Comparing the Tax Reform Plans in the House and the Senate

On November 16, 2017, the House of Representatives passed the “Tax Cuts and Jobs Act” (H.R. 1) (the “House Bill”) with a 227–205 vote. The Senate’s version of the “Tax Cuts and Jobs Act” (the “Senate Bill”) has not been voted on by the full Senate, although the Senate Finance Committee passed it with a 14–12 vote. The House and the Senate agree on some key tax reform provisions, yet significant differences remain between the two bills.

Agreements on Many Tax Reform Provisions

  1. Corporate Tax Rates – Both the House Bill and the Senate Bill propose cutting the corporate tax rate to a 20% flat rate. A couple differences to note, however, are the House Bill proposes a 25% flat tax rate for personal service corporations and would implement the new corporate rate immediately. The Senate Bill, on the other hand, would eliminate the flat tax rate for personal service corporations and would wait until 2019 to institute the new corporate rate.
  2. Alternative Minimum Tax – Both the House Bill and the Senate Bill would repeal the alternative minimum tax.
  3. State and Local Tax Deductions – The Senate Bill would eliminate the deduction for state and local taxes until December 31, 2025, when the deduction would be returned to its current form. The House Bill would also eliminate the deduction, but allow individuals to deduct up to $10,000 in state and local property taxes.
  4. Child Tax Credit – Both the House Bill and the Senate Bill would increase the child tax credit. The House Bill would provide a $1,600 credit for dependent children under the age of 17 and a $300 credit for dependents of any other age. The Senate Bill would provide a $2,000 credit for dependent children under the age of 18 and a $500 credit for other dependents. The Senate Bill would return the child tax credit to its current form after December 31, 2025. Only taxpayers under a certain income threshold receive the child tax credit. The House Bill would increase that threshold to $230,000 for joint filers while the Senate Bill would increase it to $500,000 for joint filers.
  5. Depreciable Business Assets – Both the House Bill and the Senate Bill would allow business to immediately deduct the full value of depreciable business assets instead of spreading out the deductions over multiple years. The bills also increase the amount of business assets that taxpayers can expense under Section 179, with the House Bill increasing the amount to $5,000,000 and the Senate Bill increasing the amount to $1,000,000.
  6. Charitable Contribution Deduction – Both the House Bill and the Senate Bill would raise the limit on the charitable contribution deduction to 60% of the taxpayer’s adjusted gross income (AGI). In addition, both bills would eliminate the deduction for donations made to universities in exchange for tickets to athletic events. Both bills would also require a contemporaneous written acknowledgement from charities for donations of $250 or more.
  7. Standard Deduction – Both the House Bill and the Senate Bill call for an increase in the standard deduction. The House Bill would provide a $24,400 deduction for joint filers, $18,300 for the head of the household, and $12,200 for all other filers. The Senate Bill would provide a similar $24,000 deduction for joint filers, $18,000 for the head of the household, and $12,000 for all other filers.
  8. Personal Exemption – Both the House Bill and the Senate Bill would eliminate the personal exemption amount, which is currently $4,050 per individual. The Senate Bill provides that the personal exemption would revert back to its current form after December 31, 2025.
  9. Long Term Capital Gains – Both the House Bill and the Senate Bill would maintain long-term capital gains rates.
  10. Net Investment Income – Neither the House Bill nor the Senate Bill suggest that the net investment income tax of 3.8% would change.
  11. Elimination of Other Deductions – Both the House Bill and the Senate Bill would eliminate the deductions for tax preparation services, moving expenses when starting a new job, and property losses from casualties other than natural disasters. Both bills would also eliminate the limit on itemized deductions that applies when taxpayers reach a certain income level. The Senate Bill provides that these deductions will revert to their current form after December 31, 2025.

Disagreements on Other Elements of Tax Reform

  1.  Estate Tax, Gift Tax, and Generation Skipping Transfer Tax – Both the Senate Bill and House Bill would increase the lifetime exclusion amount for the gift tax, estate tax, and generation-skipping transfer tax to $10,000,000 ($20,000,000 for a married couple), subject to inflation, for anyone who dies or makes gifts after 2017. However, the House Bill would repeal both the estate tax and the generation-skipping transfer tax, which would be effective for deaths and generation-skipping transfers after December 31, 2024. The House Bill would maintain the gift tax and lower the rate to 35%. On the other hand, the Senate Bill would not repeal the estate tax, gift tax, or generation-skipping transfer tax. The Senate Bill also provides that the increase in the lifetime exclusion amount would revert to its current amount after December 31, 2025.
  2. Medical Expenses Deduction – The House Bill would eliminate the itemized deduction for medical expenses after 2017, while the Senate Bill would maintain the current deduction for medical expenses.
  3. Pass-Through Entities – The House Bill would impose a maximum tax rate of 25% on pass-through entities’ business income. It would also create a 9% tax rate on the first $75,000 of net business income for taxpayers earning less than $150,000 in a pass-through business. Rather than changing the tax rate for pass-through entities, the Senate Bill would allow taxpayers to deduct 17.4% of business income from a pass-through entity. Neither the rate imposed by the House Bill nor the deduction provided by the Senate Bill would apply to income from service businesses.
  4. Mortgage Interest Deduction – The Senate Bill would eliminate the mortgage interest deduction for interest on home equity indebtedness but maintain the deduction for mortgage interest on acquisition of indebtedness up to $1,000,000. The Senate Bill provides that the mortgage interest deduction would revert to its current form after December 31, 2025. The House Bill would lower the deduction for mortgage interest on acquisition of indebtedness from $1,000,000 to $500,000 and only permit the deduction for a principal residence.
  5. Dividends Paid Reporting – The Senate Bill would require corporations to report the amount of dividends paid to shareholders during its tax year and the following 2.5 months in its next tax year. Failure to do so could result in penalties up to $250,000. The House Bill does not address this issue.
  6. Employer Credit for Payments to Employees of Family and Medical Leave – The Senate Bill provides a 12.5% business credit for employers paying employees on family and medical leave if the employers are paying 50% of the employee’s normal wages. The credit may be increased up to 25% if the employer is paying more than 50% of the employee’s normal wages. The House Bill does not address this credit.
  7. Education Expenses – The House Bill provides that the following provisions will be repealed: (1) the deduction for interest on student loans and qualified tuition expenses; (2) the exclusion for employer-provided education assistance programs; and (3) the exclusion for qualified tuition reduction programs. The Senate Bill does not address these education provisions, but would increase the deduction for educator expenses to $500.
  8. Affordable Care Act – The Senate Bill would eliminate the tax penalty for individuals who do not purchase qualifying health insurance. The House Bill does not address this issue.
  9. Individual Income Tax Brackets – The House Bill and Senate Bill differ on the number of tax brackets for individual income taxes and the income thresholds for each bracket. The brackets are presented below for the following taxpayers: married filing jointly (MFJ), married filing separately (MFS), head of household (HOH), and single filers (Single).

HOUSE

Tax Rate Filing Status Amount of Taxable Income
12% MFJ:

MFS:

HOH:

Single:

$90,000 or less

$45,000 or less

$67,500 or less

$45,000 or less

25% MFJ:

MFS:

HOH:

Single:

Over $90,000 and under $260,000

Over $45,000 and under $130,000

Over $67,500 and under $200,000

Over $45,000 and under $200,000

35% MFJ:

MFS:

HOH:

Single:

Over $260,000 and under $1,000,000

Over $130,000 and under $500,000

Over $200,000 and under $500,000

Over $200,000 and under $500,000

39.6% MFJ:

MFS:

HOH:

Single:

Over $1,000,000

Over $500,000

Over $500,000

Over $500,000

 

SENATE

Tax Rate Filing Status

Amount of Taxable Income

10% MFJ:

MFS:

HOH:

Single:

$19,050 or less

$9,525 or less

$13,600 or less

$9,525 or less

12% MFJ:

MFS:

HOH:

Single:

Over $19,050 and under $77,400

Over $9,525 and under $38,700

Over $13,600 and under $51,800

Over $9,525 and under $38,700

22.5% MFJ:

MFS:

HOH:

Single:

Over $77,400 and under $120,000

Over $38,700 and under $60,000

Over $51,800 and under $60,000

Over $38,700 and under $60,000

25% MFJ:

MFS:

HOH:

Single:

Over $120,000 and under $290,000

Over $60,000 and under $145,000

Over $60,000 and under $170,000

Over $60,000 and under $170,000

32.5% MFJ:

MFS:

HOH:

Single:

Over $290,000 and under $390,000

Over $145,000 and under $195,000

Over $170,000 and under $200,000

Over $170,000 and under $200,000

35% MFJ:

MFS:

HOH:

Single:

Over $390,000 and under $1,000,000

Over $195,000 and under $500,000

Over $200,000 and under $500,000

Over $200,000 and under $500,000

38.5% MFJ:

MFS:

HOH:

Single:

Over $1,000,000

Over $500,000

Over $500,000

Over $500,000

 

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