By Gary J. Gottfried LPA – Family Law Attorney in Columbus, OH
The Senate passed it’s version of tax reform just before 2:00 a.m. Saturday by a slim 51 to 49 vote. This week the House and Senate Conference Committee will try to work out the differences. 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 the most of the differences in the two tax reform bills will lean to the Senate version where there are differences. 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%, 25%, 35% and 39.6%, while the Senate bill would employ a seven-bracket system, with tax rates of 10%, 12%, 22.5%, 25%, 32.5%, 35%, and 38.5%. The 38.5% 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% of “domestic qualified business income” passed through from a partnership, S corporation, or sole proprietorship. The percentage was 17.4% in the Senate Finance Committee plan. The House bill reduces the tax rate on partnership, S corporation, or sole proprietorships to 25%. Many passthrough business owners would be eligible for the 25% rate 30% of their income with the balance being taxed as ordinary income at 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 The Senate bill would also keep the adoption tax credit and the child and dependent care credit, which would be repealed by the House.
• The Senate and House bills now 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 bill would retain the current deduction for medical expenses that exceed 10% of a taxpayer’s adjusted gross income. In addition, unlike the House bill, the Senate bill would not change the current alimony rules.
• The Senate would allow medical deductions with a 7.5% AGI threshold staring 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, 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 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 AGI 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 care mandate and related subsidies projected to save over $300 billion over 10 years. The House does not propose to eliminate the individual mandate.
• The Senate bill would not repeal the estate tax but would double the exemption amount, the same as the House bill.
• The Senate bill would lower the corporate tax rate to 20%—like the House bill—but would delay that lower rate until 2019.
• The Senate phases the 100% bonus depreciation to 80% in 2023, 60% in 2024, 40% in 2025 and 20% in 2026. The House would allow the 100% bonus deprecation until 2023.
• The Senate increases the 179 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% of taxable income.
• The Senate reduces the NOL deduction to 90% of taxable income for losses arising after 2017 and then 80% after 2022. The House would limit an NOL deduction to 90% 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.
Gary J. Gottfried is a top 50 Divorce Attorney in Columbus Ohio.