EVAN HOROWITZ | QUICK STUDY
Mark Wilson/Getty Images
Republicans have cleared another key hurdle in their dash to pass a tax bill before Christmas. On Wednesday, negotiators from the House and Senate reached an agreement on how to reconcile their competing bills.
From the beginning, there was broad consensus on the big pieces: a substantial, permanent cut to the corporate tax rate remains the heart of this bill, flanked by temporary tax cuts for individuals, some limited relief for middle-class families, and a potentially destabilizing end to the requirement that all Americans buy health insurance.
Now, House and Senate negotiators have agreed on how best to pay for these changes — while also managing to introduce some entirely new, last-minute provisions, like a surprise cut in the top tax rate for individuals. Here’s what you need to know.
Gone is the House’s original, wide-ranging effort to eliminate a spread of popular tax breaks, like the deductions for medical expenses, interest on student debt, and graduate student tuition waivers. All these will remain in place.
Instead, the final bill focuses on narrowing two core deductions. First, the mortgage interest deduction will be capped at $750,000, down from the current cap of $1 million.
Second, the ability to deduct state and local taxes from your federal tax bill. The final provision is notably different from the House and Senate versions, which limited the deduction for property taxes while abolishing the ability to deduct state income tax payments.
Instead, the final rule will apparently allow taxpayers to claim up to $10,000 in a combination of state income taxes and local property taxes.
Perhaps the most important takeaway, however, when it comes to individual tax breaks, is that they are going to be a lot less useful for middle- and upper-middle-class families.
That’s because the Republican plan also doubles what’s called the standard deduction — a fixed-dollar amount that everyone gets to shield from federal taxes. And you can’t take both. Either you use the standard deduction, or you itemize in order to claim individual deductions for things like charitable giving or state and local taxes.
So when the standard deduction gets bigger, as it would under the Republican bill, itemizing will inevitably become more rare. Likely much more rare.
Here in Massachusetts, the number of people expected to continue itemizing will drop from roughly 37 percent of filers to more like 13 percent, according to the Institute on Taxation and Economic Policy. So even if the latest changes sound good to you, you may not ever get to use them.
Most Americans — and most Massachusetts residents — would likely see their tax bills shrink under this plan, at least in the early years. But the largest benefits still flow to the wealthiest.
As if to emphasize the point, House and Senate negotiators decided at the last minute to reduce the top tax rate for individuals from the current 39.6 percent to 37 percent.
That’s a bigger change than was contemplated by either the House or the Senate, and would help high-income residents in blue states like Massachusetts offset the losses they’ll experience with the narrowing of the deduction for state and local taxes.
Most of what we know about this bill comes from leaks, with the full text still under wraps. And some of the details remain rather vague.
Senator Mike Lee has said that the child-tax credit, which stands at $2,000 in the Senate bill, may yet be expanded further. One way to make this happen would be to extend this credit to working families who don’t earn enough to pay income tax but who do contribute payroll taxes.
Also unclear is whether this bill will do anything to placate the concerns of Maine Senator Susan Collins, a crucial Republican vote who has requested a package of additional changes designed to stabilize health care markets.
Look over this list and you’ll note that most of these last-minute changes cost money. Lowering the tax rate for high-earning individuals, further expanding the child tax credit, allowing some deductions for local income taxes — they all reduce tax receipts for the government.
But that can’t happen. The Senate bill was already as expensive as allowed under Senate rules. Somehow, these costs have to be offset.
There is one clear revenue-raising change. Rather than cutting the corporate tax rate from 35 percent to 20 percent, the latest version leaves its at 21 percent.
However, that may not be sufficient. Which means there are likely some other as-yet-unknown tax increases in this latest bill. When the full text is made public in the coming days, we’ll find out what they are — and how big an effect they might have in Massachusetts.
The Sagamore Bridge is down to a single lane in either direction until Memorial Day weekend. And local business leaders are fuming.Continue reading »
Janelle Chan, who was chief of real estate at the T, will be overseeing the state’s affordable housing programs, community service, and assistance for homeless people.Continue reading »
The Northborough-based pizza chain filed for Chapter 11 bankruptcy on Monday, citing seven years of sliding sales and revenue.Continue reading »
More restaurants are composting, but the industry is struggling to keep up with all that waste.Continue reading »
Johnson, 86, will hand the role to his daughter, Abigail, who has been chief executive since 2014.Continue reading »
Boston officials have escalated their rhetoric opposing a new app that lets drivers trade public parking spaces for cash.Continue reading »
In a raft of medical studies over the past generation, research has repeatedly pointed to some health benefits from drinking wine and beer in moderation.Continue reading »
With half the union’s executive board retired, there’s a wave of concern among rank and file workers about how their pensions will be safeguarded.Continue reading »
As the new chief executive, John Flannery is expected to do something about the company’s lagging stock price. And soon.Continue reading »