Article Highlights:

  • Tax Cuts and Jobs Act Heads To Reconciliation
  • Tax Rates
  • Medical Deductions
  • Deduction For Taxes
  • Home Mortgage Interest
  • Tax on Business Pass-Through Income
  • Alternative Minimum Tax (AMT)
  • Business Expensing
  • Repeal of ACA Health Insurance Mandate

The Senate GOP finally brought their version of the Tax Cuts and Jobs Act out of committee and before the full Senate, and it passed by a narrow margin of 51-49 down party lines. The only dissenting Republican Senator was Bob Corker of Tennessee, who tweeted that he reluctantly voted no over long-term fiscal issues.

That leaves us with two bills, the House version passed November 16, 2017, and the Senate version passed in the wee hours of December 2, 2017. There are significant differences between the two bills, and both the House and Senate must pass the same legislation before it can be sent to the president for a signature. This involves a reconciliation process between the two houses of Congress. Most sources expect that most of the provisions of the Senate version will prevail during the reconciliation process in an effort to get the legislation pushed through before Christmas.

Major Differences Between the Bills for Individuals and Small Business – The following are some major differences that will need to be resolved.

  • Tax Rates: The Senate version retains seven tax brackets, while the House version has only four. One potential bone of contention is that the top tax rate in the Senate version is 38.5%, which would give the wealthiest taxpayers a 1.1% tax cut. The House version retains the current 39.6% top rate.
  • Medical Deductions: The Senate version retains medical deductions as part of itemized deductions and restores the 7.5% of AGI limitation for 2017 and 2018, while the House version does away with medical deductions altogether.
  • Deduction for Taxes: The House would allow up to $10,000 of domestic real property tax paid as a tax deduction on Schedule A. While the original Senate version axes all tax deductions currently claimable on Schedule A. However, a late amendment on the night of the bill’s passage conforms the Senate version to the House version.
  • Home Mortgage Interest: The Senate version retains the deduction for home mortgage interest on up to $1 million of acquisition debt on first and second homes, while the House version limits the deduction to the interest on $500,000 of acquisition debt entered into after November 2, 2017, and only allows interest on the taxpayer’s primary home. Both would eliminate equity debt interest deductions.
  • Tax on Business Pass-Through Income: The Senate bill provides for a somewhat simple 23% deduction for pass-through income, limited to 50% of wage income if taxable income exceeds $50,000 ($100,000 for married joint filers). On the other hand, the House version of the bill caps the pass-through tax rate at 25% but with the rebuttable presumption that 70% of pass-through income is wage income subject to ordinary income tax rates, while 30% is business income subject to a 25% maximum tax rate.
  • Alternative Minimum Tax (AMT): The Senate retains the corporate and individual AMT but increases the exemption amounts for individuals by about 40% and makes them subject to inflation adjustment after 2018. The House version repeals both the individual and corporate alternative minimum tax. Repealing the AMT was supposed to be a benchmark of the GOP tax plan, so it seems like they’re saving this for the reconciliation process
  • Business Expensing: The Senate version increases Sec. 179 expensing to $1 million with a phaseout beginning when acquisition costs of Sec 179 property for the year exceed $2.5 million, while the House version raises the maximum Sec 179 deduction to $5 million with a $20 million purchase cost phaseout threshold.
  • Repeal of ACA Health Insurance Mandate: The Senate bill essentially repeals the penalty individuals must pay if they don’t have health insurance coverage compliant with the ACA (Obamacare). This provision is not in the House bill. Several Republican House members have indicated they aren’t inclined to support a change of the House bill to include this provision, so this difference could prove to be the most difficult of all the dissimilar parts of the bills to reconcile.

What Can We Expect Next?

It is almost certain that tax reform will pass in some form or another by the close of the year, and those changes–most, if not all, of which won’t take effect until 2018–will impact just about every individual and business. Because of the wide-ranging changes, the impact on you or your business will be predicated upon how the various changes will impact your unique circumstances. Watch for additional details as the tax bill continues to work its way to the president’s desk for signature.