Late Thursday evening, the Senate Finance Committee released its version of the Tax Cuts and Jobs Act. The Senate 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. Cuts and Jobs Act shares many things with the House counterpart: both plans reduce the 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. rate, move to a territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. , provide full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. of certain capital expenditures (on a temporary basis), repeal the alternative minimum tax, provide more favorable tax treatment of pass-through businesses, and eliminate many targeted tax preferences in favor of lower rates and a higher standard deduction.
The Senate approach, however, is unique in many particulars. The tables below outline the major details of the legislation.
Individual Income Taxes
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Lowers the top marginal rate to 38.5 percent while adjusting rate and bracket thresholds. The rate schedules for single filers and heads of household converge above $60,000.
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Indexing Provisions |
Indexes tax brackets and other provisions to the Chained CPI measure of inflation. |
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Standard Deduction |
Increases the standard deduction to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers (currently $6,500 for single filers, $9,550 for heads of households, and $13,000 for married filers). Eliminates the additional standard deduction and the personal exemption. |
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Retains the charitable contribution deduction and the mortgage interest deduction for purchases, but eliminates the deduction for equity debt. Fully repeals the state and local tax deduction, except for taxes paid or accrued in carrying on a trade or business. Eliminates other itemized deductions as well. |
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Other Deductions and Exclusions |
Eliminates the moving deduction and modifies the exclusion of capital gains from the sale of a principal residence, among other changes. |
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Child Tax Credit |
Replaces the personal exemption for dependents with an expansion of the child tax credit from $1,000 to $1,650, while increasing the phaseout threshold dramatically, from $110,000 to $1 million for married filers. The first $1,000 would be refundable, increasing with inflation up to the $1,650 base. |
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Alternative Minimum Tax |
Eliminates the individual alternative minimum tax. |
Business Taxes
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Corporate Tax Rate |
Lowers the corporate income tax rate to 20 percent beginning in calendar year 2019, down from 35 percent under current law. |
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Pass-Through Provisions |
Establishes a 17.4 percent deduction of qualified business income from certain pass-through businesses. Specified service industries, like health, law, financial services, and professional services, are excluded, except those with income below $150,000 for married filers. Permits the use of the cash method of accounting for businesses with gross receipts of up to $15 million. |
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Capital Investment |
Allows full expensing of short-lived capital investment (currently subject to “bonus” depreciation), such as equipment and machinery, for five years. Increases Section 179 expensing from $500,000 to $1 million and increases the phaseout threshold from $2 million to $2.5 million. Reduces asset lives for residential and nonresidential real property to 25 years. |
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Tax Treatment of Interest |
Limits the deductibility of net interest expense on future loans to 30 percent of earnings before interest and taxes (EBIT). |
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Net Operating Loss Provisions |
Eliminates Net Operating Loss (NOL) carrybacks and limits carryforwards to 90 percent of taxable income. |
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Business Credits and Deductions |
Eliminates the domestic production activities deduction (section 199) and modifies the rehabilitation credit and orphan drug credit. Limits the deduction for FDIC premiums. |
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Alternative Minimum Tax |
Eliminates the corporate alternative minimum tax. |
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International Income |
Moves to a territorial system with special base erosion rules for passive and mobile income, and anti-abuse rules regarding U.S. subsidiaries of foreign-based companies. |
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Deemed Repatriation |
Enacts deemed repatriation of currently deferred foreign profits, at a rate of 10 percent for cash and cash-equivalent profits and 5 percent for reinvested foreign earnings. |
Other Taxes
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Doubles the estate tax exemption to $11.2 million from $5.6 million under current law. Continues with the step-up basis under current law. |
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