Dec. 7, 2017: JCT comparison of House and Senate bills (JCT is Congress’ nonpartisan scorekeeper)
Key Differences in a Nutshell: Senate repeals ACA individual mandate, while House does not; House reduces corporate rate to 20% in 2018, but Senate waits to 2019; Senate reduces top rate to 38.5%, while Senate retains 39.6% with higher threshold; House would fully repeal estate tax, while Senate retains estate tax but doubles exemption to $22 million; House repeals individual and corporate AMT, while Senate retains both with higher exemption for individual AMT; Individual tax cuts are permanent in House, but expire in 2025 in Senate; House limits mortgage deduction to $500,000, while Senate leaves it at $1 million; House scraps student loan and tuition deductions, while Senate retains them; Senate has larger increase in child credit; House scraps medical expense deduction, while Senate retains and expands it for 2017-18; House has lower corporate offshore repatriation tax rates of 14% for cash and 7% for non-cash, while Senate has 14.5% and 7.5% respectively; House taxes pass-through businesses at a top rate of 25% rate, while Senate instead creates a 23% deduction applied to current rates with an effective pass-through rate of 29.6%; Senate retains IC-DISC export incentive for small and medium manufacturers
- Repeal of Affordable Care Act (ACA) Individual Mandate: The Senate bill effectively repeals the ACA individual mandate in 2019 by eliminating the penalty. CBO reported Nov. 8 that repealing the individual mandate would increase premiums in the nongroup market by 10%, increase the number of uninsured by 13 million by 2027, and reduce deficits by $338 billion over 10 years due to a reduction in subsidy payments.
- Temporary vs. Permanent: Tax cuts in the House bill are permanent, but the Senate Finance Committee, in order to comply with the Byrd Rule (which prohibits long-term deficit increases), made the tax cuts for families temporary and set the individual tax cuts for expiration after eight years (2025), although the corporate rate cut would be made permanent.
- Individual Rates: House keeps top individual rate at 39.6% but narrows application to individuals earning over $1 million; Senate reduces top rate to 38.5%; both are intended to cut taxes for wealthiest. Link here to comparison of the 4 brackets under the House bill and the 7 brackets under the Senate bill.
- Alternative Minimum Tax (AMT) Repealed: House repeals the Alternative Minimum Tax, which was enacted to ensure wealthy taxpayers do not avoid all taxes through utilization of deductions and credits. Senate retains the AMT but increases the individual AMT exemption by about 40% compared to current law.
- Reduction/Repeal of Estate Tax: Both versions of the bill would immediately double the lifetime exemption for the estate tax to about $11 million for individuals and $22 million for couples. The House fully repeals the tax after 2024, while the Senate would keep the tax and revert to the current threshold after 2025. See Facts About Estate Tax Repeal.
- Standard Deduction Raised, but Personal Exemption Scrapped: Both bills would double the standard deduction to $24,000 for joint filers, but much of this tax cut is offset by elimination of the personal exemption. Senate provision expires in 2025.
- Modest Increase in Child Credit; new Family Credit: House bill raises the current $1,000 child tax credit to $1,600 and adds a new nonrefundable “Family Credit” for other qualifying dependents worth $300 per year for individuals and $600 for couples. The Senate bill calls for a $2,000 child tax credit, makes it available to wealthier taxpayers by increasing the phaseout threshold, and provides for a $500 family credit. Senate provision expires in 2025.
- House Limits Mortgage Interest Deduction: House bill limits the deduction to $500,000; Senate leaves it at $1 million. Both bills repeal the deduction for home equity loans. Both bills increase the length of time taxpayer must own and live in home to qualify for capital gains exclusion (5 of previous 8 years).
- House Scraps Education Benefits: House bill eliminates deductions for student loan interest and qualified tuition expenses, while the Senate retains the deductions. House also eliminates the exclusion from income for university-provided tuition reduction and employer-provided education assistance — making graduate student and employee tuition waivers and assistance fully taxable. House would allow use of 529 college accounts for private and religious elementary/secondary schools.
- House Repeals Major Medical Expense Deduction: House bill eliminates deductions for medical expenses (currently allowed when expenses exceed 10% of income); Senate retains deduction and expands it for 2017-18 by reducing threshold from 10 percent down to 7.5 percent.
- SALT Deduction Scrapped Except for Property Taxes: Both bills would repeal most of the state and local tax (SALT) deduction for individuals, but retain a deduction for property taxes up to $10,000. This hits high-tax States like California, New York, and New Jersey. Deductions would continue for taxes incurred by businesses.
- Other Deductions/Exclusions: House repeals deductions/exclusions for adoption assistance, dependent care, personal casualty/property losses, alimony payments, moving expenses, out-of-pocket teacher expenses. Senate same as House but keeps deductions for casualty/property and medical, and increases teacher deduction.
- Retirement: Senate retains current law treatment of catch-up contributions to the retirement accounts of public and charitable organization employees.
- Corporate Rate Reduced and AMT repealed: House reduces corporate rate to 20% beginning in 2018; Senate delays cut to 2019. House eliminates the corporate AMT; Senate retains the corporate AMT.
- Reduced Pass-Through Rate for Businesses: Most U.S. businesses are set up as “pass-throughs” rather than corporations (for example, partnerships, LLCs, and subchapter S) where profits are “passed-through” to the business owner’s individual tax returns. The House-passed bill would lower the rate for pass-through income to 25 percent (for the first 30% of business income), and create a special lower rate of 9 percent (phased-in) on the first $75,000 of business income for joint filers making less than $150,000. Reduced House pass-through rate would not apply to personal services ((e.g. law, accounting, engineering, financial advisory). Through 2026, the Senate bill instead creates a 23% deduction applied to current rates with an effective pass-through rate of 29.6% for pass-through owners with income up to $250,000 (single) and $500,00 (joint). Senate rate cut expires in 2025.
- Full and Immediate Expensing: Both bills would allow 100% “bonus” depreciation (i.e. “expensing”) for qualified property through 2022. House includes small business (sec. 179) expensing up to $5 million, while the Senate includes sec. 179 expensing up to $1 million. House expensing expires in five years; Senate would gradually phase-out 20% per year at the end of five years.
- IC-DISC: Senate retains IC-DISC export incentive for small and medium manufacturers.
- Senate adds some new tax benefits for: beer, wine, and alcohol; aircraft owners; qualified opportunity zones; and Alaska Native Corporations.
- Business Deductions capped or repealed to pay for tax cuts: net interest deductions capped (with some differences between House and Senate); NOL deductions capped; research expenses must be amortized; sec. 199 domestic production deduction repealed; credit for testing drugs to treat rare diseases repealed; orphan drug credit repealed by House and capped by Senate; like-kind exchanges repealed; business entertainment deduction repealed; FDIC premiums deduction repealed for large institutions; local lobbying deduction repealed.
- New Markets Tax Credit: Repealed by House; retained by Senate.
- Insurance Industry Tax Increases: House increases taxes on industry nearly $40 billion, the largest of which are imposing an 8% surtax on life insurance company income and modifying the discounting rules for property and casualty companies. Senate increases taxes $27 billion, the largest of which is changing capitalization rules for certain policy acquisition expenses.
- Bonds/Infrastructure: House bill would repeal private activity bonds issued after 12/31/17, “New Clean Renewable Energy Bonds,” and tax-exempt bonds for stadiums; House and Senate repeal exclusion for advance refunding bonds.
- Limit on Carried Interest Preference for Fund Managers: Both bills would restrict use of the “carried interest” provision that allows investment fund managers to pay tax at the lower capital gains rate; fund managers would be required to hold their assets for three years.
- Move to Territorial Tax System: Like the House, the Senate moves from the current worldwide system (with deferral and a foreign tax credit) to a modified territorial tax system generally aimed at shielding offshore corporate income from U.S. taxation. Both bills include anti-base erosion provisions aimed at discouraging companies from shifting profits to low- or no-tax locations, but there are some key differences. The House bill includes a 10% excise tax on certain payments to foreign corporations, while the Senate has an “anti-abuse” tax on such payments. Both bills limit deductible net interest expenses of a domestic corporation that is a member of a multinational group. For discussion of additional international tax and anti-base erosion provisions, see the KPMG Observations on Finance Committee Bill or Tax Foundation: International Provisions in the Tax Cuts and Jobs Act.
- Low Rates on Repatriation of Profits Held Off-Shore: To facilitate the move from a worldwide to a territorial system, both bills include a “deemed repatriation” provision that levies a mandatory one-time tax on accumulated foreign profits. House would tax companies’ post-1986 accumulated offshore earnings at 14 percent for cash holdings and 7 percent for non-cash holdings. Senate would tax offshore earnings at 14.5 percent for cash and 7.5 percent for non-cash. (Currently U.S. allows multinationals to defer taxes on foreign earnings until they “repatriate” them.)
- Tax Exempt Organizations: Both bills would modify excise taxes on investment income of colleges and universities, impose new rules for taxation of UBIT income, and add a 20% excise tax on excess executive compensation paid to five highest-paid employees. The House bill would allow non-profits, including churches, to engage in political activity (repealing the “Johnson Amendment”).