House Republicans on Thursday released the Tax Cuts and Jobs Act, kicking off a new, more public phase of their effort to rewrite the nation's tax code. Here are answers to many common questions about the tax bill.
How big is the tax cut in this bill?
$1.5 trillion. While Republicans often say the total tax cut is $5.5 trillion over 10 years, the reality is most of the reductions are paid for by raising taxes elsewhere. The tax cuts that are financed by taking on new debt add up to $1.5 trillion.
President Donald Trump often calls this tax cut the "biggest in the history of our country." The easier way to compare this tax bill to the tax cuts under past presidents is to look at how big the cut is as a size of the economy, which is measured by gross domestic product.
Trump's tax plan works out to 0.9 percent of GDP in the first four years, far smaller than the 2.9 percent of GDP tax cut passed under President Ronald Reagan in 1981.
When is the bill scheduled to kick in?
Most provisions of the bill, if passed this year, are scheduled to take effect Jan. 1. If it drags into next year, lawmakers could make it retroactive or set a new implementation date.
What happens after the release of the bill?
The House Ways & Means Committee, the tax-writing committee, is scheduled to begin a multiday "markup" of the tax bill Monday. The panel's members will have the opportunity to propose changes and then will ultimately vote to send the bill to the floor.
Ahead of the markup, Chairman Kevin Brady, R-Texas, will prepare a revised bill that could include changes negotiated with members outside the committee that would smooth the bill's passage.
The Senate, meanwhile, will launch a parallel process in the coming weeks, led by the Senate Finance Committee. The two chambers hope to resolve any differences and pass a final bill before year's end.
How are individual rates changing?
The plan will reduce the number of tax brackets from the current seven to four. A 12 percent rate would apply to individuals earning up to $67,500 and married couples earning up to $90,000. A 25 percent rate could apply to up to $200,000 for individuals and $260,000 for couples. A 35 percent rate would apply until $500,000 for individuals and up to $1 million for couples. A 39.6 percent rate would apply above $500,000 for individuals and above $1 million for couples. Most individuals earning $12,000 or below and $24,000 for couples will pay zero.
What's happening to the standard deduction and personal exemptions?
The House Republican plan proposes roughly doubling the standard deduction, a change they believe will lead many more Americans to take the standard deduction rather than itemize their deductions.
But they are also proposing to eliminate the $4,050-per-household-member personal exemption, which could mean large families might not see a net benefit.
Currently, a married couple with two children who files jointly and takes the $12,700 standard deduction would not pay tax on their first $28,900 of income. That family, under the GOP plan, would be eligible only for the higher $24,000 standard deduction. But, as long as its total income is under $230,000, it would also be eligible for a larger $1,600 per child tax credit and a $300 credit for each taxpayer and nonchild dependent that Republicans have proposed, which is subtracted from the family's overall tax liability.
Will I still be able to deduct mortgage interest and charitable gifts?
Technically, yes. The mortgage interest and charitable deductions aren't going away, but there's a new cap on the mortgage interest deduction for newly purchased homes — up to $500,000 in loan debt.
What's happening to the state and local deduction?
Under the compromise, people will still be able to deduct up to $10,000 on the property taxes they pay locally, but they will no longer be able to deduct the other taxes they pay to state or local governments from their federal tax payments.
What's happening to the child tax credit?
The plan introduces a new family tax credit that expands the child tax credit and adds a new credit for parents and nonchild dependents. The current child tax credit is currently worth up to $1,000 per child, and will increase to $1,600 per child under the plan. That's short of the $2,000 recommended by Florida Republican Sen. Marco Rubio. There will also be an additional $300 credit for any parent or nonchild dependent.
Increasing the child tax credit is important to make sure that most families do not pay higher taxes, because the plan eliminates the personal exemptions — currently excluding $4,050 of income from taxes per family member. The personal exemptions are especially valuable to large families.
What about the earned income tax credit?
The bill would make no changes to the Earned Income Tax Credit, a provision that gives low- and moderate-income working families a tax credit equal to a percentage of their earnings. The tax credit extends up to a certain income threshold, beyond which the value of the credit phases out.
The credit is intended to give low-income parents an additional financial incentive to work. Because the EITC is a tax credit, rather than a deduction, even low-income parents who take the new, larger standard deduction of their tax returns would still benefit.
What happens to investment income?
The tax plan does not make direct changes to how income on investments is taxed, but what people will pay could change as a result of other provisions in the plan.
Today, the same rules apply to dividends and capital gains, but differ depending on an individual's earnings and how long they have held an asset. Individuals who make less than $37,950 a year pay no taxes when they sell an asset after holding it for a year. Individuals who earn more than that but less than $418,400 a year pay a 15 percent long-term capital gains rate and people who earn more than that pay a 20 percent rate.
For short-term capital gains — for assets held for less than a year — people pay taxes at the same rate as they do on their ordinary income. The same rates apply to dividends, but investors need to hold the asset for 60 days to qualify.
For individuals earning more than $200,000, they must pay an additional 3.8 percent tax on capital gains and dividends, thanks to a provision in the Affordable Care Act.
The Republican tax plan doesn't change these rules directly, but by setting new income tax rates, it means many investors will pay less in taxes on short-term capital gains and dividends because their ordinary income tax rate will fall.
Will I have issues with my 401(k)?
Though it was considered, the plan makes no changes to retirement savings tax breaks.
What about the estate tax?
The Republican bill would immediately double the exemption on the death tax, a levy of up to 40 percent for very large estates when their holder dies, and after six years repeal it entirely.
All but the largest estates — current those with a gross value of more than $5.49 million in 2017 — are exempt from the tax. On average, fewer than 1 out of every 500 Americans who die in a given year leave estates subject to the tax.
Will companies pay less in corporate taxes?
Some will and some won't.
The United States has one of the highest corporate income tax rates at 35 percent, but few companies pay that much. U.S. corporations paid an effective marginal tax rate of just 18.6 percent in 2012, a Congressional Budget Office report.
So the cut in rates will hurt some companies and help others.
Will companies still be able to hold money abroad?
No. At least not tax free. The tax bill will force them to pay a minimum tax regardless of where the profits are. But U.S. companies that take advantage of lower income tax rates abroad will still have incentives to do so.
The companies that benefit the most from this are technology and pharmaceutical companies. These firms can transfer their intellectual property to a low-tax place, such as Ireland, and then the U.S. unit pays royalties on the sales to customers in the United States. That lowers their U.S. tax bill by boosting expenses in the United States, and creating profits in countries with low tax rates.
Will companies still be able to take advantage of loopholes?
Oil and gas tax breaks cost about $2 billion a year, but they are among the most durable tax breaks in the code. A century ago, Congress adopted a provision that allowed companies to write off "intangible drilling costs" in the first year of exploration. The provision still exists. The depletion allowance, first adopted 91 years ago, lets companies treat oil and gas in the ground as capital equipment; thus they were allowed to write off about a quarter of it as they take it out of the ground.