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How your taxes could change next year

We’ve now got competing tax-cut bills in the House and Senate, which means some epic political battles are underway over who will win and who will lose in the final legislation. While there are major differences in the two bills, however, there are also some important similarities, which suggest points of agreement likely to end up in a final bill. Such as:

A 20% corporate tax rate. Both chambers want to slash the top corporate rate from 35% to 20%, while also cutting taxes for privately owned business. That won’t affect most taxpayers directly. But it forces some important changes on the individual side of the tax code, because some of the revenue lost to corporate cuts must be made up elsewhere.

The state-and-local deduction is very vulnerable. The Senate wants to kill the so-called SALT deduction completely, while the House would put a new cap of $10,000 on the deduction, and limit it to property taxes only. About one-third of all taxpayers claim this deduction, which costs Washington about $100 billion in foregone revenue each year. So, killing or capping it will affect a lot of people.

Personal exemptions could disappear. Both chambers want to eliminate personal exemptions, while doubling the standard deduction. In general, personal exemptions favor families with kids, since they can claim a $4,050 exemption for each one, at current levels; if you had five kids, that would lower your taxable income by $20,250, plus another $8,100 for two parents. The higher standard deduction will be a break for some filers who don’t itemize, and some who do itemize now may find they’ll pay less with the higher standard deduction.

The alternative minimum tax would die. Taxpayers subject to this provision hate it, because it seems like a surtax pushing their payments higher than they’d be under the regular tax code. Both the House and the Senate want to kill it completely. But this doesn’t automatically mean taxes will go down for people who now pay the AMT. I used my 2016 tax return to calculate how my own taxes would change under each proposal. Under the House plan, the end of the AMT was one factor that helped cut my total tax bill by about $5,000. But under the Senate plan, my tax bill went up by about $1,500, even with the demise of the AMT. A filer’s ultimate tax burden will depend on many changes, not just the fate of the AMT.

The mortgage-interest deduction will become less valuable. Congress won’t dare kill this cherished tax break for home owners, but two changes could reduce its usefulness. The House wants to limit the size of a mortgage on which interest can be deducted from $1 million to $500,000, and do so only for new purchases. That would affect a small portion of future home buyers. But capping or killing the SALT deduction, combined with raising the standard deduction, will sharply reduce the number of people who itemize their deductions and get the benefit of the mortgage-interest break. With fewer itemized deductions allowed, it will simply make sense for more people to stick with the standard deduction — one reason the real-estate industry strongly opposes the new limits on SALT deductions.

Some important things won’t change. There were rumors a few weeks ago that a tax-cut bill might include new, lower limits on the amount of 401(k) contributions that are tax-deferred. But neither bill includes any such changes. There’s no significant change to capital gains taxes, either. The House wants to eliminate the estate tax, while the Senate wants to double the threshold at which it kicks in, to $10 million. But it’s possible nothing will change there, either, since leaving the estate tax intact might be one concession Republicans make to get wavering moderates to support their bill. The current threshold of $5.49 million means the federal estate tax only affects wealthy families.

That would still leave plenty to fight over. Congress must still determine what the new tax brackets must be and what income levels they apply to. Early analysis has already shown that taxes will go up for some taxpayers under the new legislation, which can obviously create political problems. The real effort now is harming as few Americans as possible. Harming none would be ideal.

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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman