Early Saturday, Dec. 2, 2017, the Senate passed its version of tax reform by a vote of 51-49. This Senate bill and the House bill passed several weeks ago will now move to a process of reconciliation, under which the differences between the bills must be resolved. After the process of reconciliation, an identical bill must be passed by both houses of Congress and then move to President Trump for signature. In our initial review of the Senate bill and comparison with the House bill, we would note the following:
- For individual tax payers, the House bill provides for 4 tax brackets (excluding a 0% tax bracket) and a top tax rate of 39.6%. The Senate bill provides for 7 tax brackets and a top individual tax rate of 38.5%. These rates are effective in 2018.
- Effective in 2018, each bill would essentially double the standard deduction to $24,400 for married filing joint taxpayers under the House bill, and $24,000 under the Senate bill. Each bill would eliminate personal exemptions beginning in 2018.
- Effective in 2018, the House and Senate bills would eliminate the deduction for state and local income tax. Each bill would allow an itemized deduction for real property tax to a limit of $10,000 for married persons filing joint returns.
- Both bills would continue to allow itemized deductions for charitable contributions.
- Both bills would continue a limited mortgage interest deduction, however, the House bill would reduce the amount of debt eligible for the deduction to $500,000 (from the prior limit of $1 million) for debt incurred after Nov. 2, 2017.
- The House bill would eliminate the itemized deduction for medical expenses, while the Senate bill does not make this change.
- Each bill would eliminate the deduction for miscellaneous itemized deductions.
- While the House bill would make these changes to itemized deductions and personal exemptions permanent, the Senate bill would revert some items to prior law in 2026.
- The House bill would repeal the individual alternative minimum tax (AMT). The Senate bill would continue the individual AMT, but with an increased exemption.
- The House bill (effective in 2018) provides a 20% C-corporation tax rate with a 25% rate of personal service corporations. The Senate bill provides for a 20% corporate tax rate, first effective in 2019.
- Each bill provides that business income of pass-through entities will be subject to a maximum tax rate that is lower than the 39.6% or 38.5% individual tax rates mentioned above. The House bill accomplishes that goal through a maximum tax rate of 25% on all or a portion of the business income. Certain personal service businesses are not eligible for the reduced rate under the House bill. The Senate bill would allow a deduction of 23% for all domestic business income (which excludes investment income). For income eligible for this 23% deduction, the effective maximum rate would be 29.645% (a 23% reduction of the 38.5% top individual rate).
- Both tax bills would have expansion of Sec. 179 and bonus depreciation. The House bill would expand Sec. 179 expensing of assets to $5 million per year for years 2018 through 2022. The Senate bill would increase Sec. 179 expensing of assets to $1 million per year beginning in 2018. 100% first year bonus depreciation would apply for eligible assets placed in service after Sept. 27, 2017, through 2022 under both bills.
- Both the House and Senate bill would increase the lifetime estate tax exclusion (currently $5.49 million for 2017) to $10 million, effective in 2018. The House bill would repeal the federal estate tax effective in 2025. The Senate bill does not have a provision for the repeal of the federal estate tax.
We expect the process of reconciliation to move forward, but the success of each of the changes cannot be predicted with certainty. As those matters progress, watch for additional details on handling these substantial changes.