Legislators in Washington have been haggling for weeks about how to reform the U.S. tax laws. After successive favorable votes by both houses of Congress, Republicans were faced with the daunting task of resolving two competing proposals into a single package that could satisfy lawmakers throughout Capitol Hill.
Late Friday afternoon, Republican leaders presented their final resolution of the House and Senate versions of the tax reform bill. Now, the package will go forward to another vote, with the House expected to go first and the Senate second. Although the compromise package incorporates many of the changes that people expected to see , a few last-minute tweaks reveal some of the key hot-button issues that might otherwise have threatened the measure’s passage.
What the bill does for individual tax rates and the standard deduction
The final bill will keep the current seven tax brackets, but the rates for each will be lower. The final rates will be 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Those rates generally reduce the current levels by as much as 4 percentage points compared to the current system.
The standard deduction will almost double, to $12,000 for singles, or $24,000 for joint filers. Personal exemptions will disappear, largely offsetting the positive impact of the rise in the standard deduction for taxpayers who have families.
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How the bill handles business income
The final bill reduces the corporate tax rate to 21%. That’s down from the current 35% maximum rate, but slightly higher than what most lawmakers had tried to get.
For small businesses, a business income deduction of 20% will be available for up to $315,000 in income. The move aims to put small business on an even keel with their larger counterparts, although the reduction is less than what lawmakers had sought in their original versions of the reform package.
What happens to popular deductions under the bill?
One of the key sticking points in the tax reform debate was how to handle key deductions. Originally, some lawmakers had sought to get rid of deductions for state and local taxes, a key provision that many taxpayers use in itemizing. Later developments led to preserving deductions for state and local property tax , but even that wasn’t enough to put lawmakers entirely at ease.
The final measure allows a $10,000 deduction for state and local taxes, but it apparently will require taxpayers to choose one of three major types of taxes: income, sales, or property taxes. Current law allows pooling of those taxes, so the change is slightly more draconian than some had anticipated.
On the mortgage interest front, existing mortgages will remain deductible at the levels allowed under current law. On new mortgages, up to $750,000 in purchase debt will be eligible for the interest deduction.
Tax credits and the bill
Some of the most adamant opposition to tax reform centered on key tax credits. The final bill expands the child tax credit in a couple of key ways. First, the amount will rise from $1,000 to $2,000 per child. In addition, a greater amount of that credit — $1,400 — will be available as a refundable credit to families that otherwise wouldn’t have enough tax liability to make full use of the credit.
In addition, the final bill will keep the adoption tax credit unchanged. Early efforts to find ways to raise tax revenue to offset broader cuts elsewhere had included eliminating the adoption credit, but advocates of the provision had enough support to restore it, apparently in full.
Estate tax exemptions to double
Finally, lawmakers agreed, as expected, to keep the estate tax in existence, but to dramatically increase the amount of money one can pass to heirs at death without paying it. The exemption will double to $11.2 million in 2018, and then rise with inflation after that.
It’s time for yes or no
There’s always the theoretical possibility that lawmakers could offer amendments to the proposal, but Republicans will want to avoid that at all costs in order to avoid further delays that would almost certainly delay reform well into 2018. Leaders seem confident that the measure will pass, although narrow margins in the Senate give potential swing votes considerable power to affect the outcome. Taxpayers will simply have to wait and see what their individual representatives and senators say in the run up to next week’s votes.
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