Both the House bill and Senate bill would impact virtually every individual and business on a level not seen in over 30 years. As with any tax bill, however, there would be “winners” and “losers.” Both versions call for lowering the individual and corporate tax rates, repealing countless tax credits and deductions, enhancing the child tax credit, boosting business expensing, and more. The White House has signaled its support for tax legislation before yearend.
Many of the changes to the Internal Revenue Code in the Senate bill are temporary. The House bill, in contrast, calls for permanent changes to the Internal Revenue Code. This important difference between the two bills will be high on the agenda of any conference to iron out a final bill. The proposed changes in both the House bill and the Senate bill are forward-looking (after 2017) for the most part.
The House bill proposes four tax rates: 12, 25, 35, and 39.6 percent after 2017. The Senate bill calls for seven rates: 10, 12, 22, 24, 32, 35, and 38.5 percent after 2017. Under current law, individual income tax rates are 10, 15, 25, 28, 33, 35, and 39.6 percent.
Proposed House Bill Brackets
|Rate||Joint Return||Individual Return|
|12%||$0 - $90,000||$0 - $45,000|
|25%||$90,000 - $260,000||$45,000 - $200,000|
|35%||$260,000 - $1 million||$200,000 - $500,000|
|39.6%||over $1 million||over $500,000|
Proposed Senate Plan Brackets
|Rate||Joint Return||Individual Return|
|10%||$0 - $19,050||$0 - $9,525|
|12%||$19,050 - $77,400||$9,525 - $38,700|
|22%||$77,400 - $140,000||$38,700 - $70,000|
|24%||$140,000 - $320,000||$70,000 - $160,000|
|32%||$320,000 - $400,000||$160,000 - $200,000|
|35%||$400,000 - $1 million||$200,000 - $500,000|
|38.5%||over $1 million||over $500,000|
Neither the House nor the Senate bill changes the current tax treatment of qualified dividends and capital gains. The House bill and the Senate bill do not repeal the Affordable Care Act’s taxes. Left untouched are the net investment income (NII) tax, the additional Medicare tax, the medical device excise tax, and more.
The House bill calls for a near doubling of the standard deduction to $24,400 for married filing jointly and $12,200 for single filers, as adjusted for inflation using a chained CPI for 2018. Heads-of-households could claim a standard deduction of $18,300. Similarly, the Senate bill calls for these amounts to be $24,000, $12,000, and $18,000, respectively, but only temporarily.
Both the House bill and the Senate bill eliminate the deduction for personal exemptions and the personal exemption phase-out.An enhanced child and family tax credit is positioned to make up some of the difference, being scored at saving taxpayers between $584 million and $640 million for the Senate and House bills, respectively.
Deductions and Credits
Both the House bill and Senate bill would make significant changes to some popular individual credits and deductions. The changes in the Senate bill, however, generally would be temporary, expiring after 2025 in order to keep overall revenue costs for the bill within budgetary constraints.
For most debt incurred after the proposed effective date of November 2, 2017, the current $1 million limitation would be reduced to $500,000 under the House bill.
Property taxes up to $10,000 could be deducted under the House bill. The Senate bill also provides a carve-out for property taxes. The House bill repeals the medical expense deduction. The Senate bill preserves the medical expense deduction and temporarily lowers the AGI threshold to 7.5 percent (the pre-ACA threshold).
COMPARISON OF HOUSE AND SENATE BILLS
Under the House bill, the child tax credit would increase to $1,600 from its current $1,000 level and expanded to children under the age of 17. A temporary credit of $300 would be allowed for non-child dependents. The Senate bill would temporarily increase the child tax credit to $2,000 (of which $1,000 would be refundable), expand it to children under the age of 18, and allow a $500 credit for non-child dependents.
The House bill would consolidate the American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit after 2017. The Senate bill makes no changes to these education credits.
The House bill generally retains the current rules for 401(k) and other retirement plans. However, the House bill would repeal the rule allowing taxpayers to recharacterize Roth IRA contributions as traditional IRA contributions and the rule allowing conversion of a traditional IRA to a Roth IRA.
Federal Estate Tax
The House bill calls for first doubling the federal estate tax exemption and later eliminating the estate tax after 2024. The Senate bill would keep the federal estate tax but would temporarily double the current exemption through 2025. The current maximum federal estate tax rate is 40 percent with an inflation-adjusted $5 million exclusion ($5.49 million in 2017), which married couples can combine for a $10 million exclusion ($10.98 million in 2017).
Alternative Minimum Tax
The House bill, but not the Senate bill, abolishes the individual AMT. The Senate bill retains it but with higher exemption amounts.
Affordable Care Act
The Senate bill repeals the Affordable Care Act (ACA) individual shared responsibility requirement after 2018, making the payment amount $0. The House bill makes no changes to the ACA’s individual mandate.
The House bill calls for a 20-percent corporate tax rate beginning in 2018. The Senate bill calls for a 20-percent corporate tax rate beginning in 2019. Both bills make the new rate permanent. The maximum corporate tax rate currently tops out at 35 percent. Under the House bill, the 80-percent and 70-percent dividends received deductions under current law are reduced to 65-percent and 50-percent, respectively. Under the House bill, the alternative minimum tax (AMT) on corporations would be repealed. The Senate bill would retain it.
Business Tax Benefits
A number of proposed changes to various business incentives are in the House bill and Senate bill. Chief among them is bonus depreciation and Section 179 expensing.
Both the House and Senate would increase bonus depreciation to 100 percent but for different time frames.
The Senate bill would raise the cap placed on depreciation write-offs of business-use vehicles.
Section 179 Expensing
The House bill would also enhance Section 179 expensing, raising it from the current $500,000 level with a $2 million phase-out threshold to $5 million and $20 million thresholds, respectively. The Senate version would increase the maximum Section 179 expensing to $1 million, with a $2.5 million phase-out threshold, but would be permanent.
Both the House bill and Senate bill would cap the deduction for net interest expenses generally at 30 percent of adjusted taxable income, among other criteria.
Currently, owners of partnerships, S corporations, and sole proprietorships – as “pass-through” entities – pay tax at the individual rates, with the highest rate at 39.6 percent. The House GOP bill proposes a 25-percent tax rate for certain pass-through income after 2017, with a nine-percent rate for certain small businesses. The Senate bill generally would allow a temporary deduction in an amount equal to 23 percent of qualified income of pass-through entities, subject to a number of limitations and qualifications. In both bills, the remaining portion of net business income – subject to a variety of anti-abuse rules – would be treated as compensation subject to ordinary individual income tax rates.
For example, both bills either restrict or eliminate the reduced rate/temporary deduction for any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees.
The House and Senate bills would create a dividend-exemption system for taxing U.S. corporations on the foreign earnings of their foreign subsidiaries when the earnings are distributed. The foreign tax credit rules would be modified as would the Subpart F rules. The look-through rule for related controlled foreign corporations would be made permanent, among other changes.
A portion of deferred overseas-held earnings and profits (E&P) of subsidiaries would be taxed at a reduced rate. Under both bills, foreign tax credit carryforwards would be fully available and foreign tax credits triggered by the deemed repatriation would be partially available to offset the U.S. tax.