On Novem­ber 2, 2017, House Repub­li­cans released their com­pre­hen­sive tax reform plan, the Tax Cuts and Jobs Act. Then, on Novem­ber 9, 2017, Sen­ate Repub­li­cans released their own plan. The two plans have much in com­mon, but also have sig­nif­i­cant dif­fer­ences. Some key pro­vi­sions of these tax pro­pos­als are dis­cussed below. Of course, pro­vi­sions may change as the leg­is­la­tion winds its way through Con­gress. Most pro­vi­sions, if enact­ed, would be effec­tive for 2018. Com­par­isons below are gen­er­al­ly for 2018.

Indi­vid­ual income tax rates

Cur­rent law. There are sev­en reg­u­lar income tax brack­ets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

House pro­pos­al. The sev­en tax brack­ets would be reduced to four: 12%, 25%, 35%, and 39.6%.

 

Income Brack­et Thresh­olds
Tax Rate Sin­gle Mar­ried Fil­ing Jointly/ Sur­viv­ing Spouse Mar­ried Fil­ing Sep­a­rate­ly Head of House­hold Trust/Estate
12% $0 $0 $0 $0 $0
25% $45,000 $90,000 $45,000 $67,500 $2,550
35% $200,000 $260,000 $130,000 $200,000 $9,150
39.6% $500,000 $1,000,000 $500,000 $500,000 $12,500

 

In addi­tion, the ben­e­fit of the 12% rate would be recap­tured by an addi­tion­al tax if adjust­ed gross income (AGI) exceeds $1,000,000 ($1,200,000 for mar­ried fil­ing joint­ly and sur­viv­ing spous­es).

Sen­ate pro­pos­al. There would be sev­en tax brack­ets: 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%.

 

Income Brack­et Thresh­olds
Tax Rate Sin­gle Mar­ried Fil­ing Jointly/ Sur­viv­ing Spouse Mar­ried Fil­ing Sep­a­rate­ly Head of House­hold Trust/Estate
10% $0 $0 $0 $0 $0
12% $9,525 $19,050 $9,525 $13,600 N/A
22% $38,700 $77,400 $38,700 $51,800 N/A
24% $70,000 $140,000 $70,000 $70,000 $2,550
32% $160,000 $320,000 $160,000 $160,000 N/A
35% $200,000 $400,000 $200,000 $200,000 $9,150
38.5% $500,000 $1,000,000 $500,000 $500,000 $12,500

 

Stan­dard deduc­tion, item­ized deduc­tions, and per­son­al exemp­tions

Cur­rent law. In gen­er­al, per­son­al (and depen­den­cy) exemp­tions are avail­able for you, your spouse, and your depen­dents. Per­son­al exemp­tions may be phased out based on the amount of your adjust­ed gross income.

You can gen­er­al­ly choose to take the stan­dard deduc­tion or to item­ize deduc­tions. Addi­tion­al stan­dard deduc­tion amounts are avail­able if you are blind or age 65 or old­er.

Item­ized deduc­tions include deduc­tions for: med­ical expens­es, state and local tax­es, home mort­gage inter­est, invest­ment inter­est, char­i­ta­ble gifts, casu­al­ty and theft loss­es, job expens­es and cer­tain mis­cel­la­neous deduc­tions, and oth­er mis­cel­la­neous deduc­tions. There is an over­all lim­i­ta­tion on item­ized deduc­tions based on the amount of your adjust­ed gross income.

House pro­pos­al. The stan­dard deduc­tion would be sig­nif­i­cant­ly increased, but per­son­al and depen­den­cy exemp­tions would no longer be avail­able, and addi­tion­al stan­dard deduc­tion amounts for the blind and those over age 65 would no longer be avail­able.

Most item­ized deduc­tions would be elim­i­nat­ed (or restrict­ed).

  • The deduc­tion for mort­gage inter­est would still be avail­able, but the ben­e­fit would be reduced for some indi­vid­u­als, and inter­est on home equi­ty loans would no longer be deductible.
  • The deduc­tion for state and local tax­es would be lim­it­ed to $10,000 of real prop­er­ty tax­es (income tax­es, sales tax­es, and per­son­al prop­er­ty tax­es would not be deductible).
  • The deduc­tion for per­son­al casu­al­ty loss­es would be elim­i­nat­ed, except for pre­vi­ous­ly grant­ed relief for qual­i­fied vic­tims of Hur­ri­canes Har­vey, Irma, and Maria.
  • The char­i­ta­ble deduc­tion would still be avail­able, but mod­i­fied.

Sen­ate pro­pos­al. The stan­dard deduc­tion would be sig­nif­i­cant­ly increased, and the addi­tion­al stan­dard deduc­tion amounts for those over age 65 or blind would still be avail­able. The per­son­al and depen­den­cy exemp­tions would no longer be avail­able.

Most item­ized deduc­tions would be elim­i­nat­ed (or restrict­ed).

  • The deduc­tion for mort­gage inter­est would still be avail­able, but not for home equi­ty loans.
  • The deduc­tion for all state and local tax­es would be elim­i­nat­ed.
  • The deduc­tion for per­son­al casu­al­ty loss­es would be elim­i­nat­ed unless the loss was incurred in a fed­er­al­ly declared dis­as­ter.
  • The char­i­ta­ble deduc­tion would still be avail­able, but mod­i­fied.

Stan­dard deduc­tion, item­ized deduc­tions, and per­son­al exemp­tions

Per­son­al and Depen­den­cy Exemp­tions (you, your spouse, and depen­dents)
Cur­rent law House pro­pos­al Sen­ate pro­pos­al
Exemp­tion $4,150 No per­son­al exemp­tion No per­son­al exemp­tion

 

Stan­dard Deduc­tion
Cur­rent law House pro­pos­al Sen­ate pro­pos­al
Mar­ried fil­ing joint­ly $13,000 $24,400 $24,000
Head of house­hold $9,550 $18,300 $18,000
Single/married fil­ing sep­a­rate­ly $6,500 $12,200 $12,000
Addi­tion­al aged/blind
Single/head of house­hold $1,550 Not avail­able $1,550
All oth­er fil­ing sta­tus­es $1,250 Not avail­able $1,250

 

Item­ized Deduc­tions
Cur­rent law House pro­pos­al Sen­ate pro­pos­al
Med­ical expens­es Yes No No
State and local tax­es Yes, income (or sales) tax, real prop­er­ty tax, per­son­al prop­er­ty tax $10,000 of real prop­er­ty tax only No
Home mort­gage inter­est Yes, lim­it­ed to $1,000,000 ($100,000 for home equi­ty loan) Yes, lim­it­ed to $500,000, prin­ci­pal res­i­dence only, and no home equi­ty loan Yes, but no home equi­ty loan
Invest­ment inter­est Yes No No
Char­i­ta­ble gifts Yes Yes, 50% AGI lim­it raised to 60% for cer­tain cash gifts Yes, 50% AGI lim­it raised to 60% for cer­tain cash gifts
Casu­al­ty and theft loss­es Yes No, but con­tin­ued relief for qual­i­fied vic­tims of Hur­ri­canes Har­vey, Irma, and Maria Fed­er­al­ly declared dis­as­ters only
Job expens­es and cer­tain mis­cel­la­neous deduc­tions Yes No No
Oth­er mis­cel­la­neous deduc­tions Yes No No

 

Child tax cred­it and new fam­i­ly tax cred­it

Cur­rent law. The max­i­mum child tax cred­it is $1,000. The child tax cred­it is phased out if mod­i­fied adjust­ed gross income exceeds cer­tain amounts. If the cred­it exceeds the tax lia­bil­i­ty, the child tax cred­it is refund­able up to 15% of the amount of earned income in excess of $3,000 (the earned income thresh­old).

House pro­pos­al. The max­i­mum child tax cred­it would be increased to $1,600. A cred­it of $300 would be avail­able for non-child depen­dents. In addi­tion, a fam­i­ly flex­i­bil­i­ty cred­it of $300 would be avail­able for a qual­i­fy­ing indi­vid­ual who is nei­ther a child nor a non-child depen­dent. The max­i­mum refund­able amount of the cred­it would be $1,000, indexed for infla­tion. The amount at which the cred­it begins to phase out would be increased.

Sen­ate pro­pos­al. The max­i­mum child tax cred­it would be increased to $2,000. A non­re­fund­able cred­it of $500 would be avail­able for non-child depen­dents. The max­i­mum refund­able amount of the cred­it would be $1,000, indexed for infla­tion. The amount at which the cred­it begins to phase out would be increased, and the earned income thresh­old would be low­ered to $2,500.

 

Child Tax Cred­it
Cur­rent law House pro­pos­al Sen­ate pro­pos­al
Max­i­mum cred­it $1,000 $1,600 $2,000
Non-child depen­dents N/A $300 $500
Fam­i­ly flex­i­bil­i­ty N/A $300 N/A
Max­i­mum refund­able $1,000 $1,000 indexed $1,000 indexed
Refund­able earned income thresh­old $3,000 $3,000 $2,500
Cred­it phase­out thresh­old
Single/head of house­hold $75,000 $115,000 $500,000
Mar­ried fil­ing joint­ly $110,000 $230,000 $500,000
Mar­ried fil­ing sep­a­rate­ly $55,000 $115,000 $500,000

 

Alter­na­tive min­i­mum tax

Under both the House and Sen­ate plans, the alter­na­tive min­i­mum tax would be elim­i­nat­ed.

Kid­die tax

Instead of tax­ing most unearned income of chil­dren at their par­ents’ tax rates, both the House and Sen­ate plans would tax chil­dren’s unearned income using the trust and estate income tax brack­ets.

Cor­po­rate tax rates

Under both the House and Sen­ate plans, cor­po­rate income would be taxed at a 20% rate. The House plan would make this effec­tive start­ing in 2018. The Sen­ate plan, how­ev­er, would delay imple­men­ta­tion to 2019.

Spe­cial pro­vi­sions for busi­ness income of indi­vid­u­als

House pro­pos­al. A por­tion of the net income dis­trib­uted by a pass-through enti­ty (e.g., a part­ner­ship or S cor­po­ra­tion) to an own­er or share­hold­er would be taxed at a max­i­mum rate of 25%. Wages and pay­ments for ser­vices would be taxed at ordi­nary indi­vid­ual income tax rates.

Sen­ate pro­pos­al. An indi­vid­ual tax­pay­er would be able to deduct 17.4% of domes­tic qual­i­fied busi­ness income (excludes com­pen­sa­tion) from a part­ner­ship, S cor­po­ra­tion, or sole pro­pri­etor­ship. The ben­e­fit of the deduc­tion would be phased out for spec­i­fied ser­vice busi­ness­es with tax­able income exceed­ing $250,000 ($500,000 for mar­ried fil­ing joint­ly). The deduc­tion would be lim­it­ed to 50% of the W‑2 wages of the tax­pay­er. The W‑2 wage lim­it would not apply if tax­able income does not exceed $250,000 ($500,000 for mar­ried fil­ing joint­ly), and the lim­it would be phased in for tax­able income above those thresh­olds.

Retire­ment plans

Under both the House and Sen­ate plans, the con­tri­bu­tion lev­els for retire­ment plans would remain the same. How­ev­er, it would no longer be per­mis­si­ble to rechar­ac­ter­ize (or undo) a con­tri­bu­tion or con­ver­sion to a Roth IRA.

Estate, gift, and gen­er­a­tion-skip­ping trans­fer tax

House pro­pos­al. The gift and estate tax basic exclu­sion amount would be dou­bled to about $11,200,000 in 2018.

In 2025, the estate tax and the gen­er­a­tion-skip­ping trans­fer tax would be repealed. In gen­er­al, income tax basis would con­tin­ue to be stepped-up (or stepped-down) to fair mar­ket val­ue at death. The gift tax would remain, but the top gift tax rate would be reduced from 40% to 35%.

Sen­ate pro­pos­al. The gift and estate tax basic exclu­sion amount would be dou­bled to about $11,200,000 in 2018.

Note: On Novem­ber 16, 2017, the House passed its ver­sion of the Tax Cuts and Jobs Act. On that same day, the Sen­ate Finance Com­mit­tee approved its ver­sion; it can now be con­sid­ered by the full Sen­ate. If the Sen­ate approves its ver­sion, the House and Sen­ate would then need to rec­on­cile the two ver­sions.

Con­tent pro­vid­ed by: Broad­ridge Finan­cial Solu­tions, Inc.

Novem­ber 2017