Senate Republican leaders have now released their version of a tax bill, the Tax Cuts and Jobs Act.
It would appear that there’s still some work to be done to reconcile the Senate and House bills. Here are the key differences (as well as similarities) between the two:
We currently have seven (7) tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% (you can see the brackets for 2018 – absent reform – here).
- The House bill proposed four (4) tax rates: 12%, 25%, 35% and 39.6%.
- The Senate bill would keep seven (7) brackets and reduce the top marginal rate to 38.5%.
The standard deduction amounts for 2018 – absent reform – are $6,500 for individuals, $9,550 for heads of households (HOH), and $13,000 for married couples filing jointly.
- Under the House bill, the standard deduction would increase to $12,200 for individuals, $18,300 for heads of household (HOH), and $24,400 for married couples filing jointly.
- Under the Senate bill, the standard deduction would be $12,000 for individuals, $18,000 for heads of household (HOH), and $24,000 for married couples filing jointly.
Additional Standard Deduction & Personal Exemptions
Under both plans, these would be “consolidated into this larger standard deduction” – meaning they disappear.
Mortgage Interest Deduction
Currently, you can deduct qualifying mortgage interest for purchases of up to $1,000,000 plus an additional $100,000 for equity debt. The $1,000,000 cap applies to a mortgage on your primary residence plus one other home.
- Under the House bill, current mortgages would be grandfathered – meaning they won’t be affected – but new mortgages would be capped at $500,000 for purposes of the deduction. Additionally, the deduction would only apply to your primary residence.
- Under the Senate bill, the deduction would remain in place for mortgages up to $1,000,000 but the deduction for equity debt (meaning re-fis not related to improving your home) would be eliminated.
State and Local Income Tax Deduction
Currently, you can deduct state and local income taxes or sales taxes. Both proposals would eliminate the state and local income tax or sales tax deduction for those taxpayers not engaged in trade or business.
Property Tax Deduction
Currently, you can deduct state and local property taxes.
- Under the House bill, the property tax deduction would remain in place but would be capped at $10,000. This was a compromise after Republicans in high tax states made noise (and voted against the budget proposal).
- Under the Senate bill, the property tax deduction would be eliminated.
Charitable Donation Deduction
Currently, you can deduct certain donations to qualified charitable organizations. The charitable donation deduction would remain in place under both bills.
If you itemize your deductions, under current law, you can write off certain expenses. Under both proposals, other than those mentioned above (mortgage and charitable), certain itemized deductions for individuals, such as the deductions unreimbursed employee expenses, home office expenses, and tax preparation expenses, would be eliminated.
- Under the Senate bill, the deduction for medical expenses would remain (thanks to Laurence Vance for the correction).
Above The Line Deductions
Currently, you can claim certain above-the-line expenses (meaning that you can claim them even if you do not itemize). Under both proposals, most above-the-line deductions would be eliminated, including those for student loan interest, moving expenses and out of pocket expenses for teachers.
Child Tax Credit
The credit is currently $1,000 and is refundable.
- Under the House bill, the child tax credit would be increased to $1,600 per child under 17 – subject to phaseout – with an additional $300 credit for each parent as part of a consolidated family tax credit. The first $1,000 would be refundable.
- Under the Senate bill, the child tax credit would be bumped to $1,650, with a much higher phaseout for ($1 million for married couples filing jointly). As with the House bill, the first $1,000 would be refundable.
Exclusion Of Gain From Sale Of Your Home
Under current law, you can exclude up to $250,000 ($500,000 for married taxpayers) in capital gains from the sale of your home so long as you have owned and resided in the house for at least two of the last five years. Both proposals would change the “two of five” rule to “five of eight.” Additionally, the proposals would limit the use of the exclusion to one sale every five years (instead of one sale every two years).
401(k) And Other Retirement Plans
Currently, individuals who save for retirement using certain plans (like 401(k) plans receive tax-favored treatment such as tax deferral.
- Under the House proposal, there are no changes to tax breaks for retirement accounts, including 401(k) plans and IRAs.
- Under the Senate proposal, there are a few tweaks. First, the proposal would impose the same on elective deferrals and catch-up contributions under section 401(k) plans, section 403(b) plans and governmental section 457(b) plans and impose the rules on early withdrawals across the board. Additionally, the proposal would eliminate catch-up contributions for high-income employees (defined as those who receive wages of $500,000 or more for the preceding year).
Obamacare Individual Mandate
The mandate is still in play. There are no specific health care related tax moves (beyond yanking the medical expense deduction) in either bill.
Alternative Minimum Tax (AMT)
The AMT is a secondary tax put in place in the 1960s to prevent the wealthy from artificially reducing their tax bill through the use of tax preference items. The AMT would be eliminated under both proposals.
Businesses use structures like limited liability companies (LLCs) or S corporations to pass-through income to the owners, escaping tax at the company level: Income is taxed at individual rates.
- Under the House proposal, businesses conducted as sole proprietorships, partnerships, and S corporations would be taxed at a rate of 25%. Businesses that offer “professional services” like doctors, lawyers, accountants, designers, and consultants wouldn’t qualify for the reduced rate under the proposal. Other business owners can choose to categorize 70% of their income as wages (and pay the individual tax rate) and 30% as business income (taxable at 25%) OR set the ratio of their wage income to business income based on the level of their capital investment.
- Under the Senate proposal, pass through income would be allowed a 17.4% deduction. As with the House bill, certain professional services, are excluded from the tax break – except those individuals with income up to $75,000 ($150,000 for married taxpayers filing jointly).
Corporate Tax Relief
Corporations which do not pass through their income pay tax on profits at the corporate level.
- Under the House bill, the corporate tax rate would be lowered to 20% beginning next year.
- Under the Senate bill, the corporate tax rate would also be lowered to 20%, but it would not be effective until the 2019 tax year.
Some companies – like Apple – stockpile assets overseas since bringing the funds over to the U.S. would be taxable. Both the House and Senate bills would impose a one-time “repatriation” tax to encourage companies to bring those funds back. The Senate version would impose a tax of 10% for liquid assets and 5% for illiquid assets.
Under our current system, U.S. companies are subject to tax on all profits, no matter where they are earned. The Senate and House proposals would switch to a territorial system for businesses which means that U.S. companies would only pay tax on profits earned in the U.S.
Federal Estate Tax
Currently, the federal estate tax is imposed on estates which exceed $5.49 million, or nearly $11 million per married couple.
- Under the House plan, the federal estate tax would be phased out and completely disappear after 2024.
- Under the Senate plan, the federal estate tax would remain, but the exemption for federal estate and gift tax would double.
There’s lots more to come, folks. The Senate bill is scheduled for markup by the Finance Committee on Monday, November 13, 2017.