The Senate Passes Tax Reform Bill: Here’s How It Affects You

The Senate passed its version of tax reform just before 2:00 a.m. Saturday night by a slim 51 to 49 vote. This week the House and Senate Conference Committee will try to work out the differences between each tax reform plan. President Trump has said he will sign tax reform legislation before the end of the month. Since passing tax reform is likely more difficult to achieve in the Senate, we expect that most of the differences in the two tax reform bills will lean to the Senate version. Here are the key differences between the Senate and House bills:

  • The House bill sunsets after 2027 and the Senate bill sunsets after 2025. After the final bill sunsets, the tax law would revert to what it was immediately before passage.
  • The House bill would create four income tax rates for individuals at 12 percent, 25 percent, 35 percent and 39.6 percent, while the Senate bill would employ a seven-bracket system, with tax rates of 10 percent, 12 percent, 22.5 percent, 25 percent, 32.5 percent, 35 percent, and 38.5 percent. The 38.5 percent rate would start for single taxpayers with taxable income over $500,000 and for married taxpayers filing jointly with taxable income over $1 million, which are the same thresholds in the House bill.
  • The Senate bill would allow individuals to deduct 23 percent of "domestic qualified business income" passed through from a partnership, S corporation, or sole proprietorship. The percentage was 17.4 percent in the Senate Finance Committee plan. The House bill reduces the tax rate on partnership, S corporation, or sole proprietorships to 25 percent. Many passthrough business owners would be eligible for the 25 percent rate on 30 percent of their income with the balance being taxed as ordinary income and be subject to self-employment tax.
  • The Senate bill would increase the child tax credit to $2,000 (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 Senate and House bills both would allow a deduction for state and local real property taxes, up to $10,000. The Senate Finance Committee would have totally eliminated all state and local tax deductions. Both plans repeal the state and local income tax deduction.
  • The Senate would allow medical deductions with a 7.5 percent Adjusted Gross Income threshold starting in 2017 while the House eliminates the medical deduction.
  • The House plan would limit the deductibility of mortgage interest to $500,000 of acquisition indebtedness, while the Senate bill would retain the current limit of $1 million but would repeal the deduction for interest on home equity indebtedness. The House bill would grandfather mortgages incurred before November 3, 2017.
  • Alimony would not be deductible or taxable under the House bill and remain as under current law under the Senate bill.
  • The House would repeal the alternative minimum tax and the Senate would NOT repeal the individual and the corporate AMT. The Senate does propose to increase the AMT exemption amounts. This is a change from the Senate Finance Committee plan.
  • The Senate would limit the amount an individual could deduct from business losses to $500,000 for married persons and $250,000 for single persons. This limitation would be applied at the entity level first. Any disallowed loss would be treated as a net operating loss carryover. The House does not include a similar loss limitation.
  • The House and Senate would require an individual to use their primary residence for 5 out of 8 years to qualify for the $250,000/$500,000 gain exclusion. However, the House version would phase out the exclusion altogether if an individual has average Adjusted Gross Income over $250,000 for single persons and $500,000 for married persons. The average is the year of sale and the prior two years.
  • The Senate bill would eliminate the individual health insurance mandate and related subsidies. The House does not propose to eliminate the individual mandate.
  • The Senate bill would not repeal the estate tax but would double the gift, estate and generation-skipping exemption amount to $11.2 million beginning in 2018. The House would also double these exemptions and then repeal the estate and generation skipping tax after 2023.
  • The Senate bill would lower the corporate tax rate to 20 percent—like the House bill—but would delay that lower rate until 2019.
  • The Senate phases the 100 percent bonus depreciation to 80 percent in 2023, 60 percent in 2024, 40 percent in 2025 and 20 percent in 2026. The House would allow the 100 percent bonus deprecation until 2023.
  • The Senate increases the Section 179 expensing deduction to $1 million and the House increases the expensing deduction to $5 million.
  • The Senate would shorten the real estate depreciation life for both commercial and residential property to 25 years while the House has no proposal to change.
  • The Senate bill does allow a full interest deduction for floor plan financing as does the House. For other businesses, the House and Senate limit business interest expense to the amount of business interest income plus 30 percent of taxable income.
  • The Senate reduces the NOL deduction to 90 percent of taxable income for losses arising after 2017 and then 80 percent after 2022. The House would limit an NOL deduction to 90 percent of taxable income after 2017. The House appears to allow the full deductibility of NOLs incurred before 2018.
  • There is no trigger in the Senate bill that would increase taxes if revenue targets are not met. The Senate plan reduces the projected tax cuts by about $350 billion over the period from 2018 to 2023.

We will continue to keep you apprised of developments. Various tax changes are in sight and we expect that many will benefit from making certain decisions before the end of December in order to take advantage of those changes.

About the Author

Jim is a Principal in the Tax Advisory Group in the Youngstown, Ohio office of HBK CPAs & Consultants and has been with the firm since 1986.

He has extensive experience in personal and estate planning, charitable planning, tax-exempt organizations and individual tax and financial planning. Jim earned a Bachelor of Science degree in Business Administration for the University of Toledo and the Personal Financial Specialist (PFS) designation, which is awarded by the American Institute of Certified Public Accountants to recognize CPAs who provide financial planning service. Jim also has experience in tax policies, procedures and resources, which HBK uses in their tax practices. He provides counsel to high-net worth individuals throughout HBK. He is one of the firm’s preeminent presenters and specializes in addressing business owners and individuals on topics such as the Affordable Care Act, Shale energy planning, charitable giving opportunities, estate and gift planning and exempt organization issues.

RECOMMENDED ARTICLES