Last-minute glitches and furious horse trading added real drama to the Senate’s push to approve its version of a major overhaul of the nation’s tax rules in the early hours of December 2. Now, things really get interesting as House and Senate Republicans work to iron out the differences in their respective bills.
Here's a look at some of the issues that could affect you:
1. Bigger Standard Deduction, Goodbye Exemptions
A hallmark of the House and Senate tax plans is to nearly double the standard deduction, which would not only make more income tax-free but also simplify the system. Congressional analysts say bulking up the standard deduction would let more than 30 million taxpayers avoid the hassle of itemizing write-offs on their tax return because the bigger standard deduction would exceed their qualifying expenses.
The House and Senate would raise the standard deduction to $12,000 on single returns, $18,000 for head-of-household filers and $24,000 on joint returns—up from $6,350, $9,350 and $12,700 now. As under present law, the Senate (but not the House) would also give a higher standard deduction to seniors (age 65 or older) and blind people.
In exchange for the bigger standard deductions, the Senate and House bills get rid of the $4,050 deduction for each exemption claimed on the return. So a married couple with four kids would lose $24,300 in exemptions in exchange for the $11,300 boost in their standard deduction.
2. Homeowners Lose Tax Breaks
The Senate bill would continue to allow homeowners to deduct the interest on up to $1 million of mortgage debt used to buy or improve a principal residence and a second home. But the Senate would eliminate the deduction of interest on up to $100,000 of home-equity debt.
The House bill would limit the deduction of interest paid on new mortgages of $500,000 or less. In addition to repealing the deduction on home-equity lines of credit, the House would also prohibit homeowners from deducting mortgage interest on a second home.
Both the Senate and House bills would throw a curve ball at some homeowners planning to cash in on tax-free home sale profit. Currently, the law allows you to shelter up to $250,000 of such profit, or $500,000 if you’re married, as long as you have owned and lived in the house for two of the five years before the sale. The proposals making their way through Congress would stretch the ownership and occupancy requirements to five of the eight years leading up to the sale.
In addition, the House bill would phase out the exclusion for single taxpayers with average modified adjusted gross income of more than $250,000, or $500,000 for married couples in the year of the sale and the two preceding tax years.
3. Deduction for State and Local Taxes
One of the most valuable tax deductions allowed for individuals—the write off for what they pay in state and local income, sales and property taxes—is on the block.
Originally, the Senate plan called for eliminating all of these deductions, but, in the end, it included a break for property taxes. The House’s plan wipes out the write-off of income and sales taxes, but allows the deduction of up to $10,000 a year in property taxes.
4. Medical Deductions in Jeopardy
The House bill calls for axing the itemized deduction for unreimbursed medical expenses that exceed 10% of a taxpayer’s adjusted gross income. The Senate would go the other way: retaining the write-off for two years and lowering the income threshold to 7.5%.
5. Divorce Gets Costlier
The Senate bill preserves a deduction for ex-spouses who pay alimony under a divorce decree.
The House plan would get the tax law out of such financial arrangements. For any divorce decree executed (or altered) after the end of this year, alimony payments would be tax-free to the recipient, and the paying spouse would not get a deduction.
6. Double-or-Nothing for Teachers' Tax Break
The Senate bill would double the $250 tax deduction teachers can claim for using their own money to buy classroom supplies. The House bill would eliminate the deduction.
7. Say Hello to a Higher Child Tax Credit and a New Family Tax Credit
The Senate and House both propose to increase the amount of the child tax credit, as well as the income thresholds for qualifying for the credit. The House would hike the current $1,000 credit to $1,600 per child under the age of 17, and the Senate would increase it to $2,000 and change the qualifying age to 17 and younger.
In addition to the enhanced child tax credit, the House bill provides for a new, five-year credit of $300 for a taxpayer, spouse and non-child dependents. The Senate would give a credit of $500 for each dependent who is not a child. These credits would disappear for high-income earners.
8. Tax Breaks for Students Could Be Erased
The House bill would abolish the $2,500 deduction for interest on student loans. The Senate bill would retain it.
The Senate bill would also preserve the tax treatment of tuition benefits earned by graduate students. Currently, those benefits aren’t taxed as income. The House would tax those benefits.
9. A Reprieve for Dependent Care Plans
The Senate bill would continue to allow parents to put aside pre-tax money in dependent care flexible savings accounts for child care costs. The House bill at first abolished this tax break, but now says it will keep it until 2023.
10. Credits and Deductions (That Lots of People Take) on the Chopping Block
The Senate bill would eliminate a popular deduction for moving expenses. The deduction, which is available to itemizers and non-itemizers, allows you to deduct the cost of moving yourself and your household goods to a new area as long as it’s at least 50 miles from your old home. Members of the military would still be able to claim it. The House bill also scraps the deduction, with an exception for members of the military.
Both the Senate and House bills would repeal miscellaneous itemized deductions for tax preparation fees, unreimbursed business expenses, and investment fees.
The Senate bill retains the credit for the elderly and the disabled, which can be worth up to $1,125 to qualifying low-income taxpayers and the credit for plug-in electric vehicles, which is worth of up $7,500. The House will would scrap both of these credits.