The House and Senate versions of the Tax Cuts and Jobs Act have much in common conceptually. Both seek taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. simplification, would move the U.S. to a territorial tax regime, roll back disincentives for the tax treatment of capital, and reduce corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual 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 |
|
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 $2,000, with the phaseout for joint filers beginning at $500,000 (amended in the modified chairman’s mark) |
|
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, limited to 50 percent of wage 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 do not apply to taxpayers with taxable income of $500,000 for joint filers (amended in the modified chairman’s mark) |
|
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 80 percent of taxable income (revised in the modified chairman’s mark) |
|
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. |
|
Increases exemption to $10 million, indexed for inflation, with repeal after six years |
Doubles the estate tax exemption |
|
|
Individual Mandate Penalty |
No change |
Reduces the individual mandate penalty to $0 (added in the modified chairman’s mark) |
For more on the House bill, click here. For more on the Senate bill, click here.
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