House Republicans released long-awaited tax plan

On November 2nd House Republicans released their long awaited tax plan. The framework extends to many different areas of the tax code: two critical areas are tax deductions and credits. These reduce how much taxpayers owe, but they affect various income groups differently. Here’s How could the proposed changes to these policies affect your taxes.

How Exemptions Worked in the Past

Average Taxpayers (excluding the highest earners) are currently eligible for tax “exemptions” to reduce taxable income. In 2016 Americans could take a $4,050 personal exemption from their income (doubled to $8,100 if filing as a married couple), and then get additional exemptions for any dependents.

After exemptions taxpayers can further reduce their taxable income by taking tax deductions. The “standard deduction,” was taken by 69% of taxpayers in 2015 which is currently $6,300 for (most) taxpayers filing singly.

Among the other 31% of American taxpayers, mostly in higher income groups, “itemized” their tax returns. Itemized returns take advantage of more specific tax deductions based on their expenses – the deductions came out to more than they would have gotten through the standard deduction.

Changes to Deductions

• Republicans want to nearly double the standard deduction to $12,000 for those filing singly
• Republicans want to nearly increase the standard deduction to $24,000 for those filing jointly.
• The framework calls for the repeal of exemptions, consolidating these different parts of the tax system.
• The plan aims to simplify the tax code by gutting many itemized deductions. charitable contributions and mortgage interest would be retained.
• The state and local taxes deduction (SALT) would be replaced by a property tax deduction with a $10,000 cap.
• Under current law, SALT lets you deduct state and local income or sales taxes you owe from your federal taxable income and largely benefits blue states with higher taxes.
• Home mortgage interest deduction would be capped at new mortgages of $500,000 or less, down from $1 million.

Credits

Tax Credits reduce federal income taxes owed down to zero. Refundable Tax credits can reduce owed taxes even more, allowing some taxpayers to receive a net gain from the federal government after filing. Under the Republican plan there would be an expansion of the child tax credit, increasing its value to $1,600 from $1,000. The plan also provides an additional $300 credit for “non-child dependents” and creates a new “Family Credit.”

Other Proposed Changes

The tax policies we’re looking at above are just part of U.S. federal tax code. Income tax rates are central to tax reform proposals. the Republican plan would also simplfy the income brackets by reduce the seven brackets currently used to four. Additionally the platform calls for lowering rates for many, but increasing them for some in the lowest bracket. It also calls for the repeal of the estate tax after six years time. Additionally the plan proposes a large, temporary decrease in the corporate tax rate from 35 to 20 percent, among many other changes to the business tax code.