Early this morning, the Senate passed a sweeping overhaul of U.S. tax code in a bill known as the Tax Cuts and Jobs Act. The final Senate bill differs from the tax bill which was passed by the House in mid-November. Those differences must now be reconciled and a final piece of legislation voted on by both chambers. We will keep an eye on that. Meanwhile, below are a list of the key measures from the Senate bill and how it differs from the House version.
Changes individual income tax brackets: There are seven brackets in today’s individual tax code: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
The Senate bill also calls for seven brackets but changes the rates on taxable income to:
– 10% (income up to $9,525 for individuals; up to $19,050 for married couples filing jointly)
– 12% (over $9,525 to $38,700; over $19,050 to $77,400 for couples)
– 22% (over $38,700 to $70,000; over $77,400 to $140,000 for couples)
– 24% (over $70,000 to $160,000; over $140,000 to $320,000 for couples)
– 32% (over $160,000 to $200,000; over $320,000 to $400,000 for couples)
– 35% (over $200,000 to $500,000; over $400,000 to $1 million for couples
– 38.5% (over $500,000; over $1 million for couples)
The House bill, by contrast, only calls for four brackets: 12%, 25%, 35% and 39.6%.
Nearly doubles the standard deduction: The House and Senate bills nearly double the standard deduction. For single filers the Senate bill increases it to $12,000 from $6,350 currently; and it raises it for married couples filing jointly to $24,000 from $12,700.
Eliminates personal exemptions: Today you’re allowed to claim a $4,050 personal exemption for yourself, your spouse and each of your dependents. Both the Senate and House bills eliminate that option.
Kills state and local income tax deduction, limits property tax break: Today itemizers may deduct their property taxes as well as their state and local income or sales taxes. This is known as the SALT deduction.
The original Senate bill called for a full repeal of the SALT deduction. But it was amended to preserve an itemized deduction for property taxes but only up to $10,000, which is identical to the House measure.
Expands the child tax credit: The Senate bill increases the child tax credit to $2,000 per child, up from $1,000 today, and above the $1,600 proposed in the House bill. Unlike the first $1,000, however, the additional $1,000 wouldn’t be refundable.
The credit would be available for any children under 18, up from today’s under-17 age limit. But it reverts to under 17 again in 2025, a year before the increase is set to expire under the bill.
The Senate bill expands who is eligible for the credit by raising the roof on the income thresholds where the credit starts to phase out: $500,000 for married tax filers, up from $110,000 today.
Filers with dependents who are not qualified children may be able to claim a new $500 nonrefundable credit per dependent. Under the House bill, there would be a new $300 per person credit for parents and dependents over 17.
Keeps mortgage interest deduction as is: The Senate bill would still let you claim a deduction for the interest you pay on mortgage debt up to $1 million. The House version caps the loan limit at $500,000 for new mortgages.
The Senate bill includes two changes on home-related financing: It disallows interest deductions for home equity loans. And it lengthens the time you must live in a home to get the full tax-free exclusion on your gains when you sell it.
Preserves the Alternative Minimum Tax: The original Senate bill, like the House-passed bill, would repeal the AMT. But to help offset the cost of other late amendments, the final revision of the Senate bill now keeps the AMT in place but raises the amount of income exempt from it.
Preserves the estate tax, but raises the exemption: The Senate bill proposes doubling estate tax exemption levels which are currently set at $5.49 million for individuals, and $10.98 million for married couples. The House was calling for a total repeal of the estate tax. Even at today’s levels, only 0.2% of all estates are subject to the estate tax.
Increases teacher deduction: Teachers who buy their own supplies for the classroom may deduct up to $250 today. The Senate bill doubles that amount to $500. The House bill eliminates the deduction altogether.
Expands the medical expense deduction: Today itemizers may deduct their medical and dental expenses that exceed 10% of their adjusted gross income. While the House bill gets rid of that deduction, the Senate bill not only keeps it but temporarily lowers that 10% threshold to 7.5% for tax years 2017 and 2018.
Repeals the individual mandate to buy health insurance: The Senate bill repeals ObamaCare’s individual mandate as part of their tax-cut bill, meaning people will not pay a tax penalty for refusing to purchase health insurance. The House version did not include this mandate.
Cut the corporate rate: Like the House bill, the Senate bill would cut the corporate tax rate to 20% from 35% today. But the 20% rate would not take effect until 2019 under the Senate proposal.
Make expensing rules more generous: Senate Republicans want to make it possible for businesses to immediately and fully expense new equipment for five years, then phases the provision out by 20 percentage points per year thereafter. A House provision limits it to five years.
Lower taxes on pass-through business income: Most U.S. businesses are set up as pass-throughs, not corporations. That means their profits are passed through to the owners, shareholders and partners, who pay tax on them on their personal returns under ordinary income tax rates. Both the House and Senate bills lower taxes on the business portion of a filer’s passthrough income.
The House bill dropped the top income tax rate to 25% from 39.6%, while prohibiting anyone providing professional services (e.g., lawyers and accountants) from taking advantage of the lower rate. It also phases in a lower rate of 9% for businesses that earn less than $75,000.
The Senate bill lowers taxes on filers in pass-throughs by letting them deduct 23% of their income, up from 17.4% originally.
The 23% deduction would be prohibited for anyone in a service business — except those with taxable incomes under $500,000 if married ($250,000 if single).
Prevent abuse of pass-through tax break: If the owner or partner in a pass-through also draws a salary from the business, that money would be subject to ordinary income tax rates. To prevent people from recharacterizing their wage income as business profits to get the benefit of the pass-through deduction, the Senate bill would automatically limit the deduction to half of the W-2 wages of the pass-through entity or its share to the individual taxpayer. The W-2 rule would not apply, however, if the filer’s taxable income is under $500,000 if married, $250,000 if single.
Change how U.S. multinationals are taxed: Today U.S. companies owe tax on all their profits, regardless of where the income is earned. They’re allowed to defer paying U.S. tax on their foreign profits until they bring the money home.
The Senate bill proposes changes to move the U.S. to a territorial system. It also includes a number of anti-abuse provisions to prevent corporations with foreign profits from gaming the system. It would also require companies to pay a one-time low tax rate on their existing overseas profits — 14.5% on cash assets and 7.5% on non-cash assets (e.g., equipment abroad in which profits were invested), slightly higher than the 14% and 7% rates in the House bill.
We will continue to monitor the bill’s progress. If you have questions about how any of these changes will impact you directly, please don’t hesitate to contact us.