US Senate Passes Bill for Large Tax Cuts
Trumpeted as the biggest over-hall of US taxes since the 1980’s, the proposed new finance bill will introduce and legislate sweeping tax cuts for both households and businesses. Critics of the bill argue that the largest cuts benefit the highest income earners and that the cuts for the less wealthy are limited in duration.
Following a series of amendments, the bill was passed by a small majority of 51 votes to 49. President Trump is now negotiating to reconcile the rival House and Senate bills so as to merge legislation and have a final bill agreed ahead of the 22nd December deadline. This will then enable him to have the bill signed into law before the end of 2017.
So what does the Senates new tax bill include?
The majority of Americans, covering all levels of income, will see some small tax breaks from 2019. Those with incomes below $25,000 will see a saving of around $40, those earning between $50,000 and $87,000 will see an average tax cut of around $800 and the top 1 percent of households earning in excess of $750,000 can expect their taxes to reduce by around $28,000. However, some of these savings are limited and from 2026, families earning under $75,000, would most likely actually see a rise in their taxes.
The Senate Tax bill will be measuring inflation using the chained consumer price index and this will determine how tax brackets will change going forward. Over time this will place individuals into the higher brackets sooner.
Standard deductions will be almost doubled, raising them to $24,000 for married couples who file jointly and $12,000 for single filers. Currently these deductions are $12,700 for married couples and $6,350 for singles.
Personal exemptions will be removed. These are currently worth $4,050 per person and can be taken for individuals and qualifying dependents. This is of particular value to large families and single parents, as an exemption can be taken for each child.
The current mandate stating that the majority of taxpayers had to purchase health insurance or face a fine, will end. The implication of this is that insurance premiums will increase and 13 million people could potentially lose their cover by 2027.
As from 2018, the Senate Tax Bill will double the Child Tax Credit to $2,000 for those earning below a $500,000 limit. However, this enhanced credit will only be in place until 2025. This is one of the areas to be reconciled as the House tax bill suggests raising the child tax credit to $1,600, with a phase out beginning at $115,000 for single parents and $230,000 for married couples.
State and local taxes will be stopped in the Senate’s bill with Residents living on the coasts and other areas with high taxes losing out most.
Property tax deductions will have a $10,000 cap in the Senate Tax bill which is considered to be better than previously suggested, but still not as good as was hoped for.
The Senate is proposing to keep alternative minimum tax - AMT - and to raise the exemptions (although the House is proposing to do away with it.) Currently, the AMT exemption amount is $54,300 for singles and $84,500 for married couples who file jointly. The new bill will increase the exemption to $70,300 for singles and $109,400 for married couples. However, this increase would be temporary and will return to the 2017 level, adjusted for inflation, after 2025.
The Senate bill proposes to keep the deductions for medical expenses, but the House bill is preparing to fully repeal this deduction. The Senate tax bill will expand the ability to deduct medical expenses for 2017 and 2018, allowing the deduction of costs to the extent they exceed 7.5 percent of AGI. However, In 2019, the deduction will revert to 10 percent of AGI.
Estate Tax exemption will be doubled to $11 million. Therefore, a person can transfer about $11 million to heirs without being subject to the estate tax, which is currently 40 percent. The current figure is $5.49 million per individual. Here is where some significant differences between the House and the Senate still exist and an area therefore perhaps ripe for negotiation.
It is still hoped that a combined bill will be law before Christmas but with a number of differences still remaining between the House and the Senate, and clear discomfort on all sides with some of the provisions, there is still room for movement on a number of issues. Hopefully, with the final provisions potentially due to have effect from 1 January 2018, there will be some clarity sooner rather than later.