Tax-Overhaul Impacts: Senate vs. House Proposals!

Latest Update: Nov. 26, 2017 - The GOP Senate proposed bill for "overhauling the tax code" was submitted and approved by the Way and Means committee this past Thursday. A number of its provisions differ in context and perspective from the House version. The Senate bill would delay till 2019, one of the "Trump's top priorities, of cutting the corporate tax rate." The original plan was to cut the corporate tax rate down to 20 percent. It would also delay any discussion about both the state and local tax deduction for another year.  

But, the Senate bill would also "reinstate" Trump's other priority of providing more tax breaks to middle-class families till 2025, as it varies significantly from the House version. It would keep some of the current tax breaks, such as these two deductions for the mortgage interest as well as medical expenses. Likewise, it will keep the bottom tax bracket of 10 percent. For instance, the Senate plan would completely eliminate the ability to deduct state and local taxes; there is no exception for up to $10,000 in property taxes each year, as there is in the House bill.

These two bills vary in context and perspective, highlighting the competing objectives as well as strategies of both the Senate and House legislatures. Although the GOP members from both chambers are for cutting corporate and individual taxes, they diverge on approaches - especially for those GOP House members from "high-tax states" issues and for Senate members concerned about increased federal budget deficit. With pressures mounting for a tax-overhaul, the Senate might introduce a procedural rule for the bill to pass along party-line vote, through changes to include "setting some of the tax cuts to expire after a period of years."

The Senate Republicans (Tankersley, Rappeport, Kaplan, 2017) and the House Republicans tax (Lieber and Bernard, 2017) tax bills differ on a number of issues:

A QuickTake guide to the tax-cut debate

Tax Brackets

What’s in place now: Seven brackets, with a top rate of 39.6 percent, over $480,050 in annual income for couples filing their taxes jointly.

What the House proposed: Four brackets, with a top rate of 39.6 percent, over $1 million in annual income for couples filing their taxes jointly. Income brackets are compressed into only four: 12%, 25%, 35%, and 39.6%.

What the Senate proposed: Seven brackets, with a top rate of 38.5 percent, over $1 million in annual income for couples filing jointly, or $500,000 for individual filing. The Senate bill sets the lowest tax bracket of 10 percent for individuals, while the House bill is at 12 percent.

Other Business Changes: The House bill would drop the top corporate rate from 35% to 20% next year; move to tax only the US-based domestic portion of corporate's incomes; full expense all at once business expenditures for new equipment, rather than be amortized over a number of years; curtail the business deduction for interest on purchases; repeal the deduction for lobbying at local levels; but continue the deduction for business-related state and local taxes (Jackson, 2017).

Exemptions, Credits, Standard Deductions

What’s in place now: For singles, the current standard deduction is $6,350, up to $10,400 with exemptions. For married without children, the current standard deduction is $12,700, up to $20,700 with exemptions. For married with two kids, the "deduction-plus-exemptions" is up $28,700, with $1,000 tax credit per child.

What the House proposed: The House bill is more simplified. The standard deduction for singles with no children is $12,000. For married couples, the standard deduction would increase from $12,700 this year to $24,000 next years. In addition, the child tax credit is to increase from $1,000 to $1,600 per child. For 2018, the child tax credit is available to couples earning up to $230,000, up from $110,000 now. There is an added $300 credit each to be created for each parent and non-child dependent (taxpayers, spouses, and adult dependents) to expire after 2022.

What the Senate proposed: The Senate is similar to the House, with the standard deduction for singles and married couples being $12,000 and $24,000, respectively. For single parents, the standard deduction is $18,000, up from $9,300, with the child tax credit being $1,650 per child.

State and Local Tax Deductions, and Mortgage Interest

What’s in place now: You can deduct the state and local income tax, including property taxes, on your federal income tax return. In addition, you can deduct up to $1 million in mortgage interest payments. You can also deduct up to $100,000 in interest payments on home-equity loans or line of credit (IRS, https://www.irs.gov/publications/p936).

What the House proposed: The House eliminates the state and local income tax deductions, though it keeps up to $10,000 annually in property taxes. Going forward, you can deduct mortgage interest payments on loans up to $500,000, to primary residences only. Interest payments from home equity loans or home lines of credit are not deductible.

What the Senate proposed: The Senate eliminates all state and local income tax, as well as property taxes. The current deduction on mortgage interest payments is kept in its current form.

Medical Expenses

What’s in place now: For now, you can deduct out-of-pocket medical expenses, over 10% of your adjusted gross income. This is useful for those with lower incomes, in need of regular assistance and care (IRS, https://www.irs.gov/taxtopics/tc502).

What the House proposed: The House eliminates the medical expenses deduction by 2018.

What the Senate proposed: The Senate would keep the medical expenses deduction.

Student Loan Interest

What’s in place now: Currently, those with incomes below certain thresholds can deduct up to $2,500 of student loan interest each year (IRS, https://www.irs.gov/taxtopics/tc456).

What the House proposed: The House eliminates the tax provision of the student loan interest deduction.

What the Senate proposed: The Senate keeps the status-quo.

Estate Taxes

What’s in place now: Currently, estates (inherited property) taxes are waived for the first $5,490,000. Then, taxes are applied at 40 percent rate.

What the House proposed: The House is to double the exemption of the first $5,490,000, to be repealed by 2024. Side note: The House plan would eliminate the Alternative Minimum Tax.

What the Senate proposed: The Senate likes to double the exemption, with no proposed any full repeal.

Pass-Through Businesses

What’s in place now: People with small businesses generally pay income taxes based on their individual tax rate. Types of small businesses include partnerships, sole proprietorships, limited liability companies and S corporations.

What the House proposed: The House bill creates the 25-percent tax rate, refers to as “pass-through” businesses. In such cases, portions of the business net income "pass-through" to the business owners. Therefore, those who report business earnings on personal rather than corporate returns (sole proprietors or partnerships) would pay the 25% top rate for some of their income. The proposed rules is of Section 1004 of the House bill summary , https://waysandmeansforms.house.gov/uploadedfiles/tax_cuts_and_jobs_act_section_by_section_hr1.pdf

What the Senate proposed: The Senate bill "would not leave quite as much money in taxpayers’ pockets", as it allows deduction up to 17.4 percent of domestic qualified business income from a partnership, S corporation or sole proprietorship.

The Senate original tax bill of 17.4% small business pass-through deduction was to apply only to the proposed top individual tax rate. However, the Hatch Amendment to the bill now means that all small business pass-throughs earning $500,000 ($250,000 filing individually) or less can also realize such tax deduction. According to the Tax Foundation, about 97% of pass-throughs earn less than $500,000 threshold, so the majority of the nation's small businesses would benefit from such needed and long-overdue tax relief from the bill (Ortiz, 2017). See page 17 of the Senate bill summary for more info, https://www.finance.senate.gov/imo/media/doc/11.9.17%20Chairman's%20Mark.pdf

Adoption Credits

What’s in place now: Currently, there is an adoption tax credit of up to $13,570 per eligible child. This can be matched by up to $13,750 in qualified adoption expenses by the employer, with no incurred employee's taxes. Under the current rules, the credit phases out for taxpayers with adjusted gross income between $203,540 and $243,540 (IRS, https://www.irs.gov/businesses/small-businesses-self-employed/adoption-credit-glance).

What the House proposed: The bill eliminates the adoption tax credit altogether.

What the Senate proposed: The Senate would also leave it intact.

Selling Your Home

What’s in place now: Currently, the first $500,000 in capital gains on the sale of home (for married couples filing jointly). This is only applicable for a primary residency for two of the past five years (IRS, https://www.irs.gov/forms-pubs/about-publication-523).

What the House proposed: The House proposes a tax provision, applicable to living in the primary residency "for five out of the previous eight years." The tax deduction could be used "once every five years, down from once every two years." This tax provision is to be phased out for adjusted income over $200,000 for singles, or $500,000 for joint filers.

What the Senate proposed: The Senate proposes tax provisions in terms of "years in residence and frequency of use." For those who fail to meet the five-year requirement (due to change in employment, health trouble or “unforeseen circumstances”) to exclude a portion of the $250,000 or $500,000.

Coverdells and 529 Plans

What’s in place now: There is no taxes on the $2,000 per year with certain income limits. Then, it is tax-free for paying for private school from kindergarten through 12th grade, and college. 

What the House proposed: The House increases the limits from $2,000 to $10,000 out of the 529 Education plans for private school. "Sandwiched" in Section 1202 of the tax bill are "a number of proposals to consolidate and simplify various tax breaks for education savings." Tuition (Elementary and high school) expenses of up to $10,000 per year would become “qualified” expenses for 529 plans. Families could withdraw tax-free up to $10,000 each year out of the 529 account for private school - no income limits. Parents can gain a potential tax break of up to $30,000. 

It all started back in 1997, when the late Senator Paul Coverdell, a Republican of Georgia, supported the creation of tax-free accounts for non-public K12 and college education.  The Coverdell Education Savings Account allows parents to deposit up to $2,000 each year in an tax-free investment account. The contributions are not tax-deductible, while the capital gains are not-taxable for tuition or other qualified expenses for elementary or secondary education.

Absent any legislative actions, the Coverdell tax break for elementary and secondary tuition costs is scheduled to expire on Dec. 31

What the Senate proposed: The Senate did not propose any changes.

Losses for Fires and Floods

What’s in place now: If you’re a victim of a house fire, flood, burglary or similar event, you can deduct those losses (IRS, https://www.irs.gov/forms-pubs/about-publication-547).

What the House proposed: The House eliminates what is referred to as "casualty” deductions. This might change if the legislators support a one-time bill offering relief for victims.

What the Senate proposed: Victims of disasters could claim the "casualty" deduction, only if the president officially declared to be a disaster.

Alimony

What’s in place now: The paying partner could claim the alimony as a deductible expense, while it is a taxable income for the receiving partner.

What the House proposed: The House eliminates the tax provision as deductible expense for the paying partner. In turn, the receiving partner will no longer consider the alimony as taxable income (IRS, https://www.irs.gov/taxtopics/tc452). The change would take effect in 2018 for divorce and separation agreements (and any changes to current agreements).

What the Senate proposed: The Senate bill proposes no changes.

Moving Expenses

What’s in place now: You can deduct moving expenses. Although there is no need to itemize on your tax returns, the 50-mile distance is applicable.

What the House proposed: Relocating for a new job? Moving costs is no longer a deductible expense in 2018.

What the Senate proposed: The Senate’s bill is similar to the House’s, though some exceptions for members of the military are applicable.

Tax Preparation

What’s in place now: You can deduct for the tax preparation, any similar tax-related expenses, fee for filing your forms electronically.

What the House proposed: The tax provision is no longer applicable. In theory fewer people would require professional tax help, given the House and Senate preference for increasing the standard deduction over itemizing.

What the Senate proposed: The Senate’s proposal is similar to that of the House.

Electric Cars

What’s in place now: For qualifying plug-in electric vehicles, like the Chevrolet Bolt or Volt and Tesla’s cars, you can get a tax credit for up to $7,500. (IRS, https://www.irs.gov/credits-deductions/individuals/plug-in-electric-drive-vehicle-credit-section-30d)

What the House proposed: The House would do away with the credit.

What the Senate proposed: The Senate proposed no change.

Riding a Bicycle to Work

What’s in place now: Though it is of a minimal implication, up to $20 each month is tax deductible for expenses related to regular bicycle commuting. This is only applicable if there is no other pretax commuting benefits from your employer.

What the House proposed:The House bill did not propose any changes.

What the Senate proposed:The Senate would take away this tax break.

Reduced and Waived Tuition

What’s in place now: Employees of educational institutions with reduced or waived tuition for themselves, spouses or dependents are generally not taxed. This is particularly helpful for certain graduate students, whose tuition is waived as part of teaching or research arrangements at their educational institution.

What the House proposed:The House bill is to reverse such tax exemption, by treating the reduced or waived tuition as income.

What the Senate proposed:The Senate bill is to keep things the same.

Employer-Paid Tuition

What’s in place now: For employees receiving tuition support for professional developments, they don't pay taxes on the amount of tuition provided, given certain limitations and amounts of no more than $5,250 per year.

What the House proposed:The House bill is to make these tuition payments count as taxable income starting in 2018.

What the Senate proposed:The Senate would keep things the same.

In sum, the Senate and House proposals would add confusion to the GOP agenda, partially due to challenging political priorities facing legislatures in each chamber. The many proposals would defuse many of the "economic growth projections" used to account for the "promised" corporate and individual taxes. In the coming weeks, many proposals will be forwarded and "rectified for possible Congress full votes."

Sources:

Bernard, Tara Siegel & Lieber, Ron. (2017, Nov. 2). The Tax Bill’s Fine Print: Tuition, Medical Expenses and Alimony. NY Times, from https://www.nytimes.com/2017/11/02/business/house-tax-bill-deductions.html

Jackson, Herb. (2017, Nov. 17). Breaking down the House's tax overhaul. USA Today, p. 2A

Lieber, Ron. (2017, Nov. 8). The Private School Tax Break in the Middle-Class Tax Bill. https://www.nytimes.com/2017/11/08/your-money/the-private-school-tax-break-in-the-middle-class-tax-bill.html

Lieber, Ron and Bernard, Tara Siegel. (2017, Nov. 11). How Could a Tax Change Affect You? This Is What the Senate and House Propose. NY Times. p. A17 from https://www.nytimes.com/2017/11/10/your-money/how-could-a-tax-change-affect-you.html?rref=collection%2Fsectioncollection%2Fbusiness&action=click&contentCollection=business&region=rank&module=package&version=highlights&contentPlacement=6&pgtype=sectionfront

Litvan, Laura and Edgerton, Anna. (2017, Nov. 21). Your Guide to the U.S. Tax-Cut Debate. BloombergQuickTake. https://www.bloomberg.com/news/articles/2017-11-07/your-guide-to-following-the-u-s-tax-cut-debate-quicktake-q-a

Ortiz, Alfredo. (2017, Nov. 24). Business Embrace 'Good Enough' Tax. WSJ. p. A18

Parlapiano, Alicia. (2017, Nov. 2). Six Charts That Help Explain the Republican Tax Plan. NY Times, https://www.nytimes.com/interactive/2017/09/27/us/politics/six-charts-to-explain-the-republican-tax-plan.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=b-lede-package-region&region=top-news&WT.nav=top-news

Rappeport, Alan. (2017, Nov. 9). House and Senate Have Big Differences to Bridge on Tax Plans. NY Times. from https://www.nytimes.com/2017/11/09/us/politics/tax-plan-house-senate-differences.html

Tankersley, Jim, Rappeport, Alan. and Kaplan, Thomas. (2017, Nov 10). Senate Tax Plan Diverges From House Version, Highlighting Political Pressures. NY Times. p. A1 from https://www.nytimes.com/2017/11/09/us/politics/facing-math-trouble-house-panel-races-to-adjust-tax-bill.html