Republican Tax Plan 2017: How the House reform bill hits deductions, brackets & the middle-class

The House of Representatives unveiled on Thursday the full text of a drafted bill to overhaul the tax code, the Tax Cuts and Jobs Act. Before the bill can become a law, several steps remain: It is expected to be taken up by the House Ways and Means Committee starting on Monday, at which point it will be opened up to public questions and scrutiny.

So what does this bill propose to do, exactly? Overall, many middle-class workers will get to pay less in tax: though key caveats include the fact that a loss of the personal exemption would reduce that benefit, corporations and richer taxpayers will get disproportionately large breaks (including a phase-out of the estate tax and elimination of the alternative minimum tax), and the federal budget deficit would balloon over the next decade.

Some elements of the bill might disappoint those who rely on popular tax breaks, as it eliminates many popular deductions, including those for medical expenses; personal casualty losses; and tax preparation services (as well as gambling losses). The plan would end several “above-the-line” deductions that help reduce your taxes, whether or not you itemize, include those for moving expenses or alimony.

Many of these deductions are likely to become flashpoints for criticism, said Martin Sullivan, a former Treasury department economist currently working at think tank Tax Analysts: “It’s horrible that medical deductions or casualty losses... if you have medical expenses in excess of $10,000 for example, you can’t deduct that now,” Sullivan said. “We just had hurricanes. I can’t believe the hurricane-prone [state] members would let that pass ... those people are really hurting.”

Importantly, for Americans with student debt, the plan could reduce overall education benefits: buried in the bill are provisions to cut tax deductions for student loan interest payments and qualified tuition and related payments, as well as other perks. Before these changes, eligible folks could deduct up to $2,500 in student loan interest and up to $4,000 for tuition — and loan balances have actually doubled since that $2,500 limit was established, according to Pew, meaning the changes could be a tough pill to swallow.

The bill would also end new contributions to Coverdell education savings accounts; repeal the exclusion for adoption and dependent care assistance programs; and cap the mortgage interest deduction. The plan, originally planned for a Wednesday release, was postponed as legislators struggled to compromise over which popular deductions would be eliminated.

President Donald Trump — whose family, reports suggest, could personally benefit from several provisions in the GOP tax bill — has said he wants to sign a bill by Christmas, but, as many analysts have pointed out, that gives lawmakers less than a month to work the bill through committee, a House vote and a vote in the Senate. The last time Congress passed an overhaul of the tax code, in 1986, the whole process took roughly a year.

Crucially, the bill’s passage is far from assured. As the Washington Post’s Tory Newmyer writes, today’s draft could reasonably be described as in “rough shape.” The cuts would cost the government $1.51 trillion over a decade, the New York Times reports — despite a $1.5 trillion limit on lost revenue permitted by rules in the latest budget. Other interest groups are sure to join the fight as the plan comes under scrutiny.

If the bill does pass, there are a few other ways that your tax bill could be affected. Here’s what we know for now.

The bill reduces the number of tax brackets — but not as much as we thought.

As expected, the new tax bill collapses the number of tax brackets, from the current seven, to four. The GOP framework for the bill originally called for reductions across the board, lowering even the tax rate for individuals making $418,400 or more, from 39.6% to 35%.

The bill announced Thursday leaves that top bracket in place, but everyone else’s rate will likely go down.

The new rates for single filers would be 0% on incomes up to $25,000, 12% for individuals making less than $45,000 per year, 25% for incomes up to $200,000 per year, 35% for individuals making up to $500,000 a year and a top rate, of 39.6%, on incomes more than $1,000,000.

Couples will pay 12% on incomes up to $90,000, 25% on incomes from $90,001 to $260,000, 35% on incomes from $260,001 to $1,000,000, and 39.6% on incomes of more than $1,000,000.

You’d be able to write off some state and local taxes — but there are limits.

One of the biggest controversies about the bill was that it would have eliminated state and local tax deductions, which was seen as a deal-breaker for Republicans in high-tax states who didn’t want to back a bill that raised taxes on their constituents.

It appears from the bill that the state and local tax deduction will be capped, and that a new $10,000 limit will be put in place for property tax.

The bill affects retirement savings, but not as expected.

Another major point of contention in the tax debate was whether or not the contribution limits on 401(k) plans would change. Currently, up to $18,500 of your income each year is tax deductible if you put it into a 401(k) retirement plan. At some points, there was talk of reducing that limit to a level as low as $2,400, an unpopular proposal. The bill does, however, prevent Roth IRA rollovers to traditional IRAs.

Child tax credit expanded

One of the possible flash points over the tax debate? The child tax credit will be expanded from $1,000 to $1,600, which some people don’t think will be enough — a “little stingy,” according to Tax Analyst’s Sullivan. “They doubled the standard deduction [but] they got rid of the personal exemptions,” Sullivan said. “If you have more children it’s probably not a good deal.”

Even some Republicans in the Senate wanted the tax credit to be higher, to avoid that possibility that low-income households or households with large families might effectively see their taxes go up when the bottom bracket rises from 10% to 12%.

“All the stuff for the rich and corporations they keep permanent, but a $300 tax credit for spouses and non-child dependents they decide to phase out after five years,” said Hunter Blair, a budget analyst at the Economic Policy Institute. “I think it’s clear who they are intending this tax cut for.”

There would be new restrictions on the mortgage interest deduction.

A final area of compromise was the mortgage interest tax deduction. The bill drew the ire of the real estate industry when word got out lawmakers were considering scrapping the mortgage-interest tax deduction, which lets people deduct the interest on their mortgage payments, even occasionally interest on second homes.

As the law currently stands, interest is deductible on loans up to $1 million. The new bill reduces that to loans of $500,000 or less.

Overall, the fact that the bill maintains the top tax bracket may not be enough to placate criticisms that the plan is primarily a gift to America’s highest earners. The bill fully repeals the estate tax, for example, which applies only to estates worth $5.49 million or more for individuals.

“The giant corporate tax cuts in this plan... are far greater than what’s needed to make American corporations competitive internationally,” said Andy Stettner of the Century Foundation, a left-leaning think tank. “The ultra-rich could see other big tax breaks in this plan, in the form of the estate tax exemption and cuts to the ‘pass-through’ tax.”

Correction: Nov. 6, 2017

Sign up for the Payoff — your weekly crash course on how to live your best financial life.