By Alistair M. Nevius
November 9, 2017
Thursday saw two developments in the tax reform legislative process. The Senate Finance Committee released a proposed tax reform bill, the Tax Cuts and Jobs Act, and the House Ways and Means Committee issued a revised version of H.R. 1, the bill it first introduced last week.
The Senate bill contains many of the same proposals as the House bill, but also differs in several significant respects from the proposed House bill.
Where the House bill would create four income tax rates for individuals, the Senate bill would employ a seven-bracket system, with tax rates of 10%, 12%, 22.5%, 25%, 32.5%, 35%, and 38.5%. The 38.5% rate would start for single taxpayers with taxable income over $500,000 and for married taxpayers filing jointly with taxable income over $1 million.
The Senate bill would create a $12,000 standard deduction for individual taxpayers, an $18,000 standard deduction for head-of-household filers, and a $24,000 standard deduction for married couples. It would also preserve the additional standard deduction for elderly and blind taxpayers.
The bill would allow individuals to deduct 17.4% of "domestic qualified business income" passed through from a partnership, S corporation, or sole proprietorship. The deduction would not apply to specified service businesses, except in the case of a taxpayer whose taxable income does not exceed $150,000 (for married individuals filing jointly; $75,000 for other individuals). The benefit of the deduction for service providers would be phased out for taxable income exceeding $150,000 (for married individuals filing jointly; $75,000 for other individuals). In the case of a taxpayer who has qualified business income from a partnership or S corporation, the amount of the deduction would limited to 50% of the W-2 wages of the taxpayer.
The Senate bill would increase the child tax credit to $1,650 (as opposed to $1,600 in the House bill). The child tax credit would be modified to allow a $500 nonrefundable credit for qualifying dependents other than qualifying children. The bill would also keep the adoption tax credit and the child and dependent care credit.
The Senate bill would eliminate the deduction for state and local taxes entirely. The House bill would allow a deduction for state and local real property taxes, up to $10,000.
The Senate bill would also retain the current deduction for medical expenses that exceed 10% of a taxpayer's adjusted gross income.
While the House plan would limit the deductibility of mortgage interest to $500,000 of acquisition indebtedness, the Senate bill would retain the current limit of $1 million but would repeal the deduction for interest on home equity indebtedness.
The Senate bill would lower the corporate tax rate to 20%—like the House bill—but would delay that lower rate until 2019.
Finally, the Senate bill would not repeal the estate tax but would double the exemption amount.
The Senate bill still needs to be marked up in the Senate Finance Committee and then differences with the House bill will need to be resolved before the legislation can be enacted.
—Alistair M. Nevius (Alistair.Nevius@aicpa-cima.com) is the JofA's editor-in-chief, tax.