By: Diana Teixeira, CPA, MST
On December 2, 2017, the Senate approved a tax reform plan, which is now on the table next to the House’s tax reform plan. While the ideas of tax reform have come a long way, there are still many differences for Congress to work out. These differences are highlighted below:
For individuals:
- House bill calls for four rates with a maximum of 39.6% after 2017, while the Senate calls for seven rates, with a maximum rate of 38.5%.
- Both bills leave the Net Investment Income Tax and the additional Medicare Tax intact.
- House bill nearly doubles the standard deduction to $24,400 for MFJ filers and $12,200 for Single filers. Senate bill increases these to $24,000 and $12,000, respectively, but only temporarily.
- Both bills repeal personal exemption deductions.
- House bill would limit mortgage interest deduction for mortgages over $500,000. The Senate bill keeps the limitation as is but disallows a deduction for home equity line interest.
- Both bills repeal the deduction for state and local income taxes. Both bills allow a deduction of up to $10,000 of property taxes.
- House bill repeals the medical expense deduction while the Senate bill temporarily lowers the threshold to 7.5% of AGI.
- House bill increases child tax credit to $1,600, while the Senate bill increases the credit to $2,000.
- House bill combines the education credits after 2017, while the Senate bill leaves them as is.
- House bill repeals the student loan interest deduction while Senate bill leaves as is.
- House bill generally retains the current rules for retirement plans but does change the re-characterization rules while the Senate makes no changes here.
- House bill doubles the estate tax exemption with full a repeal after 2024 while the Senate bill doubles the exemption through 2025.
- House bill repeals the individual Alternative Minimum Tax (AMT) but the Senate bill retains it but offers higher exemptions.
- House bill makes no changes to the Individual Mandate Tax while the Senate bill repeals the mandate.
For corporate returns:
- House bill calls for a 20% corporate rate in 2018, while the Senate bill calls for 20% corporate rate beginning in 2019.
- House bill repeals the AMT for corporations while the Senate bill would retain it.
- Both bills increase the bonus depreciation to 100%, but different timeframes would apply.
- House bill raises the Section 179 deduction to $5 million with a $20 million threshold, while the Senate bill raises the Section 179 deduction to $1 million with a $2,500,000 threshold.
- Both bills remove the Section 199 Domestic Production Activities Deduction.
- The house bill leaves the R&D credit, but requires a five-year amortization of the expenditures. The Senate bill, while keeping the AMT, still allows for the credit but makes it potentially harder for the credit to be used.
- Both bills cap the deduction for net interest expenses, generally to 30% of adjusted taxable income.
For pass-through entities:
- The House bills generally calls for a 25% tax rate on pass-through income after 2017, while the Senate bill generally allows for a 23% deduction of certain pass-through income.
As you can see, while we all feel pretty close to tax reform, there are some serious discrepancies in Congress’ ideas. While we cannot rely on any of the above-proposed changes, the industry is fairly certain tax rates will be going down. Our message for year-end is the same as it has been over the years . . . defer income, accelerate deductions. The only difference is this time the message seems to hold more weight as tax deductions are more meaningful now than they most likely will be in the future.
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