What does the Senate and House GOP Tax Bills mean for me?
Here is a quick rundown of the key differences and similarities between the two versions of the Tax Cuts and Jobs Act.
The House of Representatives recently passed its version of a tax reform bill but the version that is making its way through the Senate looks a bit different. Why is this important? Because before any tax reform proposal can be signed into law, both chambers must pass identical bills.
Republicans now will work quickly on a compromise measure to send to President Donald Trump by Christmas!
With that in mind, let’s jump into the major differences and similarities.
Individual tax brackets and standard deductions
For individuals, one of the most important differences between the two bills is how the marginal tax brackets for individuals would be structured.
The House’s version the new bill will change the number of tax brackets. The overall goal would be to simplify the tax code by reducing the number of tax brackets the House is keeping their promise with the GOP. The rates would be as follows: 12%, 25%, 35%, 39.6%
The Senate’s version keeps the seven bracket structure that we currently have, however, it lowers the rates.
- Current Rates – 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%,
- Proposed Senate Rates – 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%
The Senate’s bill makes its individual tax cuts temporary, ending after 2025, while the House’s plan makes them permanent.
The House plans to repeal alternative minimum tax for both individual and corporations while Senate plans to retain alternative minimum tax with higher exemption amounts and phaseout thresholds.
The standard deduction is used by about 70% of U.S. taxpayers. They both have in common the fact that they’d be getting rid of personal exemptions, of $4,050, and are both almost doubling the standard deduction as shown below.
Tax Filing Status
|Current 2018 law||House bill||Senate bill|
|Head of household||$9,550||$18,300||
|Married filing jointly||$13,000||$24,400||
For starters, both versions of the Tax Cuts and Jobs Act would lower the top corporate tax rate from 35% to 20%. The key difference is that the cut would go into effect in 2018 under the House’s plan, while the Senate would delay the cut until 2019.
While both versions cut the corporate tax rate to 20%, the Senate is looking to reinstate the corporate alternative minimum tax. Companies that will try to use certain credits to lower their effective tax rates, such as research and development tax credit, may lose out on this incentive due to the alternative minimum tax calculation.
Businesses would also be able to repatriate cash held overseas at a special 14% rate under the House bill, while the Senate would allow a lower 10% rate.
Millions of U.S. businesses, in the form of LLC’s, S Corps or partnerships “pass through” their income to individuals, who then pay personal income tax on those earnings and then pay at their personal income tax rate- not the corporate rate.
- The House provides a bigger tax cut to “pass-through” businesses than the Senate does. Senators approved a 23 percent tax deduction — subject to certain limitations — on business income earned from partnerships, limited liabilities, and other so-called pass-through businesses. The House version would create a 25 percent tax rate for such business income — with restrictions on which businesses could qualify. Small businesses would get extra relief under the House legislation as well.
Both the Senate and the House, expand their write-offs allowed for companies that buy equipment.
Both the Senate and the House will impose a one time tax on profits that U.S. based corps are holding overseas.
The Senate bill ends tax advantages for business that are moving overseas and requires corporations to continue to pay the business version of the alternative minimum tax.
The House measure seeks to eliminate tax incentives that encourage some U.S. companies to move overseas.
So how do these tax reforms affect me as an individual?
Tax deductions and credits for individuals
Let’s start with the largest tax deduction of all, under current law.
The State and Local Tax Deduction, also known as the SALT deduction, is a big deal to Americans who live in high-tax states, such as California, New York, and New Jersey. The House and Senate bill eliminates this deduction completely. While both House and Senate will allow a deduction for property taxes up to $10,000. That’s a big deal!
Some deductions would be preserved under both bills with some major modifications.
Specifically, both preserve the mortgage interest deduction. However, the Senate limits home acquisition indebtedness to $1 million on principle and one other residence. While the House reduces the deduction for interest payments on $500,000 debt accrued after 2017 and only for the principal residence. Both eliminate the interest paid on Home Equity Debt.
They also both keep the deduction for charitable contributions, as well as the adoption tax credit.
Both the House and the Senate would increase the tax credits available to families, but the Senate bill is significantly more generous in this respect.
The House bill raises the current $1,000 child tax credit to $1,600 and introduces a new “Family Flexibility Credit” worth $300 per year for individuals and $600 for couples.
The Senate bill doubles per-child tax credit to $2,000 and provides for a $500 credit for other qualifying dependents, and also dramatically increases the phase-out income limit for the credit.
The bills’ effects on education tax breaks are a major difference. The Senate bill preserves most education tax benefits, while the House makes significant changes to some potentially valuable education tax breaks. Just to name a few:
- The House bill would repeal the deduction for student loan interest.
- The LifeTime Learning Credit would be repealed, as would the tuition and fees deduction, but the American Opportunity Credit would become available for five years (currently four).
- Coverdell ESAs would be unavailable for new contributions after 2017.
The Senate’s bill preserves a few more key deductions that the House’s version would get rid of, including the deduction for student loan interest, as well as the medical expense deduction.
Currently, when someone dies the estate owes taxes on the value of assets transferred to heirs about $5.5 million for individuals, $11 million for couples.
Both the House and Senate, would immediately double the lifetime exemption for estate tax to about $11 million for individuals and $22 million for couples.
The key difference is that under the House bill, the estate tax goes away completely in 2024, while the Senate keeps the tax, just with the higher exemption amounts.
With the Alternative Minimum Tax, or AMT, which is aimed at ensuring that higher-earning people pay at least some tax, even if they have a lot of deductions, there are some differences. The House measure repeals the tax, and the Senate doesn’t repeal it completely but reduces the number of people who have to pay it.
Affordable Care Act
Finally, it’s important to mention one provision that was recently added to the Senate’s version of the bill. The latest version would reduce the penalty for not having qualifying health insurance, known as the individual mandate, to $0. The House’s version does not make changes to any healthcare-related tax provisions.
Lastly, if you itemize your deductions, The Senate will say bye bye to deductions like the moving expenses and tax preparation. The House will get rid of medical expense deduction altogether. While both House and Senate remove the Itemized deduction phase-outs.
As stated earlier, in order for the tax reform plans to go into law, both the House and Senate must pass identical bills. Although the ideas are similar, there are still quite a few differences.
The bottom line is that the eventual tax reform bill that is passed (if any) is likely to be significantly different than either of the two versions we’ve seen so far. More to come!