Details of the Senate Version of the Tax Cuts and Jobs Act

November 10, 2017

Jared Walczak
Amir El-Sibaie

Jared Walczak, Amir El-Sibaie

Late Thursday evening, the Senate Finance Committee released its version of the Tax Cuts and Jobs Act. The Senate Tax Cuts and Jobs Act shares many things with the House counterpart: both plans reduce the corporate income tax rate, move to a territorial tax system, provide full expensing 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

Tax Brackets

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.

Single Filers

Heads of Household

Joint Filers

10.0% > $0

10.0% > $0

10.0% > $0

12.0% > $9,525

12.0% > $13,600

12.0% > $19,050

22.5% > $38,700

22.5% > $51,800

22.5% > $77,400

25.0% > $60,000

25.0% > $60,000

25.0% > $120,000

32.5% > $170,000

32.5% > $170,000

32.5% > $290,000

35.0% > $200,000

35.0% > $200,000

35.0% > $390,000

38.5% > $500,000

38.5% > $500,000

38.5% > $1,000,000

Indexing Provisions

Indexes tax brackets and other provisions to the Chained CPI measure of inflation.

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.

Itemized Deductions

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.

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.

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.

Alternative Minimum Tax

Eliminates the individual alternative minimum tax.

Business Taxes

Corporate Tax Rate

Lowers the corporate income tax rate to 20 percent beginning in calendar year 2019, down from 35 percent under current law.

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.

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.

Tax Treatment of Interest

Limits the deductibility of net interest expense on future loans to 30 percent of earnings before interest and taxes (EBIT).

Net Operating Loss Provisions

Eliminates Net Operating Loss (NOL) carrybacks and limits carryforwards to 90 percent of taxable income.

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.

Alternative Minimum Tax

Eliminates the corporate alternative minimum tax.

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.

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

Estate Tax

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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A 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.

Inflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.

The mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act reduced the amount of principal and limited the types of loans that qualify for the deduction.

A pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates.

Tax repatriation is the process by which multinational companies bring overseas earnings back to the home country. Prior to the 2017 Tax Cuts and Jobs Act (TCJA), the U.S. tax code created major disincentives for U.S. companies to repatriate their earnings. Changes from the TCJA eliminate these disincentives.

A tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat.

A tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax.

A tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state/local taxes paid, mortgage interest, and charitable contributions.

The standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes.

Itemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. 

An estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs.

Full 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.

An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.

Depreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment.

A 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.

A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.

Taxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.