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Tax Reform: Differences in the House and Senate Tax Bills

TAX REFORM: DIFFERENCES IN THE HOUSE AND SENATE TAX BILLS

Kevin Michels, CFP®, EA | December 13, 2017

President Trump built a large part of his campaign on promises to overhaul and simplify the current tax code.  If successful it would be the most significant rewriting of the federal tax code since Ronald Reagan’s tax reform in 1986.

Currently, separate versions of a tax reform bill have been passed both in the House and the Senate on November 16 and December 2, respectively.

President Trump has asked that a bill be placed on his desk by Christmas for his signature and now both the House and Senate are working to reconcile their versions of the bill to one piece of legislation that can be signed into law by the end of the year.

From what we know there were quite a few added provisions and amendments made to the Senate bill right before it was voted on, but from what we know, here are the main differences that will need to be reconciled between the House and Senate’s bill.

Ordinary Income Tax Rates (Married Filing Jointly)

Our current tax code includes seven different tax brackets with rates ranging from 10% to 39.6%.  While both the House and Senate bill calls for generally lower rates across the brackets, the House’s bill also reduces the number of brackets from seven to four.

House

$0

$90,000

12%

$90,000

$260,000

25%

$260,000

$1,000,000

35%

$1,000,000

Over

39.6%

Senate

$0

$19,050

10%

$19,050

$77,400

12%

$77,400

$140,000

22%

$140,000

$320,000

24%

$320,000

$400,000

32%

$400,000

$1,000,000

35%

$1,000,000

Over

38.5%

Standard Deduction

Under the current tax code the standard deduction for 2018 will be $13,000 for married filing jointly, $9,550 for head of household, and $6,500 for single filers.  Both the House and Senate bill calls for a raise in the standard deduction. 

House

Married Filing Jointly

$24,400

Head of Household

$18,300

Single

$12,200

Senate

Married Filing Jointly

$24,000

Head of Household

$18,000

Single

$12,000

Child Tax Credit

Currently the Child Tax Credit is a $1,000 credit for each dependent child 17 or younger.  The credit is non-refundable for anybody who falls in the 15% or higher tax bracket.  The credit is also phased out for married couples with income above $110,000.

Both the House and the Senate’s bill both provide for an increase to the Child Tax Credit as well as an expansion on the income limits for who can claim the credit. 

House

Child Tax Credit

$1,600

Refundable

Partial

Phase-Out (2 children)

$294,000

Senate

Child Tax Credit

$2,000

Refundable

Partial

Phase-Out (2 children)

$580,000

Itemized Deductions

The most common itemized deductions include medical expenses, state & local income taxes, property taxes, home mortgage interest, and charitable contributions.

Currently, you are allowed to deduct medical expenses that exceed 10% of AGI (adjusted gross income).  The House would completely eliminate the medical expenses deduction while the Senate would actually expand it by lowering the threshold of deductible expenses from those that exceed 10% of AGI down to expenses that exceed 7.5% of AGI.

Both the House and the Senate would eliminate the state and local income tax deduction and would cap the property tax deduction at $10,000.

Currently you’re allowed to deduct home mortgage interest derived on a mortgage of up to $1,000,000.  The House would cap the mortgage value at $500,000 while the Senate would keep it the same.

Finally, both the House and Senate propose keeping the charitable contribution deduction as is. 

House

Medical Expenses

Eliminate

State & Local Income Tax

Eliminate

Property Tax

Cap deduction at $10,000

Home Mortgage Interest

Cap mortgage at $500,000

Charitable Contributions

Keep

Senate

Medical Expenses

Keep

State & Local Income Tax

Eliminate

Property Tax

Cap deduction at $10,000

Home Mortgage Interest

Keep

Charitable Contributions

Keep

Pass-Through Income

Owners of pass-through businesses, which include sole proprietorships, partnerships, and S-Corporations, currently pay taxes on their company’s profits at their own personal tax rate which could be as high as 39.6%.

The House’s bill proposes instituting a top pass-through rate of 25% while the Senate’s bill would create a 23% deduction for pass-through income.

Both the House and the Senate’s bill includes restrictions and caps to ensure owners of pass-through businesses don’t try and take advantage of lower rates by re-characterizing regular W-2 wages as profit and therefore pass-through income 

House

Maximum Pass-Through Tax Rate

25% (with restrictions)

Additional Deductions

No

Senate

Maximum Pass-Through Tax Rate

39.6%

Additional Deductions

23% of income (with restrictions)

Bottom Line

Although the House and Senate bill differs on quite a few points, there are a few areas they agree on.

They both propose cutting the corporate tax rate from 35% to 20%, and they both propose eliminating all personal exemptions.

It will be interesting to see what happens in the next few weeks as Congress works against their unofficial deadline to reconcile the two proposals into one final bill by Christmas.

If you’re interested in reading the actual bills passed by both the House and the Senate click on the links below.

House Tax Bill

Senate Tax Bill

One final and important note is the impact tax reform will have on our Federal budget and national debt.

The tax cuts proposed by both the House and Senate will initially lower the tax revenue collected by the government.  However, the whole idea behind tax cuts for individuals and corporations is to spur economic growth which in theory will eventually raise tax revenue.

The Joint Committee on Taxation, which is a non-partisan committee of Congress made up of Ph.D. economists, attorneys, and accountants has released their analysis on the proposed tax reform. They conclude that the Senate’s proposed tax reform could add as much as $1 trillion to our national debt in the next 10 years, even after accounting for economic growth.

Having said that, many assumptions go in to modeling an analysis as complex as this one and many Republicans argue that no one can truly know how much growth will come from the tax cuts.

If you’re interested in reading the JCT’s analysis on the Senate’s tax reform bill click below.

JCT Analysis