How President Trump's tax plan affects you, and what we still don't know about it
"State policies are putting a huge amount of tax burdens on our local taxpayers," said Rep. Tom Reed, a New York Republican who serves on the Ways and Means Committee.
"It’s tough to advocate when you’ve got other states that come in and say, you know, ‘Why are we subsidizing you?’ And I always make the comment that we’re donor states,'" Reed said, referring to studies showing his state pays more in federal taxes than it receives back in federal programs.
The tax plan also calls for eliminating most other tax deductions but does not specify them. Common deductions that could be affected include those for medical costs, job expenses, having a home office, or teachers paying for school supplies.
Mortgage, charity deductions stay, but ...
Popular deductions for mortgage interest and charitable contributions would continue. But like the current system that requires a choice between the standard deduction or itemizing, those expenses would only be deductible if they exceed the increased standard deduction amounts above.
The National Association of Realtors argues that having a higher standard deduction could make home ownership less valuable in comparison to renting. And that, they warn, could reduce what someone would be willing to pay for a home and therefore potentially lower the value of existing homes.
The association also did a study of an early version of the plan this year that combined the change in the standard deduction with the loss of the deduction for local property taxes, and it said average homeowners making $50,000 to $200,000 would end up paying more in taxes.
Big corporate rate cut
Corporations would see their top tax rate drop from 35% to 20%, which is higher than the 15% Trump wanted, but comparable to or lower than other major industrial nations.
The tax code would begin to transition from a system that taxes American companies based on worldwide profits to a territorial system based on domestic profits alone. Companies with cash held by overseas subsidiaries — one estimate put the amount at $2.3 trillion — would be encouraged to bring it back to the United States through a temporary low tax rate, which was not immediately identified.
The plan would also eliminate the corporate Alternative Minimum Tax, which seeks to prevent companies from using credits and other provisions to lower their tax rates too much.
Trump has said the corporate rate cut would spur job creation and lead companies that had moved operations offshore to return. Others have said it would benefit primarily stockholders. The White House has said that would include pension funds for police and teachers and other public employees.
The plan would put new limits on the ability of companies to write off the cost of interest on money they borrow, but it would, for five years, allow for "full expensing." This means the cost of assets such as trucks or equipment bought after Wednesday for a business could be written off immediately, rather than amortized over a number of years, a change that supporters believe will spur investment in growing businesses.
Business deductions for research and development and for low-income housing would be retained, but others could be eliminated.
Small-business owners who file their taxes on their individual returns, rather than on corporate returns, would see a new top rate of 25%. For those whose incomes would otherwise put them in the 35% individual bracket, this would be a tax cut that arguably could be used to expand their companies.
Taxes on wealthy eliminated
The plan eliminates the individual Alternative Minimum Tax, which is designed to prevent people from avoiding tax entirely through deductions and credits and overwhelmingly is paid by the rich.
In 2014, 4.1 million of the 4.2 million people who paid AMT made more than $100,000 and the tax they paid totaled nearly $28 billion, according to IRS data.
The plan also eliminates the estate tax, which is charged only on estates worth about $5.5 million or more. Supporters of eliminating this tax say it can force family-owned businesses to be broken up and sold to pay taxes, affecting workers' jobs.
Trump has said he wants the tax cut to be the largest in history, but how much it will cost may take a while to determine and could be in dispute long after that.
This is both because key details must be worked out, but also because members of Congress want to use a different way to calculate costs that takes into account anticipated economic growth resulting from tax cuts.
Step 1 is for the House and Senate to agree on a budget resolution. Work on that is supposed to begin in the Senate next week, but the two chambers do not have agreement on what would be included, and it is possible each house adopts a different budget and a conference committee would have to hash out the differences.
The extent to which Republicans who dominate both houses are willing to increase the deficit to provide tax cuts, or insist on budget cuts elsewhere, will determine how quickly action takes place.
Liberal groups have warned that the cuts to federal revenue would be so deep Congress would ultimately have to look to cut popular programs such as Social Security and Medicare.
Once a budget is adopted, the tax-writing committees can begin filling in the details on actual legislation. The budget would also set rules the Senate could use to prevent a filibuster, which would require 60 votes to break, on the bill.
Contributing: Maureen Groppe