The U.S. Senate recently passed its version of the Tax Cuts and Jobs Act, which would make sweeping changes to the U.S. tax code. While the lower corporate tax rate has gotten lots of news coverage, the bill makes many significant tax changes for individuals. With that in mind, here are 11 major changes the Senate tax reform bill would make that could affect you.
1. There'd still be seven brackets -- but with different rates and income thresholds
Unlike the House of Representatives' version of the Tax Cuts and Jobs Act, which aims to simplify the tax code by consolidating the tax brackets into four, the Senate version would keep the current seven-bracket structure.
However, the seven tax rates and the income ranges to which they apply would be significantly different. The rates changed slightly from the initial version released by the Senate, as the final bill calls for marginal tax rates of 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%. All but two of these (10% and 35%) are lower than the current corresponding rates.
2. The standard deduction would be much higher
The Senate bill would nearly double the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly. One caveat: The bill also eliminates the personal exemption, which could offset the higher deduction and then some, especially for larger families.
3. Deductions for mortgage interest, charitable contributions, and medical expenses would remain
In the Senate's version of the bill, the mortgage interest deduction would remain. Homeowners would still be allowed to deduct interest paid on up to $1 million of mortgage debt, but would no longer get a deduction for interest on home equity loans.
In addition, the charitable contribution deduction would remain. These two deductions are in line with the GOP's tax framework released earlier this year.
One surprise is that not only is the medical expense deduction, which is eliminated in the House version, preserved in the Senate bill, but it becomes even more generous. Current tax law allows deduction of medical expenses above 10% of AGI, while the Senate bill would reduce the threshold to 7.5%.
4. Property taxes would still be deductible, but not state and local income taxes
This has been perhaps the most controversial aspect of tax reform on the individual side. The deduction for state and local taxes, also known as the SALT deduction, is an extremely valuable deduction for residents of high-tax states such as New York, New Jersey, and California, just to name a few examples.
While the Senate bill eliminates this deduction for state and local income taxes, taxpayers who itemize can still deduct up to $10,000 of property taxes.
5. The child tax credit would increase
The Senate version of the Tax Cuts and Jobs Act would double the child tax credit to $2,000, and would also nearly more than quadruple the income threshold at which the credit starts to phase out, from $110,000 to $500,000 for married couples. However, only the first $1,000 of the credit would be refundable, meaning that this is the maximum a taxpayer could get back if their federal income tax bill is zero.
6. The adoption tax credit would remain
While it's not a widely used credit, the adoption tax credit is quite valuable to those who do use it. The Senate tax reform bill keeps this credit, capped at $13,460 per child, in place.
7. The AMT would remain, but it'd get a tweak
In order to help pay for other last-minute changes to the bill, the alternative minimum tax, or AMT, remains in the Senate tax bill. However, one major concern is that the tax, which is intended to ensure that wealthy taxpayers pay their fair share, applies to many middle-income households as well. The Senate bill addresses this by increasing the amount of income necessary to trigger the AMT.
8. The estate tax would apply to even fewer households
Under current tax law, the estate tax apples only to the top 0.2% of households, since it is assessed on estates valued at $5.49 million or more per individual ($10.98 million per couple). The Senate bill doubles these thresholds, making the estate tax applicable to even fewer people.
9. Tax benefits for education would remain
While the House version of the bill makes several cuts to education tax benefits, the Senate's version leaves them alone. These include the valuable student loan interest deduction, which is an above-the-line deduction, meaning that taxpayers can use it even if they don't itemize.
10. The teacher tax deduction would double
One of the biggest complaints after the House version of the bill was released was that it eliminated the deduction available to teachers for up to $250 of out-of-pocket classroom expenses.
In contrast, the Senate's version would double this deduction to $500, which should come as welcome news to educators. As a former high school teacher, I can tell you that the vast majority of teachers spend more than $250 on supplies for their classrooms.
11. The individual mandate would go away
Finally, the Senate version of the Tax Cuts and Jobs Act eliminates the individual healthcare mandate in order to pay for some of its other tax cuts. The idea here is that without the threat of tax penalties, fewer Americans will choose to purchase health insurance, which would result in fewer government subsidies being paid out.
Some common ground, but several key differences that need to be resolved
Keep in mind that this is just the Senate's version of the tax reform bill -- the House of Representatives passed its own version. Before it could become law, the House and Senate will need to pass identical bills.
To be clear, there is a lot of common ground here. Among other things, both bills would roughly double the standard deduction, keep the deduction for charitable contributions, and allow a $10,000 property tax deduction.
On the other hand, there are some key differences that will need to be ironed out. On the individual side alone, major differences regarding the individual health insurance mandate, tax bracket structure, child tax credit, and medical expense deduction will need to be dealt with.
The bottom line is that a final tax reform bill is likely to look completely different from either of the bills that have passed, so all of the provisions discussed here have a long way to go before they become law.
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