Making Sense of the House and Senate Tax Bills

A closer look at each major provision and how they stack up against current tax law

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Now that the Senate has passed their tax bill, many of my friends have been asking me the same kinds of questions about the bill and what it means for their livelihoods. The short answer: we don’t know, as nothing has been signed into law. We should keep in mind that if nothing else happened, we’d still be under current tax law, for better or worse. Still, that’s not a comforting feeling for most, hence the following questions.

1. “Will my income tax increase next year?”

First, it’s important to understand where we are in the legislative process. The next step after both houses pass their iterations of tax reform is reconciliation wherein select members of both houses “reconcile” the differences between the two bills. In reconciliation, a new temporary committee (a “conference committee” much like what you would see at the end of a congressional budget process) is formed to iron out the details between both houses’ versions. This is where the party makeup of each house becomes critical to know, even more so the members making up the committee. The Senate and House leadership are currently deciding which members to send to this special committee, so we don’t yet know who they are, but we can be sure that the committee will have a healthy amount of the minority party. Why? Congress, if anything, is a institution of tradition, and it’s customary to include “enough” of the minority membership in major pieces of legislation, the reason being that each party knows that they won’t hold power forever. Simply put, it is better to at least put on airs of bipartisanship rather than score big one or two times with the public in the short term but face the other party’s wrath when it later becomes the majority.

Back to the bill at hand, Majority Leader McConnell has said publicly that he plans to have the final version of the tax bill on the president’s desk by Christmas. When he says this, he’s talking about going through the probably exhaustive reconciliation process. I say exhaustive because he knows that he has even less room for error than he did in his frankly masterful shepherding of the Senate to passage. But now he, along with House Speaker Paul Ryan must also shepherd this more bipartisan committee to a final draft.

So while it’s too early to say if your federal income taxes will go up next year, we can do some comparisons of major provisions of the House/Senate bills with current tax law. Below is a table showing individual income tax brackets.

Notice that the House version reduces the current amount of tax brackets from 7 to 4, and that both the House and Senate’s top tax brackets remain roughly the same. Also keep in mind that this is the barebones income tax schedule without any deductions or credits assigned to your specific condition.

2. “Are there more tax deductions available?”

That depends on the deduction and what you plan to do in the coming years. Are you a student, or plan on going back to school? Do you have a job and see yourself getting a pay raise soon? Are you thinking of starting a family? Do you already have a family? Are you buying a home, second home or improving either one? Did you recently sustain major medical debt, or are you worried you might at some point? Are you thinking about starting a business? As you can see, the situation is different for everyone.

That said, if we were to assume that reconciliation yielded minor changes to the final bill and that bill were signed into law, then the answer is a general ‘yes’.

For now, though, compare the following types of deductions and tax credits to get a better idea of what is possibly in store for you.

Notice the House and Senate bills roughly double the current deduction limit for each category.

*AGI stands for Adjusted Gross Income and represents your total yearly income minus all deductions. A common mistake is thinking this excludes taxes, but in fact it includes all local, state and federal taxes. In fact, AGI is used by government to determine just how much in taxes you owe. It’s also used in other ways such as from student loan agencies to determine how much in monthly loan payments you’d be making.

*The individual mandate refers to the provision in the Affordable Care Act (or Obamacare) that requires all US citizens who do not qualify for the exemption to have health insurance or incur a yearly fee. There are two ways to measure the fee: as a percentage of household income or per person. Under current rules, you would pay whichever is higher.

*There are two major types of mortgage debt: equity and acquisition. Equity mortgage debt is money dedicated to purchasing a “main” home. Acquisition mortgage debt is money borrowed to improve your first home or build/improve your second home. Any homes beyond that do not qualify for the deduction.

*Pass-through income is income derived from any business that isn’t a large corporation such as a sole proprietorship, a joint venture, LLCs (Limited Liability Corporations) and S Corporations. Simply Googling more about these types of businesses will net you more information. The “pass-through” term comes from the fact that, since the small business is not large enough to sustain a heavy tax load and because we as a society want our small businesses to flourish, the typical taxes owed by a corporation are passed through to the individual in the form of individual income tax. Thus, pass-through taxes are treated as income taxes, brackets and all. There are almost 28 million small businesses in the US who rely on these pass throughs as part of their business model, so any changes made to this type of tax will have a big impact on people and communities.

It’s important to note that corporations located in the US pay, on average, something close to 21% of their total revenue in taxes as a result of leveraging the current tax code in their favor. Thus, the changes made in both houses will better reflect the effective corporate tax rate.

*Pulled from The Tax Foundation: “The Alternative Minimum Tax (AMT) was created in the 1960s to prevent high-income taxpayers from avoiding the individual income tax. This parallel tax income system requires high-income taxpayers to calculate their tax bill twice: once under the ordinary income tax system and again under the AMT. The taxpayer then needs to pay the higher of the two. The AMT uses an alternative definition of taxable income called Alternative Minimum Taxable Income (AMTI). To prevent low-and middle-income taxpayers from being subject to the AMT, taxpayers are allowed to exempt a significant amount of their income from AMTI.”[1]

The Alternative Minimum Tax is a bit of a misnomer as it is not really an alternative for most people and it doesn’t result in you paying the minimum amount if you are eligible. But what the AMT means, in a nutshell, is that if you are a person or corporation whose income exceeds your exemption amount (refer to the table above) who also itemizes to a large degree (such as corporations who often itemize their State and Local Tax (SALT) deductions), and in doing so would normally avoid paying your “fair share” based on the normal income tax schedule, you would then trigger the AMT schedule.

*The estate tax is tax on the net value of an estate who belonged to a deceased person and is taxed before the estate is carried over to new heirs.

3. “Are there any new taxes introduced?”

Based on my research reading assessments of both tax bills and listening to several House and Senate floor debates, I know of no new tax types introduced in either the House or Senate versions. Actually, as you saw in the above tables, some taxes are done away with for certain individuals or businesses. What’s arguably more important is the degree to which the taxes you pay now increase or decrease.

We should know soon who the members of this committee will be. Then we can gauge how they will vote based on their house’s bill vote and what they have said to the press the provisions they’d like to see. This last one is especially important if they held out on voting in favor of the last bill. Either way, the president may yet get a major piece of legislation signed into law before the year’s end. Stay tuned.

Citations

[1] The Tax Foundation’s information on the House/Senate provisions provided a baseline for my own comparisons. Their analysis can be found here: https://taxfoundation.org/2018-tax-brackets

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