How Do They Compare?
Senate Republicans released a tax reform plan on November 9, 2017. Like the House GOP bill – the “Tax Cuts and Jobs Act” – the Senate GOP plan would impact virtually every individual and business on a level not seen in over 30 years. Senate Republicans released a tax reform plan on November 9, 2017. Like the House GOP bill – the “Tax Cuts and Jobs Act” – the Senate GOP plan would impact virtually every individual and business on a level not seen in over 30 years.
Also on November 9, the House Ways and Means Committee approved, along party lines, a revised version of the House GOP bill. Republican leaders have said they are aiming to bring the bill to a floor vote during the week of November 13.
Both House and Senate legislation include the following sweeping changes:
- Repeal of AMT
- Higher Child Tax Credit
- Many Individual Tax Incentives Repealed
- Corporate Tax Rate Cut
- Many Business Tax Incentives Repealed
- Research Credit Retained
- International Reforms
Note: Taxpayers need to plan for several possible contingencies: passage of a final tax reform bill before year end, passage of the bill in early 2018, or the bill failing to move forward. The proposed changes in both the House GOP bill and the Senate GOP plan are forward-looking (after 2017 tax year) for the most part.
Tax Changes for Individuals
Income Tax Brackets
The House GOP bill and the Senate GOP plan includes proposed income ranges for their respective proposed tax brackets as indicated below:
Under both the House GOP bill and the Senate GOP plan, income levels would be indexed for inflation for a “chained CPI” instead of CPI. Under the House GOP bill, the benefit of the 12 percent rate would be phased out for taxpayers in the 39.6 percent bracket.
The House GOP bill calls for a near doubling of the standard deduction to $24,400 for married filing jointly and $12,200 for single filers. Heads-of-households could claim a standard deduction of $18,300. Similarly, the Senate GOP plan calls for these amounts to be $24,000, $12,000, and $18,000, respectively.
One goal of a higher standard deduction is to simplify tax filing by reducing by more than half the number of taxpayers who itemize deductions. Supporters argue that it effectively creates a more broadly applicable “zero tax bracket” for taxpayers earning less than the standard deduction amount.
The doubling of the standard deduction would effectively eliminate most individuals from claiming itemized deductions other than high-income taxpayers. For example, if the standard deduction for married filing jointly is $24,400, as under the House GOP bill, then only individuals with mortgage interest and charitable deductions in excess of $24,400 would claim them as itemized deductions. With fewer individuals claiming those deductions, this could have broad impact on both real estate prices and charitable organizations.
Deductions and Credits
Under both the House GOP bill and the Senate GOP plan, the number of individual deductions and credits would be pruned. However, the two proposals take different approaches.
- The home mortgage interest deduction would be retained, but modified under both proposals. For most debt incurred after the proposed effective date of November 2, 2017, the current $1,000,000 limitation would be reduced to $500,000 under the House GOP bill. The Senate GOP plan retains the home mortgage interest deduction, but eliminates the home equity interest deduction.
- Under the House GOP bill, the deduction for state and local income taxes would be repealed after 2017. Similarly, taxpayers would no longer be able to elect to deduct state and local sales taxes in lieu of state and local income taxes. Property taxes up to $10,000 could be deducted. The Senate GOP plan would eliminate the state and local tax deduction. There would be no carving out for property taxes as in the House GOP bill.
- The House GOP bill repeals the medical expense deduction. The Senate GOP plan preserves the medical expense deduction.
- The House GOP bill repeals the alimony deduction. The Senate GOP plan makes no changes regarding alimony.
Under the House GOP bill, the child tax credit would be increased to $1,600 and a temporary credit of $300 would be allowed for non-child dependents. A temporary family flexibility credit of $300 would be allowed with respect to the taxpayer (each spouse in the case of a joint return) who is neither a child nor a non-child dependent. The Senate GOP plan would increase the child tax credit to $1,650 and allow a $500 credit for non-child dependents.
Under the House GOP bill, the phase out for the combined child credit, the non-child dependent credit, and the credit for a non-child or non-child dependent would increase to $230,000 for married couples filing joint returns and $115,000 for single individuals. Under the Senate GOP plan, these amounts are increased to $1,000,000 and $500,000, respectively.
Under an amended version of the House GOP bill, the adoption credit is proposed to be retained, and the Senate GOP plan makes no changes to the credit. The maximum amount of the credit in 2017 is $13,570 and is scheduled to increase to $13,840 in 2018. Both the House GOP bill and the Senate GOP plan retain the earned income tax credit (EITC).
Federal Estate Tax
The House GOP bill calls for doubling the federal estate tax exemption and then eliminating the estate tax for decedents dying after 2024. The current maximum federal estate tax rate is 40 percent with an inflation-adjusted $5 million exclusion ($5.49 million in 2017), which married couples can combine for a $10 million exclusion ($10.98 million in 2017). The Senate GOP plan would keep the federal estate tax but increase the basic exclusion to $10 million for individuals, subject to inflation adjustments.
Tax Changes for Businesses
The House GOP bill calls for a 20 percent corporate tax rate beginning in 2018. The Senate GOP plan calls for a 20 percent corporate tax rate beginning in 2019. The maximum corporate tax rate currently tops out at 35 percent.
Business Tax Benefits
A number of proposed changes to various business incentives are included in the House GOP bill and Senate GOP plan. Chief among them is temporarily allowing immediate expensing of qualified property (qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023, with an additional year for certain longer production period property).
The bonus depreciation rate has fluctuated wildly over the last 15 years, from as low as zero percent to as high as 100 percent. It is often seen as a way to incentivize business growth and job creation. However, some economists have found that bonus depreciation does little to motivate businesses to buy new equipment or property that they would not otherwise have bought. Instead, bonus depreciation simply creates an incentive to accelerate already planned purchases to tax years when it is available. The House GOP bill also would temporarily increase the Code Sec. 179 expensing limitation to $5 million and the phase-out amount to $20 million for tax years beginning before 2023. Additionally, the House bill would modify the rules for deducting business interest and the rules for net operating losses.
Deductions and Credits
Numerous business tax preferences would be eliminated after 2017 under the House GOP bill and the Senate GOP plan. These include the Code Sec. 199 domestic production activities deduction, non-real property like-kind exchanges, the Work Opportunity Tax Credit, and more. Additionally, the rules for business meals would be revised.
The House GOP bill leaves the research and development credit in place, but requires five year amortization of research and development expenditures. The Senate GOP plan makes no changes to research and development incentives.
Both the House GOP bill and Senate GOP plan would cap the deduction for net interest expense at 30 percent of adjusted taxable income. Exceptions would exist for small businesses. This provision is an attempt to “level the playing field” between businesses that capitalize through equity and those that borrow.
Currently, owners of partnerships, S corporations, and sole proprietorships pay tax at the individual rates, with the highest rate at 39.6 percent. The House GOP bill proposes a 25 percent tax rate for pass-through income after 2017, with a 9 percent rate for certain small businesses. The Senate GOP plan provides for a 17.4 percent deduction of pass-through or sole proprietorship income.
Tax Changes for Exempt Organizations
The House GOP bill would modify the so-called “Johnson amendment,” which generally restricts Code Sec. 501(c)(3) organizations from political campaign activity. The House GOP bill would also revise reporting requirements for donor advised fund sponsoring organizations and impose an excise tax on the investment income of certain colleges and universities, among other changes. The Senate GOP plan would repeal tax-exempt status for professional sports leagues, among other changes.
Read the entire November 10, 2017 CCH Tax Briefing PDF with additional insight and analysis by clicking the button below.Read CCH Tax Briefing
As Congress debates on tax overhaul, MCB will keep clients informed of the proposed legislative changes regarding tax reform and the impact on our tax clients. Please contact an MCB Tax Advisor today if you require advice for year-end tax planning by clicking here or call us at 703.218.3600.