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Blogging Beyond the Numbers

Here’s a Comparison of Senate and House Tax Reform Proposals
Posted by: Mike Scholz 10 months 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 law House Tax Bill Senate Tax Bill
Personal tax rates Seven 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 rates Up to 23.8% Up to 23.8% Up to 23.8%
Maximum pass-through tax rate 39.6% 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 rate 35% 20% (25% for personal service corporations) 20% effective for years beginning after 2018
Personal standard deduction Married filing jointly: $12,700 Head of household: $9,350 Single: $6,350 Married filing jointly: $24,400 Head of household: $18,300 Single: $12,200 Married 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Personal exemption $4,050 Repealed Repealed
Medical expenses Deductible to the extent they exceed 10% of AGI Not deductible Deductible to the extent they exceed 10% of AGI (7.5% of AGI for 2017 and 2018)
Depreciation Fixed assets are generally capitalized and depreciated; In some cases, Section 179 immediate expensing of up to $500,000 is available Immediate expensing of most new and used property (excluding structures) through 2022; Section 179 limit increased to $5 million Immediate expensing of most new property (excluding structures); Section 179 limit increased to $1 million
Depreciable life of buildings 39 years for most non-residential buildings; 27.5 years for residential rentals 39 years for most non-residential buildings; 27.5 years for residential rentals 25 years
Mortgage interest Deductible on up to $1.1 million of debt; interest on second home deductible Deductible on up to $500,000 of debt; no second home or home equity interest Deductible 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 tax Allowable as an itemized deduction Property tax capped at $10,000; income and sales tax deduction repealed Same as House plan except unlimited carryover
Individual Alternative Minimum Tax (AMT) Imposed when minimum tax exceeds regular income tax Repealed after 2017; AMT credits refundable from 2019 through 2022 Increases AMT exemption amounts and phase-out
Business interest Generally deductible Generally limited to extent interest exceeds 30% of income; unlimited for small business Same as House plan except unlimited carryover
Cash method of accounting Generally limited to business with less than $1 million, $5 million, or $10 million in receipts depending on facts Expanded to include businesses with less than $25 million in receipts Expanded to include businesses with less than $15 million in receipts
Domestic production activities deduction Domestic producers eligible for a deduction equal to 9% of their qualifying income Repealed after 2017 Repealed after 2017 (2018 in the case of C corporations)
Corporate AMT 20% corporate AMT Repealed after 2017; AMT credits refundable from 2019 through 2022 Retains current law
Net operating losses (NOL) Generally carried back 2 years and forward 20 years Carryback repealed except farms (one year); carryover deduction limited to 90% of pre-net operating loss income Carryback repealed except farms (two years), carryover deduction limited to 90% of pre-net operating loss income
Gift and estate tax Tax of up to 40% imposed on gifts and estates, subject to a $5.49 million lifetime exemption per spouse Lifetime exemption doubled; estate tax repealed after 2024; gift tax remains in effect with 35% rate in 2024; step-up continues Lifetime 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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