Senate Tax Reform Proposal Differs From House Proposal in Key Ways

Tax reform is developing, and the pace is breakneck. On November 2, the House Ways & Means Committee released HR1, the “Tax Cuts and Jobs Act.”—its version of tax reform. The bill has already seen amendments, and the contents have been a topic of great discussion in the profession and the news. On Thursday, November 9, the Senate Finance Committee released a conceptual description of its version, also termed the “Tax Cuts and Jobs Act."

The House proposal outlines new personal and corporate income tax brackets and rates, repeal of AMT, an increased standard deduction and the elimination of the deduction for personal exemptions among the many, many changes. The plan would result in a $1.41 trillion loss in revenue over 10 years, according to the Joint Committee on Taxation (JCT). The Senate bill started its markup process in the Finance Committee on November 13 with a vote expected by the end of the week.

“Now that both the House and Senate have started work on tax reform bills, we are encouraged there will be progress,” said Jeannine Birmingham, CPA, ASCPA President and CEO. “Tax practitioners and taxpayers alike are ready for the reforms these bills will bring.”

AICPA President and CEO Barry C. Melancon, CPA, CGMA, also commented on the process.

“The Senate took an important step toward fundamental tax reform when the Senate Finance Committee released the summary of its tax reform bill,” he said. “Congress is engaged in an ongoing process to achieve tax reform that we welcome.”

While some of the provisions of the Senate bill mirror the House bill, some key differences exist.

In the Senate approach, the current code’s seven individual income tax brackets would remain, but the rates would change to 10%, 12%, 22%, 24%, 32%, 35% and a top rate of 38.5%. Single taxpayers with income greater than $500,000 and married taxpayers filing jointly with income greater than $1 million would apply the 38.5% rate, which is lower than the top rate in the House bill. The standard deductions would increase to $12,000 for single taxpayers, and $24,000 for married couples filing jointly, both slightly less than the House bill provides for.

Again, in the Senate approach, individuals with pass-through investments would see a 17.4% deduction for “domestic qualified business income,” which would not apply to specified service businesses unless the individual’s taxable income does not exceed $250,000, or $500,000 for married individuals filing jointly. The deduction is phased out above those limitations.

Under the Senate plan, the child tax credit increases to $2,000, more than the House bill. The credit would be modified to allow a $500 nonrefundable credit for qualified dependents other than qualifying children, and sets the threshold phase out to $500,000 for married taxpayers filing jointly.

Deductions for mortgage interest would be retained at the current level of $1 million of acquisition indebtedness; however, the deduction for interest on home equity indebtedness would be repealed. Estate taxes would remain, with the exemption being doubled from its current amount.  The House doubles the exemption but eliminates the estate tax after 6 years.

Alimony rules and the deductibility of medical expenses exceeding 10% of a taxpayer’s AGI would be retained, unlike the House bill. The Senate markup calls for a reduction of the individual shared responsibility payment under the ACA to zero.

The Corporate rate under the Senate’s Tax Cuts and Jobs Act falls to 20%, but that rate change would be delayed until 2019.

The Senate Finance Committee language under consideration is 253 pages (about half the length of the House bill) with suggested changes released November 14 available here at 103 pages. A two-page highlight summary is also available. Both the House and Senate bills are in active consideration, with reconciliation of the two, should the bills be approved by their respective bodies, expected in the very near future.

To stay on top of developments and the profession’s advocacy efforts, including a side-by-side comparison of the Senate and House approaches, visit the AICPA’s Tax Reform Resource Center at www.aicpa.org/taxreform.

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