On Wednesday December 13, 2017, the joint committees of the House and Senate Republicans have reached a compromise on the “Tax Cuts and Jobs Act” and the compromised bill will be made public on Friday December 15, 2017. The bill is expected to be voted on next week. Currently, the bill is still at risk of not passing. Given that polls show only 26% of Americans support the bill and deficit is estimated to increase by 1.5 trillion. In addition two Republican Senators have serious health issues and may be unavailable to vote next week. Finally, there is two Senators that are holding out for a larger child tax credit. Having said that based on what has been leaked out here is where we are with the bill.
Individuals:
- The compromise lowers the top individual tax bracket to 37%. The Senate’s legislation retains the same number of tax brackets for individuals as under current law, seven, although most are lowered through the year 2025. The House bill has four permanent brackets plus a bubble rate of 45.6%.
- The compromise will keep the credit at 1,100. The Senate's version has the child tax credit increasing to $2,000 per child, and the income limits increasing to $500,000. The House bill increases the child tax credit to $1,600 with the phase-out occurring at $230,000.
- Both bills introduce the new standard deduction of $12,000 for Single, and $24,000 for Married.
- The compromise will allow a 10,000 deduction for either real estate tax or state income tax originally, both bills repeal the deduction for income and sales taxes. Then they both allowed a $10,000 deduction for state and local property taxes.
- The compromise will follow the Senate. Under the Senate bill, the estate tax will be retained but doubles the current exemption amount. The House bill would eliminate the estate tax, as phased in through 2023 (becoming permanent in 2024), after doubling the exemption amount currently.
- It is uncertain as to whether medical deductions will remain dedcutable. The Senate bill keeps the deduction for medical expenses while the House eliminated it. The Senate's legislation sets an adjusted-gross-income (AGI) threshold of 10%, but an amendment lowered it to 7.5% of AGI for 2017 and 2018.
- The compromise would eliminate a penalty for non-compliance with the ACA individual mandate. Under the Senate bill the mandate would be repeal the penalty on individual taxpayers who do not have health insurance. The House bill did not repeal the individual mandate.
- The compromise will keep the AMT in place. But given the elimination of the deduction for state and local taxes there will not be many adjustments that will cause individuals to be in the AMT. Originally, the Senate bill adopted a revised corporate and individual alternative minimum tax (AMT) threshold, rather than repealing it, which the House bill would do.
- Under the compromise mortgage interest will be limited qualified purchases up to 750,000 and eliminate the home equity deduction. It is unclear if mortgages already in existence will be grandfathered.
Businesses:
- The compromise will reduce the top corporate rate to 21%. The Senate bill lowers the top corporate tax rate from 35% to 20%, the same as the House bill but with a later effective date of 2019. Both introduce the rate changes as permanent.
- The compromise will allow a deduction of 20% of certain pass-through income. Many issues remain unclear. And, the pass-through treatment varies substantially between the two bills. The Senate wants a deduction to be allowed for 23% of qualifying pass-through income with no other preferential rate. The House wants the income taxed at various rates such as 9% for the first $75,000 and a cap at 25% with various special rules in effect.
- Both bills have a five-year expensing rule for the purchase of new equipment with the Senate bill phasing out after year five, and adding a shorter depreciation for buildings.
- Both bills move toward a territorial tax system wherein only domestic profits are taxed; yet both bills impose taxes to a differing degree on transactions with foreign subsidiaries.
- The repatriation tax differs as to the percentage of tax imposed: Senate bill is 14.49% on liquid assets and 7.49% on physical assets; the House bill is 14% and 7%, respectively.
There are many areas that remain uncertain. Over the next couple of days hopefully there will be a clear picture as to where the tax law is heading. If you have any questions that may pertain to the most recent projections please contact your trusted Smolin professional.