Tax reform was been a big part of the Trump administration's policy agenda, and throughout the year, proponents of tax law changes had pushed hard for Congress to get something done by the end of 2017. Efforts over the past couple of months from the House of Representatives and the Senate had left many questions unanswered about what would end up in a final bill, and some were doubtful that Republicans could come to agreement on some of the issues that divided the party.
On Wednesday, Republican lawmakers said that they had reached an agreement to reconcile the House and Senate versions of the tax reform bill. Some of the newest changes are surprising, but both chambers expect to make aggressive pushes to pass the agreed-upon compromise within the next week. Here are some of the major changes that were necessary to reach consensus.
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Corporate tax rates won't fall as much as anticipated
The most visible move in the final compromise was the decision to choose a slightly higher corporate tax rate than the original bills had anticipated. Corporate rates will fall to 21% rather than the 20% that previous proposals had sought, with lawmakers arguing that the change frees up about $100 billion over the next 10 years for use on other tax breaks. The shift also allowed lawmakers to agree to implement the change in 2018, rather than the 2019 date that the Senate proposal had suggested. Meanwhile, small businesses will get a 20% deduction on pass-through income, down from the 23% that the Senate had proposed.
Top income tax rates will fall more than anticipated
Although the tax cut for corporations won't be as big as initially sought, individual taxpayers at the high end of the income spectrum will get a bigger windfall than either the House or the Senate had initially proposed. The top rate on the individual side will fall to 37%, down from the 39.6% rate that the House proposal would have preserved as well as the 38.5% rate in the Senate plan. Where the final tax brackets at which this top rate applies note that the move not only solely helps high-income taxpayers but does so in an extremely visible way.
State and local tax deductions will be partially restored
Earlier versions of the tax reform bill had eliminated itemized deductions for state and local income and sales taxes entirely, preserving only a $10,000 deduction for property taxes. The compromise would keep the $10,000 number but allow taxpayers to apply it to any state and local tax, including both property tax and the existing election to choose either income or sales tax to deduct. The move should help win over Republican votes in high-tax states, where some House members had voted against the original proposal.
Mortgage interest deductions will fall, but not as much as they could have
One sticking point between the two versions of the bill was in their treatment of mortgage interest. The House looked to limit the mortgage interest deduction to the first $500,000 in mortgage debt on a home purchase, while the Senate wanted to keep the current $1 million. In the end, lawmakers reached the natural compromise of $750,000. That should be sufficient for most Americans, although those in high-value real estate markets could find themselves missing out on part of their deductions on future mortgage loans.
The estate tax will stay
The House version had wanted to repeal the estate tax, while the Senate took the more conservative course of boosting the exemption amount above which it applies. The Senate won out on that argument, with a doubling of the estate tax exemption to $11.2 million per person for 2018. That should make estate taxes an even rarer burden for taxpayers.
Mixed results on alternative minimum tax
Lawmakers agreed to different handling of the controversial alternative minimum tax. AMT for corporations will go away entirely, as the House version of the bill had proposed. For individuals, however, the AMT will remain, but with higher thresholds for application. Individuals with income under $500,000 or joint filers under $1 million are intended not to have to pay AMT under the compromise.
Some popular tax breaks will remain
In addition, the compromise plan retains some of the tax deductions and other favorable provisions that the House would have eliminated. They include deductions for medical expenses, student loan interest, and spending by teachers for classroom supplies, as well as exemptions for tuition waivers for graduate students.
Will tax reform pass?
The House and Senate members who worked on reconciling the two measures were confident that their changes would gather enough support in both houses of Congress to get passed quickly, and most of those following the process expect votes within the next week. Some past holdouts have won concessions during the process, including a few district- and state-specific provisions unrelated to taxes, in order to improve the likelihood of its passage. With so much on the line politically, taxpayers can expect another rushed job to integrate negotiated compromise provisions into formal legislative language, with these major changes coming into effect on Jan. 1.
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