaway to the wealthy at the expense of the middle class,” said Democratic Pennsylvania Sen. Robert Casey.
“By eliminating key deductions like the deduction for state and local sales and income tax and the $4,050 personal exemption per family member, some middle-class families in Pennsylvania could see their taxes rise while the super-rich get a windfall,” he said.
This proposal finances tax giveaways to the 1 percent while it eliminates the vital tax deductions to help middle-class families adopt children and pay their medical bills, Casey said.
“This Republican tax bill, which provides a $1.5 trillion tax cut for corporations, comes on the heels of passage just last week of a Republican budget which proposes cutting Medicare and Medicaid by the same amount, $1.5 trillion,” he said.
The senator added that there’s a need to reform the tax code for the middle class and small businesses, but the congressional Republican outline does the opposite, providing massive giveaways to the super rich and large corporations.
“Congressional Republicans should scrap this obscene plan and start over with a bipartisan process that raises incomes for the middle class and creates jobs,” Casey said.