On November 9, Senate Republicans and Finance Committee Chairman Orrin Hatch (R-Utah) released their tax reform legislation, the Chairman’s Mark of the “Tax Cuts and Jobs Act”. While the Senate proposal has some similarities to the House bill the Senate Finance Committee clearly takes a different approach to tax reform.
Differences between the Bills
Perhaps the most notable difference in the two bills is that the Senate proposal would delay the corporate tax rate cut to 20% until 2019 due to budget and deficit constraints. The House version proposes that the corporate cut be immediate (2018) and permanent.
The Senate bill also offers seven rates on the individual side of taxation (10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5%; whereas, the House bill offers four individual rates (12%, 25%, 35% and 39.6%). Income thresholds for each bracket are not yet designated in the Senate’s proposal.
Additionally, the Senate bill would maintain the mortgage interest deduction cap at $1 million; the House proposes a reduced cap of $500,000. The Senate bill would completely eliminate the state and local tax (SALT) deduction, presumably including the real estate property tax itemized deduction. This proposal, even more onerous than the counterpart provision in the House bill, has drawn criticism from both Democrats and Republicans hailing from high-tax states. And while the Senate bill retains the estate tax, unlike the House’s proposed phase out of the tax, it doubles the threshold for qualifying estates.
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.
Also, The Senate bill would also retain the current deduction for medical expenses that exceed 10% of a taxpayer’s adjusted gross income (AGI).
Reportedly, the House and Senate are both still discussing repealing the Patient Protection and Affordable Care Act’s (ACA’s) individual mandate. This move could generate substantial revenue to pay for proposed tax cuts. On November 8, the Congressional Budget Office reported that repealing the individual mandate would reduce coverage. However, it would also reduce federal deficits by over $300 billion between 2018 and 2027.
Pass Through Business Income Changes
The Senate 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 be limited to 50% of the Form W-2 wages of the taxpayer.
Next Steps for Tax Reform
The Senate Finance Committee is expected to begin markup of its bill on November 13. Republicans hope to pass tax reform legislation before Thanksgiving.
Also on November 9, the House issued a revised version of the tax reform bill introduced on November 2, including its final markups. Click here to read more.
This legislation is moving hurriedly through both chambers of Congress and is expected to continue to evolve through the mark up processes in both the House and the Senate. Please continue to monitor our website or look for LinkedIn posts. Feel free to contact Bob Grossman or Don Johnston if you have questions about the latest developments.