Important Differences Between House and Senate Versions of the Tax Cuts and Jobs Act

November 10, 2017

The House and Senate versions of the Tax Cuts and Jobs Act have much in common conceptually. Both seek tax simplification, would move the U.S. to a territorial tax regime, roll back disincentives for the tax treatment of capital, and reduce corporate income tax rates. Each bill repeals a range of specific deductions and exemptions, limits the net interest deduction, increases the standard deduction, and expands child tax credits. The details, however, necessarily vary. The following list, though not exhaustive, catalogues the major differences between the House and Senate tax reform bills.

Provision House Version Senate Version

Individual Income Tax Rates and Brackets

Consolidates current seven income tax rates into four, while retaining the top marginal rate of 39.6 percent and including an income recapture provision which phases out the effect of the 12 percent bracket for high earners, sometimes called a “bubble rate.”

Retains seven brackets while reducing rates, bringing the top marginal rate to 38.5 percent and avoiding a bubble rate.

Standard Deduction

$12,200 for single filers, $18,300 for heads of household, and $24,400 for joint filers, indexed to chained CPI

$12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers, indexed to chained CPI

Itemized Deductions

Retains state and local property tax deduction, capped at $10,000, while eliminating the remainder of the state and local tax deduction, except for taxes paid or accrued in carrying on a trade or business; limits the mortgage interest deduction to the first $500,000 in principle value.

Eliminates the state and local tax deduction except for taxes paid or accrued in carrying on a trade or business; keeps the mortgage interest deduction for acquisition debt, but eliminates the deduction for equity debt.

Child and Family Tax Credits

Increases child tax credit value to $1,600, with the phaseout for joint filers beginning at $230,000, while creating a new $300 per-person family tax credit for those not eligible for the child tax credit, to expire after five years

Increases credit value to $1,650, with the phaseout for joint filers beginning at $1 million

Treatment of Pass-Through Income

Caps the pass-through rate at 25 percent and adds a lower minimum rate (added in markup), then sets anti-abuse rules that begin with the rebuttable presumption that 70 percent of pass-through income is wage income (subject to the regular rate schedule), while 30 percent is business income (subject to the lower rate cap)

Adopts a 17.4 percent deduction for pass-through income, which may provide benefits to smaller businesses less able to take advantage of the House provisions; both proposals restrict many service providers from preferential treatment, though the Senate’s restrictions are broader.

Corporate Rate Reduction Timing

Cuts rate to 20 percent, effective tax year 2018

Cuts rate to 20 percent, delayed to tax year 2019

Capital Investment

Increases the Section 179 small business expensing cap from $500,000 to $5 million, with the phaseout beginning at $20 million, and maintains current depreciation schedules for real property

Raises Section 179 small business expensing cap to $1 million with a phaseout starting at $2.5 million, and shortens the depreciation of real property to 25 years

Tax Treatment of Interest

Caps net interest deduction at 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA)

Caps net interest deduction at 30 percent of earnings before interest and taxes (EBIT)

Net Operating Losses

Eliminates net operating loss (NOL) carrybacks while providing for indefinite net operating loss carryforwards, increased by a factor reflecting inflation and the real return to capital, while restricting the deduction of NOLs to 90 percent of current year taxable income

Eliminates net operating loss carrybacks while limiting NOL carryforwards to 90 percent of taxable income

Cash Accounting

Increases small business eligibility for small businesses, from $5 million to $25 million

Increases small business eligibility for small businesses, from $5 million to $15 million

Business Credits and Deductions

Eliminates credits for orphan drugs, energy, private activity bonds, rehabilitation, and contributions for capital, among others

Modifies, but does not eliminate, the rehabilitation credit and the orphan drug credit, while retaining certain other preferences eliminated in the House version

International Income

Moves to a territorial system with base-erosion rules including the inclusion of 50 percent of excess returns by controlled foreign corporations in U.S. shareholders’ income, and an excise tax on payments made to foreign firms unless claimed as effectively connected income

Moves to a territorial system with anti-abuse rules and a base erosion minimum tax of the excess of 10 percent of modified taxable income over an amount equal to regular tax liability

Deemed Repatriation

Enacts deemed repatriation of currently deferred foreign profits at a rate of 14 percent for liquid assets and 7 percent for illiquid assets (changed in manager’s amendment)

Enacts deemed repatriation of currently deferred foreign profits at a rate of 10 percent for liquid assets and 5 percent for illiquid assets

Retirement Accounts

No major changes

Eliminates catch-up contributions for high-wage employees and consolidates contribution limits for 457(b)s to match 401(k)s and 403(b)s.

Estate Tax

Increases exemption to $10 million, indexed for inflation, with repeal after six years

Doubles the estate tax exemption

For more on the House bill, click here. For more on the Senate bill, click here.


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