5 Ways the Senate Tax Plan Helps the Rich
Tax reform efforts took a big step forward in Washington late last week, when the Senate passed its version of legislation to revamp the tax laws. However, those watching the efforts have had to keep a close eye on the proceedings, because the final version of the bill not only has many differences from the House tax reform bill but also incorporates numerous changes from what the Senate had originally proposed.
Many skeptics of tax reform have argued that the bills passed so far in Congress benefit the wealthy more than the middle class. With that in mind, let's take a look at five of the biggest provisions in the Senate bill that favor the rich to see whether those criticisms are justified.
1. Lower tax rates for high-income individual taxpayers
The clearest way in which the Senate bill provides an additional tax break to the rich is in its tax bracket provisions. For single filers, the House version would have kept the current 39.6% tax bracket for those with taxable income above $500,000. However, the Senate chose to reduce that top rate to 38.5%. A reduction of just 1.1 percentage points might not sound like much, but it does equate to a tax break of $1,100 for every $100,000 that a taxpayer makes above that top tax bracket threshold.
2. Higher income threshold for child tax credit phaseout
One key provision of the tax reform efforts throughout Washington was to raise the child tax credit. Currently, the child tax credit starts phasing out for those with incomes above certain levels, which for 2017 were $75,000 for single filers and $110,000 for joint filers. The House bill would have more than doubled the phaseout to $230,000 for joint filers, but the Senate version goes a step further, setting a much higher $500,000 income level for phaseouts to begin. That will allow many rich Americans to claim the credit who weren't previously able to get that tax benefit.
3. Preserves mortgage interest deductions for high-value homes
Mortgage interest provisions were under attack in tax reform efforts, and the House version of the bill would limit the mortgage interest deduction to the first $500,000 in mortgage debt on a home purchase. The Senate sought a middle ground, choosing instead to preserve the existing $1 million limit on deducting mortgage interest on a newly purchased home, but also eliminating the current deduction for up to $100,000 in home equity debt. Residents of states where real estate values are extremely high will note that even $1 million doesn't necessarily buy you an upper-class home, but for those in more reasonable real estate markets, the move will focus heavily on those of more than modest means.
4. Raising the estate tax exemption
There are some areas in which the Senate bill doesn't go as far as the House would have gone. With respect to the estate tax, the House measure would have repealed the tax entirely within six years of passage. Yet the Senate found that provision too costly, and so senators chose instead simply to double the current estate tax exemption amount. That would yield a 2018 exemption figure of $11.2 million per person, which would go a long way toward helping all but the wealthiest of individuals avoid the tax entirely.
5. Increased use of tax-favored 529 plans for pre-college expenses
529 plans were initially created to encourage college saving, but under an amendment from Sen. Ted Cruz (R-Texas), 529 plans would become available for expenses of kindergarten to 12th grade education. In other words, those who send their children to private schools would be able to use 529 plan funds to save for future costs on a tax-deferred basis, with any gains from those investments becoming tax-free if used for qualifying educational expenses. Homeschooling families will also be able to use 529s to cover those expenses. Although those of any income level are eligible to use 529 plans, the nature of the deduction makes the tax savings more extensive for higher-income taxpayers than their lower-income counterparts.
Watch for what happens
Because the Senate and House bills differ from each other, the next step for lawmakers is to try to reach consensus on a bill that both chambers of Congress can support. That could prove challenging, but lawmakers have already surmounted several similarly intimidating challenges to get as far as they have.
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