How the Senate’s Tax Reform Bill is Different Than the House Version

The U.S. Senate Finance Committee released their proposed tax reform bill, the Tax Cuts and Jobs Act, on November 9th, one week following the House Ways and Means Committee’s release of their original version of the bill, which was revised this week.  Click the links to read our previous analysis of the House bill on individuals and businesses.

Many of the provisions in the Senate bill are similar to the House bill, but differs in several major areas.  The purpose of this article is to summarize some of the key differences and help you determine which one is better for you.  The Senate bill still needs to be marked up and then the differences with the House bill will need to be resolved before the bill can be enacted.  We will keep you posted with any updates so that you can take advantage of the new changes.

Provision: Individual Income Tax Brackets
Senate Version
Retains seven brackets while reducing rates, bringing the top marginal rate to 38.5 percent and avoiding a bubble rate.
House Version
Consolidates current seven income tax rates into four, while retaining the top marginal rate of 39.6 percent and including an income recapture provision which phases out the effect of the 12 percent bracket for high earners, sometimes called a “bubble rate.”

Provision: Standard Deduction
Senate Version
$12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers, indexed to chained CPI.

House Version
$12,200 for single filers, $18,300 for heads of household, and $24,400 for joint filers, indexed to chained CPI.

Provision: Child and Family Tax Credits
Senate Version
Eliminates the state and local tax deduction except for taxes paid or accrued in carrying on a trade or business; keeps the mortgage interest deduction for acquisition debt, but eliminates the deduction for equity debt.
Increases credit value to $1,650, with the phase-out for joint filers beginning at $1 million; and keeps the current adoption credit.
House Version
Retains state and local property tax deduction, capped at $10,000, while eliminating the remainder of the state and local tax deduction, except for taxes paid or accrued in carrying on a trade or business; limits the mortgage interest deduction to the first $500,000 in principle value.
Increases child tax credit value to $1,600, with the phase-out for joint filers beginning at $230,000, while creating a new $300 per-person family tax credit for those not eligible for the child tax credit, to expire
after five years; repeals adoption credit.

Provision: Itemized Deductions
Senate Version
Eliminates the state and local tax deduction except for taxes paid or accrued in carrying on a trade or business; keeps the current deduction for medical expenses that exceed 10% of adjusted gross income and mortgage interest deduction for acquisition debt, but eliminates the deduction for equity debt.
House Version
Retains state and local property tax deduction, capped at $10,000, while eliminating the remainder of the state and local tax deduction, except for taxes paid or accrued in carrying on a trade or business; limits the mortgage interest deduction to the first $500,000 in principle value.

Provision: Treatment of Pass-Through Income
Senate Version
Adopts a 17.4 percent deduction for pass-through income, which may provide benefits to smaller businesses less able to take advantage of the House provisions; both proposals restrict many service providers from preferential treatment, though the Senate’s restrictions are broader.
House Version
Caps the pass-through rate at 25 percent and adds a lower minimum rate (added in markup), then sets anti-abuse rules that begin with the rebuttable presumption that 70 percent of pass-through income is wage income (subject to the regular rate schedule), while 30 percent is business income (subject to the lower rate cap)

Provision: Corporate Rate Reduction Timing
Senate Version
Cuts rate to 20 percent, delayed to tax year 2019
House Version
Cuts rate to 20 percent, effective tax year 2018

Provision: Section 179 Expense
Senate Version
Raises Section 179 small business expensing cap to $1 million with a phaseout starting at $2.5 million, and shortens the depreciation of real property to 25 years
House Version
Increases the Section 179 small business expensing cap from $500,000 to $5 million, with the phaseout beginning at $20 million, and maintains current depreciation schedules for real property

Provision: Tax Treatment of Interest
Senate Version
Caps net interest deduction at 30 percent of earnings before interest and taxes (EBIT)
House Version
Caps net interest deduction at 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA)

Provision: Net Operating Losses
Senate Version
Eliminates net operating loss carrybacks while limiting NOL carryforwards to 90 percent of taxable income
House Version
Eliminates net operating loss (NOL) carrybacks while providing for indefinite net operating loss carryforwards, increased by a factor reflecting inflation and the real return to capital, while restricting the deduction of NOLs to 90 percent of current year taxable income

Provision: Cash Accounting
Senate Version
Increases small business eligibility for small businesses, from $5 million to $15 million
House Version
Increases small business eligibility for small businesses, from $5 million to $25 million

Provision: Business Credits and Deductions
Senate Version
Modifies, but does not eliminate, the rehabilitation credit and the orphan drug credit, while retaining certain other preferences eliminated in the House version
House Version
Eliminates credits for orphan drugs, energy, private activity bonds, rehabilitation, and contributions for capital, among others

Provision: Retirement Accounts
Senate Version
Eliminates catch-up contributions for high-wage employees and consolidates contribution limits for 457(b)s to match 401(k)s and 403(b)s.
House Version
No major changes

Provision: Estate Tax
Senate Version
Doubles the estate tax exemption
House Version
Increases exemption to $10 million, indexed for inflation, with repeal after six years

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