Early in the morning on December 2, the U.S. Senate passed its version of the Tax Cuts and Jobs Act by a vote of 51 to 49. The U.S. House of Representatives passed its own version of the tax bill on November 16, and a conference committee of representatives from both houses of Congress is scheduled to begin work on a reconciled final bill this week.
The goal is to get that bill to President Trump's desk for signature before Christmas, with most of the changes taking effect for 2018. The two bills already agree on many matters, but several notable differences must be resolved.
KEY AREAS WHERE THE BILLS AGREE
Important individual provisions where the bills are in
agreement include the following:
Inflation
Adjustments
Both bills calculate inflation adjustments, where applicable,
using the chained consumer price index. This index will increase
tax bracket thresholds, the standard deduction, certain exemptions
and other figures at a slower rate than the consumer price index
currently used, potentially pushing taxpayers into higher tax
brackets more quickly.
Personal Exemptions and
Standard Deduction
Under current law for 2017, taxpayers can claim a personal
exemption of $4,050 each for themselves, their spouses and any
dependents. Both tax bills eliminate personal exemptions beginning
in 2018. The bills also nearly double the standard deduction
amounts to $12,200 for single filers and $24,400 for married
couples filing jointly (for 2018 with inflation adjustments).
State and Local Tax
Deductions
The deduction for state income or sales taxes is eliminated under
both bills. They retain a deduction for property taxes, but cap the
deduction at $10,000.
Adoption
Credit
Early drafts of the House bill eliminated the adoption credit, but
both of the passed bills preserve it.
Deductions and
Credits
Both bills generally get rid of the deductions for moving
expenses, tax preparation fees and personal casualty losses.
Principal Residence Gain
Exclusion
The bills allow the exclusion from income on gains from the sale
of a principal residence of up to $250,000 for single filers and
$500,000 for married couples. In both cases, it's necessary to
own the home and have used it for five of the previous eight years
(compared with two out of the previous five years now).
Here are some key business provisions where the bills agree:
Corporate Tax
Rates.
The House and Senate bills permanently reduce the current maximum
corporate rate from 35% to 20%.
Depreciation
The bills allow businesses to fully and immediately expense 100%
of the cost of qualified property acquired and placed in service
after September 27, 2017, and before January 1, 2023.
Foreign Income
The bills adopt a territorial taxation system for
multinational companies. In other words, they generally limit U.S.
income taxes to income earned in the United States. They also
impose a one-time tax on repatriated offshore earnings, with a 14%
rate for liquid assets (for example, cash, stocks and bonds) and a
7% rate on illiquid assets, such as factories.
KEY AREAS WHERE THE BILLS DIVERGE
Among the areas where the bills' individual
provisions differ are the following:
Tax Bracket
The House bill consolidates the seven current individual income
tax brackets of 10%, 15%, 25%, 28%, 33%, 35% and 39.6% into four
brackets of 12%, 25%, 35% and 39.6%. The Senate bill maintains
seven brackets but changes them to 10%, 12%, 22%, 24%, 32%, 35% and
38.5%. In addition, while the changes to individual tax rates are
permanent in the House bill, they're only temporary in the
Senate bill, set to expire at the end of 2025.
Family Tax
Credits
The House bill provides a family tax credit that includes a larger
child tax credit ($1,600 for each child under age 17 or under, up
from the current $1,000), a $300 credit for each non-child
dependent and a $300 family flexibility credit for the taxpayer or,
on a joint return, each spouse who is not a child or non-child
dependent. The family tax credit begins phasing out at income of
$230,000 for joint filers.
The child tax credit in the House bill is not adjusted for
inflation. And the non-child dependent and family flexibility
credits end after 2022, effectively raising taxes in 2023 if not
renewed.
The Senate bill, on the other hand, increases the child tax credit
to $2,000 for each child under age 18 (although it
reverts to under age 17 in 2025, a year before the increase
expires). And the bill dramatically expands eligibility for the
credit by increasing the phaseout for joint filers from the current
$110,000 to $500,000. It also provides a $500 credit per
dependent.
Alternative Minimum Tax (AMT)
and Estate Tax
The House bill repeals the AMT and doubles the estate tax
exemption base from $5 million to $10 million and repeals the
estate tax (as well as the generation-skipping transfer tax) after
2024. The Senate bill keeps the AMT but reduces the number of
taxpayers who pay it by increasing the exemption. Similarly, the
Senate increases the estate tax exemption, but it does not repeal
the estate tax.
Some Other Deductions and
Credits
The House bill eliminates the medical expense deduction. The
Senate bill retains it and, for 2017 and 2018, allows taxpayers to
claim it when their expenses exceed 7.5% of adjusted gross income,
compared to 10% currently. It also keeps the deduction for student
loan interest and doesn't tax graduate students on tuition
waivers, unlike the House bill.
Affordable Care Act
Individual Mandate
The Senate's bill repeals the individual mandate, thereby
ending penalties for failing to have health insurance. The House
bill does not repeal the mandate.
Mortgage Interest
Deduction
Both bills retain the mortgage interest deduction. However, the
House bill limits the deduction to home mortgage debt of $500,000
or less received after 2017, compared with $1 million now. The
Senate bill leaves the current cap in place. Both bills eliminate
the current deduction for home equity loans.
The House and Senate bills also differ on these significant business provisions:
Corporate Tax Rate Timing and
AMT
Under the House bill, the reduced corporate tax rate kicks in for
2018. The Senate bill delays the reduction until 2019. Also, the
House bill repeals the corporate AMT while the Senate bill retains
it.
Pass-Through Entity Tax
Rates
Currently, owners and shareholders of pass-through entities (sole
proprietorships, partnerships, limited liability companies and S
corporations) pay taxes on their net income at ordinary income tax
rates as high as 39.6%. The House bill generally treats up to 30%
of such net income as business income subject to a maximum rate of
25%, with the balance subject to the personal income tax rates. It
also adopts a new 9% rate on the first $75,000 ($37,500 for single
filers) in net business income passed through to an active owner
earning less than $150,000 ($75,000 for singles) in taxable income.
The 9% rate phases in over five years — 11% in 2018 and 2019,
10% in 2020 and 2021, and 9% in 2022.
The Senate bill creates a 23% deduction on pass-through income
(excluding most professional services firms). Salaries paid to
pass-through owners and partners are taxed at ordinary income tax
rates. Several guardrails apply, though. For example, to prevent
taxpayers from re-characterizing wage income as profits, the bill
limits the deduction to half of the pass-through entity's W-2
wages or its share to the individual taxpayer. This limit does not
apply if the taxpayer's taxable income is under $250,000 for
single filers or $500,000 for married couples filing jointly.
Depreciation
Sunsetting
The House provision allowing immediate and full expensing expires
in 2023. The Senate bill begins phasing it out at that time,
reducing the deduction 20 percentage points each year for four
years and then sunsetting completely for the fifth year.
Stay Tuned
Regardless of the final language, any tax bill that passes both
houses of Congress is bound to represent the largest overhaul of
the U.S. tax system in 30 years. We'll keep you up to date on
how new tax legislation could affect you.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.