It appears likely that a federal income tax bill will be passed soon. The following is a list of some of the major items (and differences) in the House and Senate tax bills:
1. Individual Tax Brackets: The Senate bill has 7 tax brackets ranging from 10% to 38.5%. The House bill has 4 brackets ranging from 12% to 39.6% (no change in top rate).
2. Individual Tax Break Sunset: The Senate bill ends tax breaks for individuals in 2025. The House bill makes the individual tax cuts permanent.
3. Corporate Tax Rates: The House bill enacts a 20% corporate rate in 2018. The Senate bill enacts a 20% corporate rate in 2019. The corporate rate would be permanent under both bills.
4. Pass-through Business Income: The tax treatment of pass-through income is handled differently in each bill:
(a) The House bill provides for an income tax rate of 25% on a portion of the income. The Senate bill allows for a deduction equal to 23% of the pass-thru business income, with the taxable income being taxed at ordinary rates.
(b) There are many exceptions and limitations to these pass-through business income rules depending on income levels, amount of active participation, type of business and more.
(c) Although some taxpayers will benefit from a 25% tax rate under the House bill, the effective rate for many other pass-through business owners will be at least 35% under the House bill and 29.6% or more under the Senate bill.
(d) There is a loss limitation provision in the Senate bill that limits the deductible loss from an active pass through business. This limitation could have a significant impact on taxpayers who have business losses and substantial income from other sources (such as wages).
5. Individual AMT: The alternative minimum tax (AMT) is repealed in the House bill, while the Senate bill maintains it with increased phase-out and exemption amounts.
6. Corporate AMT: The House bill repeals the corporate AMT. The Senate bill would retain the corporate AMT at the current 20% rate.
7. Medical Expenses: The House bill would repeal deductions for medical expenses outright, but the Senate bill would go the other direction and temporarily reduce the AGI deduction limitation floor from 10% under current law to 7.5% for all taxpayers for tax years beginning after 2016 and ending before 2019.
8. Estate Tax Exemption: The Senate bill doubles the exemption on the estate tax up to $11 million being tax-free, while the House increases the exemption to $10 million with annual increases and a full repeal in 2024.
9. Mortgage Interest Deduction: The Senate bill maintains the current mortgage interest deduction based on a $1 million mortgage but suspends interest deduction on home equity loans. The House bill cuts the mortgage limitation in half to $500,000 for newly purchased homes.
10. State Tax Deductions: Each bill would repeal the deduction for state income and sales tax, and limit the deduction for property taxes to $10,000 annually.
11. Capital Expensing: Each bill would provide for immediate expensing of certain qualified assets for 5 years:
12. Standard Deduction: Each bill would provide for a $24,000 individual standard deduction ($12,000 for single).
13. Corporate Interest Deduction: Each bill caps net interest deduction at 30% of an amount based on earnings (EBITDA under the House bill and EBIT under the Senate bill).
14. Net Operating Losses (NOLs): Each bill limits the ability to offset taxable income in a carryforward year. The House bill limit is 90% of income to be offset, while the Senate allows for 90% decreasing to 80% in 2022. Additionally carrybacks are eliminated in both bills.
15. Section 199: The Section 199 domestic production deduction would be repealed under each bill.
16. Research Credit: Both bills retain the research credit, but beginning in 2023 in the House bill, and 2026 in the Senate bill, capitalization and amortization of such expenses would be required.
17. ACA Individual Mandate: The Senate bill repeals the Affordable Care Act’s individual mandate. The House bill does not.
18. Repatriation Tax: The House bill would generally provide a 14% tax on liquid assets and 7% tax on non-liquid assets. The Senate bill would impose a 14.5% tax on liquid assets and a 7.5% tax on non-liquid assets.
For more information on the federal House and Senate tax bills, please contact me at Jsenney@pselaw.com or 937-223-1130.