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Blogging Beyond the Numbers

Here’s a Comparison of Senate and House Tax Reform Proposals
Posted by: Mike Scholz 1 month ago

Determined to get something passed before the holidays, the House and Senate are working feverishly on tax reform bills. 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.

Notable differences between the two bills include the proposed individual and pass-through tax rates, limitations on the deductibility of mortgage interest, and repeal of the estate tax. Many of the Senate provisions — including all of the individual tax reform provisions — sunset by the end of 2025 because of a complicated legislative rule that prevents the Senate from passing a reconciliation bill that increases the federal deficit beyond the 10-year budget window.

Below is a side-by-side comparison of key provisions in the House and Senate bills.

 

Current lawHouse Tax BillSenate Tax Bill
Personal tax ratesSeven tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, 39.6%Four tax brackets: 12%, 25%, 35%, and 39.6%, and a 6% surtax on a portion of income in excess of $1.2 million ($1 million for single filers)Seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, 38.5%
Personal long-term capital gains and qualified dividend tax ratesUp to 23.8%Up to 23.8%Up to 23.8%
Maximum pass-through tax rate39.6%Passive business: maximum 25% plus net investment income tax; Active business: generally 30% of income subject to 25%, and 70% of income subject to 39.6%; Personal service business: maximum 39.6%Ordinary rates with deduction of 23% of qualifying domestic income; limited deduction for income from lower-income service businesses
Maximum corporate tax rate35%20% (25% for personal service corporations)20% effective for years beginning after 2018
Personal standard deductionMarried filing jointly: $12,700 Head of household: $9,350 Single: $6,350Married filing jointly: $24,400 Head of household: $18,300 Single: $12,200Married filing jointly: $24,000 Head of household: $18,000 Single: $12,000
Child tax credit$1,000 per child$1,600 per child and a $300 credit for taxpayer, spouse, and non-child dependents$2,000 per child; $500 for non-child dependents
Personal exemption$4,050RepealedRepealed
Medical expensesDeductible to the extent they exceed 10% of AGINot deductibleDeductible to the extent they exceed 10% of AGI (7.5% of AGI for 2017 and 2018)
DepreciationFixed assets are generally capitalized and depreciated; In some cases, Section 179 immediate expensing of up to $500,000 is availableImmediate expensing of most new and used property (excluding structures) through 2022; Section 179 limit increased to $5 millionImmediate expensing of most new property (excluding structures); Section 179 limit increased to $1 million
Depreciable life of buildings39 years for most non-residential buildings; 27.5 years for residential rentals39 years for most non-residential buildings; 27.5 years for residential rentals25 years
Mortgage interestDeductible on up to $1.1 million of debt; interest on second home deductibleDeductible on up to $500,000 of debt; no second home or home equity interestDeductible on up to $1.0 million of debt (including interest on debt to acquire a second home); no home equity interest deduction
Personal state income, sales tax, and property taxAllowable as an itemized deductionProperty tax capped at $10,000; income and sales tax deduction repealedSame as House plan except unlimited carryover
Individual Alternative Minimum Tax (AMT)Imposed when minimum tax exceeds regular income taxRepealed after 2017; AMT credits refundable from 2019 through 2022Increases AMT exemption amounts and phase-out
Business interestGenerally deductibleGenerally limited to extent interest exceeds 30% of income; unlimited for small businessSame as House plan except unlimited carryover
Cash method of accountingGenerally limited to business with less than $1 million, $5 million, or $10 million in receipts depending on factsExpanded to include businesses with less than $25 million in receiptsExpanded to include businesses with less than $15 million in receipts
Domestic production activities deductionDomestic producers eligible for a deduction equal to 9% of their qualifying incomeRepealed after 2017Repealed after 2017 (2018 in the case of C corporations)
Corporate AMT20% corporate AMTRepealed after 2017; AMT credits refundable from 2019 through 2022Retains current law
Net operating losses (NOL)Generally carried back 2 years and forward 20 yearsCarryback repealed except farms (one year); carryover deduction limited to 90% of pre-net operating loss incomeCarryback repealed except farms (two years), carryover deduction limited to 90% of pre-net operating loss income
Gift and estate taxTax of up to 40% imposed on gifts and estates, subject to a $5.49 million lifetime exemption per spouseLifetime exemption doubled; estate tax repealed after 2024; gift tax remains in effect with 35% rate in 2024; step-up continuesLifetime exemption doubled; estate tax remains in effect

 

A conference committee has begun working to resolve the differences between the two bills since identical versions of the final bill must be passed by both legislative bodies before it can be submitted to President Trump for his consideration.

Buried in the Tax Reform 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.

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.

What’s next?

The tax reform process continues to be fluid. We will continue to inform you as the bills progress through the legislative process.  Please contact us if you have any questions regarding the proposed bills, the impact the bills would have on you and your business if enacted, or tax strategies you can adopt to take advantage of opportunities and respond to challenges tax reform may present.

 

 

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