X
X

Find Your Specialist

X

Contact Us

Go Back

Congress in Its Own Christmas Rush to Pass Tax Reform

Side-by-Side of House and Senate Bills

Determined to get something passed before the holidays, the House and Senate are working feverishly on tax reform bills. The House bill is H.R. 1, reported out of the House Ways and Means Committee on November 9th and the Senate version is being considered in the Senate Finance Committee with hundreds of amendments pending.

The bills are similar in size and scope but have differing approaches to some of the major issues. Both bills would cut taxes $1.5 trillion over the next decade. The Joint Tax Committee projects that every income group, on average, would see tax cuts over the 10 years from 2019 to 2027. However, some households would pay more tax than under current law, particularly taxpayers in the upper middle income range, who stand to lose significant itemized deductions.

Any final legislation will no doubt contain elements of both the House and Senate versions, but for now, let’s take a look at the similarities and differences of the major provisions of the bills. Below that, you will find a list of significant changes getting less attention in the press, provisions “buried in the bills.”

Comparison of House and Senate Versions of Tax Cuts and Jobs Act

as of November 13, 2017

 

Provision

 

House Version

 

Senate Version

Corporate rate reduction
Reduced from 35% to 20% in 2018. Reduced from 35% to 20%, but delays reduction until 2019.

 

Treatment of Passthroughs
Passthrough income tax rate capped at 25%.

Provides a new, low tax rate of 9% for business owners making less than $75,000 in income.

Anti-abuse rules:

–70% of passthrough income for active businesses taxed at ordinary income rates but owners could decrease amount based on capital investment of the business.

–100% of professional service income would be ineligible for lower passthrough rate.

17.4% deduction for passthrough income, equivalent to about a 32% tax rate.

 

Anti-abuse rules:

–Amount of the deduction would be limited to 50% of the W-2 wages of the taxpayer.

–Deduction would not apply to service businesses, such as lawyers and accountants, except for taxpayers whose taxable income does not exceed $150,000 for married individuals filing jointly and $75,000 for other individuals.

Depreciation and Capital Investment
Replaces depreciation with higher expensing limits of $5 million, with a $20 million purchase limitation.

Limits the increased expensing to five years.

Retains current depreciation schedules for real property.

 Replaces depreciation with higher expensing cap of $1 million with a $2.5 million purchase limitation.

Limits the increased expensing to five years.

Shortens real estate depreciation to 25 years.

Interest Deduction
Caps corporate net interest deduction at 30% of earnings before interest, depreciation, and taxes. Caps corporate net interest deduction at 30% of earnings before interest and taxes only.
Net Operating Losses
Restricts NOL deductions to 90% of taxable income.

–Eliminates carrybacks but allows indefinite carryforwards with no year limitation.

–Indexes NOLs for inflation.

Restricts NOL deductions to 90% of taxable income.

–Eliminates carrybacks but allows indefinite carryforwards with no year limitation.

Business Credits and Deductions
Eliminates many special business credits and deductions.

Retains the R&D credit and low-income housing credit.

Modifies the rehabilitation credit and orphan drug credit and retains many special tax breaks, including R&D credit.
International Taxation and Repatriation
 
Moves U.S. to a territorial system.

Includes a base erosion minimum requiring inclusion of 50% of income from controlled foreign corporations in U.S. shareholders’ income and an excise tax on foreign firms.

Repatriation: Profits held offshore subject to a one-time tax of 14% for liquid assets and 7% for noncash assets.

Moves U.S. to a territorial system.

 Includes a base erosion minimum tax of the excess of 10% of modified taxable income over regular tax liability.

Repatriation: Profits held offshore subject to a one-time tax of 10% for liquid assets and 5% for noncash assets.

Cash Accounting Method
Increases the small business limitation for cash accounting from $5 million to $25 million. Increases the small business limitation for cash accounting from $5 million to $15 million.
Individual Tax Rates and Brackets
Collapses current 7 rates into 4 rates:

12%, 25%, 35%, and 39.6%.

Retains top marginal rate of 39.6 percent and phases out the effect of the 12% bracket for high-income taxpayers.

(See brackets below table.)

Retains seven brackets while reducing rates.

10%, 12%, 22.5%, 25%, 32.5%, 35%, and 38.5%. The 38.5% rate is for single taxpayers with taxable income over $500,000 and married taxpayers filing jointly with taxable income over $1 million.

Sets top marginal rate to 38.5%

(See brackets below table.)

Standard Deduction
Increases standard deduction to:

–$12,200 for single filers –$18,300 for heads of household

–$24,400 for joint filers

(Indexed to chained CPI)

Increases standard deduction to:

–$12,000 for single filers

–$18,000 for heads of household

–$24,000 for joint filers

(Indexed to chained CPI)

Personal Exemptions
Eliminates personal exemptions.

(See family tax credits below.)

Eliminates personal exemptions.

(See family tax credits below.)

Itemized Deductions
 
Eliminates most itemized deductions except the charitable deduction, state and local property tax deduction, and mortgage deduction.

Caps mortgage interest deduction at $500,000 for newly-purchased homes.

Disallows mortgage interest deductions for second homes.

Caps property tax deductions at $10,000.

Eliminates most itemized deductions except the charitable deduction, mortgage deduction, and medical expense deduction.

Eliminates deduction for home equity loans.

No state or local tax deductions allowed.

Child and Family Tax Credits
Increases child tax credit to $1,600 and raises phaseout to $230,000 for joint filers.

Creates new $300 per-person family tax credit, for parents and non-child dependents, set to expire after 5 years.

Increases child tax credit to $1,650, allows it up to age 18 and raises phaseout for joint filers to $1 million and single filers to $500,000.

Creates a $500 credit for non-child dependents.

Retirement Accounts
No major changes. Eliminates catch-up contributions for high-wage employees and consolidates contribution limits for 457(b)s to match 401(k)s and 403(b)s.

 

Tax Breaks for Students and Teachers
Consolidates the three main higher education credits into one American Opportunity Credit and allows the credit for a fifth year (and at half the value).

Graduate students and life time learners would no longer qualify for these education deductions.

Repeals the deduction for student loan interest.

Retains existing higher education tax breaks.
Estate and Gift Tax
Doubles the estate tax exemption to $10 million per person and eliminates estate taxes in 6 years. Doubles the estate tax exemption to $10 million per person.
Alternative Minimum Tax
Repeals the AMT. Repeals the AMT.

Tax Bracket Tables

House Bill
Income Levels and Filing Status
Tax Rate Single Married-Joint
12% $0-$44,999 $0 – $89,999
25% $45,000 – $199,999 $90,000 – $259,999
35% $200,000 – $499,999 $260,000 – $999,999
39.6% $500,000+ $1,000,000+
Senate Bill
Income Levels and Filing Status
Tax Rate Single Married-Joint
10% $0-$9,525 $0-$19,050
12% $9,525-$38,700 $19,050-$77,400
22.5% $38,700-$60,000 $77,400-$120,000
25% $60,000-$170,000 $120,000-$390,800
32.5% $170,000-$200,000 $390,800-$450,000
35% $200,000-$500,000 $450,000-$1,000,000
38.5% $500,000+ $1,000,000+


Buried in the Bills

Both bills includes hundreds of pages of other provisions, mainly revenue raisers that curtail different tax breaks. Here are a few of the more significant proposed changes.

Chained CPI. Both bills would index inflation in a different way for purposes of raising tax bracket amounts each year, moving to Chained CPI. This change could actually increase taxes significantly over time.

Like-Kind exchanges. The House bill would abolish like-kind exchange treatment for personal property but retains it for real property.

Longer Period Required for Exclusion of House Gain. The Senate bill would increase time you have to live in your house to get the exclusion of gain from sale of a principal residence to 5 of the 8 years before sale. Currently, you are only required to live in the house 2 of the 5 years before sale. The bill also would allow the exclusion only every five years. Now the exclusion may be taken every two years.

Excise Tax on College Endowments. Both the House and Senate bills would impose a 1.4% excise tax on private universities with assets of more than $250,000 per student. Small colleges with fewer than 500 students will be exempt from the tax.

Private Activity Bonds. The House bill would eliminate the tax exemption of private activity bonds.

Trade ‘Subsidy’ for Intangibles. The House proposal imposes a favored rate as low as 12.5% on a U.S. company’s intangible profits from exports of property and services. The catch? This provision could violate World Trade Organization rules.

And last but not least…

Football Tickets??? Current law allows an 80 percent deduction for money donated to a university for the right to purchase season tickets to a school’s home basketball and football games. The House bill would repeal this provision, leaving these contributions subject to much lower charitable contribution limits.

Note: We will update you as the bills progress through the legislative process.

 

 

 

Related Articles