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All your major questions about the GOP tax plan, answered

The Washington Post logoThe Washington Post 11/3/2017
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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. Below, find 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.

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President Trump often calls this tax cut the "biggest in the history of our country," but The Washington Post Fact Check team gives that statement four Pinocchios. 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 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, 2018. 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 multi-day "markup" of the tax bill on Nov. 6. 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-Tex.), will prepare a revised bill that could include changes negotiated with members outside the committee that would smooth the bill's passage. Further changes could be made after committee passage but before the bill is brought to the floor House Speaker Paul D. Ryan (R-Wis.) has said he wants the legislation through the House by Thanksgiving.

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.

U.S. President Donald Trump holds sample tax forms as he promotes a newly unveiled Republican tax plan with House Republican leaders in the Cabinet Room of the White House in Washington, U.S., November 2, 2017. © REUTERS/Carlos Barria U.S. President Donald Trump holds sample tax forms as he promotes a newly unveiled Republican tax plan with House Republican leaders in the Cabinet Room of the White House in Washington, U.S., November 2, 2017.

INDIVIDUAL TAXES

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. For reasons explained below, most individuals earning $12,000 or below and $24,000 for couples will pay zero because of the doubling of the standard deduction.

Whether individuals or households will pay more or less will depend on a wide variety of factors, including whether they take the standard deduction which reduces taxable income by a fixed amount or they take targeted tax deductions, like subtracting mortgage interest or and state local taxes.

Most Americans are likely to see a small reduction in taxes under the plan. At the same time, many Americans will pay more, particularly those who do not take take the standard deduction. People who make in the high hundreds of thousands of dollars a year or just over $1 million a year could see the biggest benefits.

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 non-child dependent that Republicans have proposed, which is subtracted from the family's overall tax liability.

Whill 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 -- that will mean people with very expensive newly purchased homes won't be able to deduct the current $1 million on their interest payments.

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.

That reflects a compromise, as an earlier version of the Republican tax plan would have would have eliminated the ability for people to deduct their state and local tax payments from their federal tax payments. That change would have raised revenue to help Republicans offset the losses from the massive rate cuts, and some proponents of it argued that the state and local tax deduction (known as "SALT") amounted to a federal subsidy of high-tax states.

Republican representatives from districts whose residents pay high state and local taxes -- especially those from New York, New Jersey and Pennsylvania -- balked at that plan, and it became one of the most contentious intraparty fights in the run up to the bill's introduction. It remains to be seen whether the compromise will win over Republicans who threatened to vote against the bill because of SALT.

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 non-child 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. There will also be an additional $300 credit for any parent or non-child 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.

Aparna Mathur at the American Enterprise Institute estimated that middle class families that make between $60,000 and $80,000 a year are likely to be better off under the new plan and see a tax cut compared to the status quo. Information about how the tax credits will phase out at higher income levels was not yet available.

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 under $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 rate 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.

CORPORATE TAXES

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. After taking advantage of a variety of special deductions, U.S. corporations paid an effective marginal tax rate of just 18.6 percent in 2012, a rate that went unchanged despite ups and downs in the economy over the previous decade, according to a Congressional Budget Office report.

So the cut in rates will hurt some companies, and help others. The nation's retailers pay the highest effective income tax rates of any industry, according to Matthew Shay, president of the National Retail Federation. (Walmart paid a 29.5 percent rate in its most recent statement.) The National Retail Federation has been pushing for "a rate as low as we can get it," Shay said. He is also pressing for cuts in the tax rates on pass through entities, noting that many small retailers incorporate to pay rates lower than individuals would pay.

Boosting corporate income tax rates and squeezing loopholes would hurt other companies, such as capital intensive industries. Oil and gas companies, for example, take advantage of special depreciation rates, two of which are about a century old. International companies — such as pharmaceutical or technology firms —shelter income abroad to avoid taxes in the United States.

A report by the Institute on Taxation and Economic Policy covering 2008-2015 estimates that capital-intensive industries such as the utilities, gas and electric sector paid only 3.1 percent effective corporate tax rate, telecommunications 11.5 percent and Internet services and retailing 15.6 percent effective rates. The report said that over the eight year period just 25 companies claimed $286 billion in tax breaks.

What is the pass through rate?

This is a complicated one: 70 percent of the income pass-through businesses earn will be taxed at the rate of the business owner's individual tax rate (i.e. 25 percent, 35 percent of 39.6 percent). The remaining 30 percent will be taxed at a new low rate of 25 percent rate.

According to the Brookings Institution, about 95 percent of U.S. businesses are pass-through companies, meaning the income earned from the business is passed through to the owner's individual income tax. The GOP bill aims to give some small businesses a rate cut while still ensuring doctors, lawyers, hedge fund managers and other high-earning business owners pay their fair share.

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 this continue? Almost definitely yes. The tax bill would create a new foreign minimum tax on foreign earnings in an effort to prevent companies from simply stashing money abroad without paying any U.S. tax. But as long as that minimum rate is lower than the U.S. corporate income tax, there is incentive for companies to move as much of their profits as possible to low-tax countries.

Will companies still be able to take advantage of loopholes?

Yes!

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 a about a quarter of it as they take it out of the ground.

The industry says it deserves special treatment because of the high risks involved in drilling, although advances in seismic testing have greatly reduced the chances of drilling dry holes. The largest oil and gas companies have not been able to benefit fully from the depletion allowance since a change in the law in 1975 and the allowance was reduced somewhat. But there are still plenty of big independent companies that qualify, including companies like Apache and Continental Resources — and during the campaign President Trump listened to a lot of the advice given by Continental's chief executive Harold Hamm.

The proposal does eliminate some oil and gas items. It repeals creditrs for enhanced oil recovery and production from marginal wells, but those items have virtually no revenue effect.

Which loopholes will disappear?

House negotiators have been searching to raise revenue to pay for the big cuts in the tax bill, and many have been looking for provisions or loopholes they could eliminate that are too complicated or obscure to arouse public outcry.

As a result, many businesses have been waging a lobbying battle to keep those proposals out of the bill in the first place. For example, the insurance business has been worried that the tax bill would limit their ability to deduct additions to reserves against future claims. The effort failed, however.

How much revenue will the new proposal generate? About $14.9 billion over 10 years.

Mike Debonis, Zachary Goldfarb, Carolyn Johnson, Heather Long, Steven Mufson, Damian Paletta, Patrick Reis and Kevin Uhrmacher contributed to this report.

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