December 14, 2017
As the tax reform proposal continues its journey to potential passage, we thought we would offer you a brief look at the similarities and differences in the House and Senate tax bills. Both bills have recently been passed in their respective chambers, and now the next step is for differences to be worked out in conference. The product of the said conference committee, a reconciled tax bill, will then be voted upon by both bodies and, if passed, signed into law. The tax reforms would then be effective for tax years beginning January 1, 2018.
Read on for details about what is included in each of the congressional tax bills and what important variances exist between the two.
Individual Tax Rates –
The House bill calls for four tax brackets (but also includes a “bubble rate” of 45.6%):
- 12% (income up to $45,000 for individuals; income up to $90,000 for married filing joint [MFJ])
- 25% (over $45,000 to $200,000; MFJ – over $90,000 to $260,000)
- 35% (over $200,000 to $500,000; MFJ – over $260,000 to $1 million)
- 39.6% (over $500,000; MFJ – over $1 million)
The Senate bill calls for seven tax brackets:
- 10% (income up to $9,525 for individuals; MFJ – income up to $19,050)
- 12% (over $9,525 to $38,700; MFJ -over $19,050 to $77,400)
- 22% (over $38,700 to $70,000; MFJ – over $77,400 to $140,000)
- 24% (over $70,000 to $160,000; MFJ – over $140,000 to $320,000)
- 32% (over $160,000 to $200,000; MFJ – over $320,000 to $400,000)
- 35% (over $200,000 to $500,000; MFJ – over $400,000 to $1 million)
- 38.5% (over $500,000; MFJ – over $1 million)
Personal Tax Exemption – Under both the House and the Senate plans this exemption is eliminated.
Estate Tax – Both the House and Senate bills essentially double the exemption, while just the House bill eliminates the estate tax entirely in 2024.
Alternative Minimum Tax (AMT) – The House bill eliminates the AMT altogether. The Senate bill retains the AMT but increases the individual exemption threshold.
Standard Deduction – Both the House and the Senate bills nearly double the standard deduction, increasing it to $12,000 for individual filers and $24,000 for married couples filing jointly.
Additional Deductions –
- State and Local Tax Deduction (SALT) – Both bills repeal the SALT deduction for income and sales taxes
- Real Estate Taxes – Both bills place a limit of $10,000 on the property tax deduction.
- Mortgage Interest – The House bill lowers the deduction to interest on the first $500,000 of mortgage acqusition debt and limits it to one principal residence. Exception: qualifying debt outstanding as of 11/2/17 is “grandfathered”. The Senate bill keeps the deduction on up to $1,000,000 of acquisition debt.
- Interest on Home Equity Loans – Interest is currently deductible on up to $100,000 of such loans. The Senate plan eliminates the deduction, while the House plan “grandfathers” up to $100,000 of home equity debt outstanding as of 11/2/17.
- Student Loan Interest Deduction – The House bill eliminates this deduction; the Senate bill preserves it.
- Medical Expenses – The House bill eliminates this deduction. The Senate bill keeps the deduction and, for tax years 2017 and 2018, lowers the eligible AGI limit to 7.5%, after which time the 10% of AGI floor would return.
- Miscellaneous Itemized Deductions – The House plan eliminates specific deductions (the largest being the non-reimbursed employee business expenses), while the Senate bill eliminates these deductions in their entirety.
- Electric Vehicle Tax Credit – The House eliminates this credit. The original Senate bill did not eliminate it. During debate, there was a proposed amendment to eliminate the credit, but it is not clear if that amendment was included in the bill that passed the Senate.
- Child Tax Credit – The House bill increases the credit to $1,600 and includes a $300 credit for each parent and non-child dependent; the credit is phased out at joint incomes above $230,000. The Senate bill increases the credit to $2,000 and includes a $500 credit for non-child dependent, but not the parents; the credit is phased out at join incomes above $500,000.
- Exclusion of Gain Upon Sale – Both bills lengthen the required period of primary residency to 5 years out of the prior 8 years in order to qualify for the exclusion. The House bill reduces the exclusion amount based on the homeowner’s adjusted gross income.
- Section 529 Savings – Both the House and Senate plans simplify and expand 529 savings plans to include K-12 expenses, as well as consolidating other education incentives into one expanded tax credit.
- Obamacare Taxes – The Senate bill includes a reduction of the individual healthcare mandate penalty to $0. The House bill makes no changes in this area.
- Graduate Student Income – The House bill treats graduate student tuition waivers as taxable income. The Senate bill does not include any policy change in this area.
Top Corporate Income Tax Rate – Currently set at 35%, both the House and Senate bills lower this top rate to 20%; however, while the House rate cut would go into effect in 2018, the Senate bill delays the rate cut until tax year 2019. Additionally, the House bill includes a 25% rate for personal service corporations, while the Senate bill has no such special rate.
Corporate Alternative Minimum Tax –The House bill repeals this tax. The Senate-passed Act leaves the corporate AMT unchanged.
Expensing Purchase of Equipment – Both bills allow for 5 years of unlimited expensing for new equipment. The Senate bill includes another 5 years to phase out this policy, at 20% per year.
Net Operating Losses (NOL) – The House bill eliminates NOL carrybacks while providing for indefinite NOL carryforwards, increased by a factor reflecting inflation and the real return to capital; it restricts the deduction of NOLs to 90% of current-year taxable income. The Senate bill eliminates NOL carrybacks entirely and limits NOL carryforwards to 90% of taxable income (reduced to 80% in tax years beginning after 12/31/2022).
Credits and Deductions – The House bill eliminates credits for orphan drugs, energy, private activity bonds, rehabilitation, and contributions for capital, among others. The Senate bill modifies the rehabilitation credit and the orphan drug credit, limits the deduction for FDIC premiums, and retains certain other preferences eliminated in the House bill.
Donations to Colleges/Universities – Under current law, corporations can deduct charitable donations given in exchange for the right to purchase athletic event tickets or seating rights. The House bill makes no change to this, but the Senate bill eliminates the deduction.
Depreciation for residential and nonresidential property – The House bill makes no change to the current policy, which spreads depreciation over 27.5 years for residential property and 39 years for nonresidential property. The Senate bill, however, changes both depreciation periods to 25 years.
International Tax Rules – Both the House and Senate plans move toward a territorial system that only taxes domestic profits. The House would impose a 10% international minimum tax and a 20% excise tax on certain transactions with foreign subsidiaries. The Senate plan would impose a 10% tax on low-tax intangible income and certain transactions with foreign subsidiaries.
Repatriation Tax – The two bills include similar, but slightly varied, repatriation tax proposals. The House plan would impose a 14% tax on liquid assets and a 7% tax on non-cash assets; the Senate plan would impose a 14.5% tax on liquid assets and a 7.5% tax on non-cash assets.