8 changes in the new tax bill

Published on December 20th 2017

The House and Senate have reached a compromise and passed a final tax bill. This legislation is the most significant overhaul of the federal tax code in a generation.

This Facts in Focus walks you through the historical data you need to evaluate these changes.

As a nonpartisan group, USAFacts takes no position on the merits of the proposed tax changes. None of the figures below have been adjusted for inflation.

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Historical taxes collected by the federal government:

1. Changes to itemized and standard deductions

Deductions lower a taxpayer’s tax bill by reducing the amount of income subject to tax. Taxpayers can elect to receive a standard deduction or to itemize their deductions. Tax credits and the personal exemption can be claimed regardless of whether a taxpayer elects to itemize or uses the standard deduction.

About 150 million tax returns are filed each year:

Income brackets:

 

Roughly two thirds of tax filers claim the standard deduction and one third itemize their deductions:

 

Those deductions, both standard and itemized, allow them to remove $2.1 trillion from their taxable income:

Income brackets:

 

Two changes have been made: double the standard deduction and eliminate the personal exemption.

Currently, married couples who do not itemize can exclude $20,800 of their income from taxation, through a combination of the standard deduction and the personal exemption . Single taxpayers can exclude $10,400. Single taxpayers with children add an additional $4,050 per child through the personal exemption.

The personal exemption reduces the taxable income of taxpayers with adjusted gross income lower than $384,000 ($436,300 for married couples filing jointly), and can be used by both taxpayers claiming the standard deduction or choosing to itemize. Those who itemize and have incomes below the phase-out level lose the personal exemption.

The new standard deduction is:

Married taxpayers filing jointly: $24,000

Single filers with children: $18,000

Single filers without children: $12,000

Taxpayers using the standard deduction remove $900 billion from their taxable income annually:

Income brackets:

 

The legislation retains deductions for charitable contributions, student loan interest, and education savings. It reduces but retains deductions for home mortgage interest, state and local taxes, medical expenses, and personal casualty losses. It eliminates most other deductions, including tax preparation expenses, moving expenses, and alimony payments.

In addition, it repeals the limitation on itemized deductions (i.e., the so-called Pease provision) currently in place for high-income taxpayers.

Taxpayers who choose to itemize do not pay tax on roughly $1.2 trillion in income annually:

Income brackets:

 

Aggregate amount of select deductions:

Additional information on the Mortgage Interest Deduction, the Charitable Deduction, and the State and Local Deduction

 

Average tax savings per return (family unit) by income (2015):

Income QuintileState & Local Tax DeductionMortgage Interest DeductionCharitable Deduction
All$645$484$324
Bottom 20% ($0-$8k)$7$3$1
Second 20% ($8k-$31k)$35$17$10
Middle 20% ($31k-$61k)$144$84$45
Fourth 20% ($61k-$113k)$452$373$151
Top 2%-20% ($113k-$711k)$1,569$1,669$727
Top 1% ($711k+)$21,723$6,971$14,330

 

2. Adjust tax brackets

 

Total revenue from individual income taxes:

The legislation keeps seven tax brackets and adjusts the rates to: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Tax brackets have changed many times. Currently, our seven tax rate brackets are: 10%, 15%, 25%, 28% 33%, 35%, and 39.6%.

NOTE: In this image, individual income tax brackets are based on married filing jointly status, and tax rates are for ordinary income (not dividends or investment income). The sources are the Internal Revenue Service and Congress.gov.

3. Repeal the Alternative Minimum Tax

The current Alternative Minimum Tax (AMT) was created in 1982 to prevent high-income earners from using deductions, credits, and other tax benefits to avoid taxation. In the years prior to 2012, the AMT was not indexed to inflation during which time an increasing number of upper and middle income taxpayers were subjected to the AMT.

The legislation retains the AMT for individuals, but increases the exemption amount and phaseout threshold.

Alternative Minimum Tax paid as portion of all federal individual income taxes:

 

Roughly 4 million tax returns are subject to the Alternative Minimum Tax…

Income brackets:

 

…and those taxpayers pay almost $29 billion in additional taxes as a result.

Income brackets:

*Data not available from source for 500K+ income bracket in 2003

 

4. Changes in individual tax credits

Tax credits, like tax deductions, are targeted benefits that allow taxpayers to reduce their tax bill. Unlike tax deductions which lower the amount of income subject to tax, tax credits subtract a set amount off the final tax bill. Credits that are refundable can result in a cash refund if your income tax liability falls below zero.

Expand the Child Tax Credit

The Child Tax Credit reduces the income tax liability of qualifying families by $1,000 per child. If a family does not owe any taxes, they may be eligible for the additional child tax credit if certain conditions are met.

The legislation increases the Child Tax Credit to $2,000 per child, plus $500 for any non-child dependents. The credit is refundable up to $1,400. The income thresholds at which the credit phases out are raised to $400,000 for married taxpayers and $200,000 for single taxpayers, allowing more taxpayers to claim the credit.

More than 22 million taxpayers claim the child tax credit…

…and receive about $27 billion in credits:

Income brackets:

 

Nearly 20 million taxpayers claim the additional child tax credit…

…and receive more than $26 billion in credits:

Income brackets:

 

5. Repeal estate taxes

The estate tax is a tax on inherited wealth. Starting in 2001, the tax was set to be phased out by 2010. This accounts for the gradual decrease in estate tax revenue during that decade, culminating in temporary repeal in 2011. The tax was reinstated in 2012, but only on estates larger than $5.5 million, or $11 million for a married couple.

The bill raises the threshold to $10 million ($20 million for a married couple) starting in 2018.

Estate taxes paid as portion of all federal taxes:

*Note: Totals are from the Treasury and may differ from total IRS data shown elsewhere in this report

 

Roughly 12,000 returns were subject to the estate tax in 2015…

Estate Size:

 

…resulting in $17 billion in taxes paid.

Estate Size:

 

6. Lower the corporate tax rate

The bill reduces the corporate income tax rate to a flat 21% starting in 2018.

Corporate income taxes paid as portion of all federal taxes:

*Note: Totals are from the Treasury and may differ from total IRS data shown elsewhere in this report

 

The corporate tax rate (on the last dollar of income) is currently 35%…

…and corporations paid nearly $300 billion in income taxes in the most recent year of data:

*Data for corporations refers to those businesses registered as “C-Corporations.” For data on other business types, see the following section.

7. Reduce taxes paid by other business types

“Pass-through” businesses include S-corporations, sole proprietorships, and partnerships. Income from these businesses is “passed-through” to the business owner’s personal tax return and taxed as ordinary individual income.

The legislation creates a 20% income tax deduction for these business types.

Total pass-through businesses by type:

 

8. Reduce taxes on income held abroad

The legislation enacts a one-time reduction of the tax rate on profits earned outside the US to 15.5% for cash and 8% for all other assets, if those profits are brought back onshore, or “repatriated.”

Untaxed income held overseas:

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Sources

Internal Revenue Service

Treasury

Office of Management and Budget