Tax Reform: House vs. Senate Plans NECA Government Affairs November 10, 2017

Tax Brackets – Senate Bill The Senate would include seven individual brackets with these taxable income thresholds for married taxpayers filing jointly: 10 percent, up to $19,050; 12 percent, $19,050 to $77,400; 22.5 percent, $77,400 to $120,000; 25 percent, $120,000 to $290,000; 32.5 percent, $290,000 to $390,000; 35 percent, $390,000 to $1 million; and, 38.5 percent, $1 million and up.

Tax Brackets – House Bill The House would shrink the number of brackets to four with these thresholds for married taxpayers filing jointly: 12 percent: $24,000 to $90,000; 25 percent: $90,000 to $260,000; 35 percent: $260,000 to $1 million; 39.6 percent: $1 million and up. 

Corporate Tax Rate Senate Bill: A corporate tax-rate cut to 20 percent would be delayed by one year to January 2019. House Bill: The corporate income tax rate would be a flat 20 percent starting in 2018.

Passthroughs – Senate Bill For partnerships, limited liability companies and other so-called pass-through businesses, the legislation would provide a 17.4 percent deduction for non-wage income. The deduction wouldn’t be available to many types of service businesses -- except for those whose taxable income falls below $150,000 for joint filers or $75,000 for all others.

Passthroughs – House Bill Qualified pass-through business owners could choose to count 70 percent of their income as wages -- subject to their individual tax rate -- and 30 percent as business income, taxable at the 25 percent rate. Or, they could set the ratio of their wage income to business income based on their capital investment. Provides a 9 percent rate for the first $75,000 in net business taxable income of an active owner or shareholder earning less than $150,000 in taxable income through a pass-through business, instead of the ordinary 12 percent rate.

Estate Tax Senate Bill: Preserve the estate tax while doubling the current $5.49 million exemption for individuals. House Bill: The estate tax would end after 2024, under a revision approved by the Ways and Means Committee. Before then, the current $5.49 million exemption for individuals would be doubled.

State and Local Tax Deductions Senate Bill: Eliminates state and local tax income and property deductions for individuals. House Bill: The deduction for state and local income taxes or sales taxes would be repealed, while the deduction for state and local property taxes would be capped at $10,000.

Carried Interest Senate Bill: Will be handled through an amendment in the Finance Committee. House Bill: The carried-interest tax break would be limited by tripling the length of time assets would have to be held to qualify for the capital gains rate of 23.8 percent. Under current law, an investment fund’s assets must be held for a year or more to qualify.

Interest Deductibility Senate Bill: Would restrict interest deduction for businesses to 30 percent of adjusted taxable income, while allowing interest not allowed as a deduction to be carried forward indefinitely. House Bill: Companies would be prevented from deducting interest expenses that exceed 30 percent of their earnings before interest, taxes, depreciation and amortization. The limit would not apply to real estate firms and small businesses. Companies that use loans to finance high-cost inventory will be given the ability to completely write off their interest payments. In exchange, those businesses will not be able to immediately write off their capital investments.

Private-Activity Bonds (Municipal) Senate Bill: Retains the tax exemption on municipal bonds for privately run projects such as airports and toll roads, while barring it for professional sports stadiums. House Bill: The sale of private-activity municipal bonds would be barred for financing professional sports stadiums and privately run infrastructure projects such as toll roads and airports.

Accumulated Offshore Income Senate Bill: Multinational companies’ accumulated offshore earnings would be taxed at 10 percent for cash holdings and 5 percent for noncash holdings. House Bill: Multinational companies’ accumulated offshore earnings would be taxed at 14 percent for cash holdings and 7 percent for noncash holdings. Companies would have eight years to pay, regardless of whether they plan to return that income to the U.S.

Home-Mortgage Interest Deduction Senate Bill: Preserve the existing mortgage-interest deduction for home purchases with up to $1 million of debt. House Bill: The home-mortgage interest deduction would be reduced for new purchases to $500,000 of debt from the current $1 million. The bill would also limit the deduction to one principal home, ending the break for second homes.

Standard Deduction Senate Bill: Roughly doubles the standard deduction to $12,000 for individuals and $24,000 for couples. House Bill: Same.

Medical Expense Deduction Senate Bill: Preserve existing medical expense deduction. House Bill: Repeal the medical expense deduction.

Child Tax Credit Senate Bill: Expand the credit to $1,650 from $1,000 for children under age 18; present law allows the credit for children under 17. Another $500 credit would be allowed for dependents other than children. The credit begins to phase out for married couples earning more than $1 million. House Bill: Increase the credit to $1,600 per child younger than 17; includes an additional $300 credit for each parent as part of a consolidated family tax credit.