Last night, Sen. Orrin Hatch (R-UT) released the “Chairman’s Mark” to the Senate’s version of the Tax Cuts and Jobs Act. This much-anticipated amendment includes a number of important changes to the 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. plan, including fitting the package within the constraints imposed by the Senate’s so-called “Byrd Rule,” which places limits on what can be adopted under the reconciliation process.
Below is a summary of major changes to the proposal.
Individual Tax Changes
- Individual Income TaxAn 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. Rates: The new version of the plan makes slight changes to individual income tax rates. Rates are lowered in the three middle tax bracketsA 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. , and bracket widths become a bit larger than the original Senate proposal. The new rates and brackets are below.
| Current Law | Original Proposal | Chairman’s Mark | |||
|---|---|---|---|---|---|
| 10% | $0-$9,525 | 10% | $0-$9,525 | 10% | $0-9,525 |
| 15% | $9,525-$38,700 | 12% | $9,525-$38,700 | 12% | $9,525-$38,700 |
| 25% | $38,700-$93,700 | 22.5% | $38,700-$60,000 | 22% | $38,700-$70,000 |
| 28% | $93,700-$195,450 | 25% | $60,000-$170,000 | 24% | $70,000-$160,000 |
| 33% | $195,451-$424,950 | 32.5% | $170,000-$200,000 | 32% | $160,000-$200,000 |
| 35% | $424,951-$426,700 | 35% | $200,000-$500,000 | 35% | $200,000-$500,000 |
| 39.6% | $426,701+ | 38.5% | $500,000+ | 38.5% | $500,000+ |
| Current Law | Original Proposal | Chairman’s Mark | |||
|---|---|---|---|---|---|
| 10% | $0-$19,050 | 10% | $0-$19,050 | 10% | $0-$19,050 |
| 15% | $19,051-$77,400 | 12% | $19,050-$77,400 | 12% | $19,050-$77,400 |
| 25% | $77,400-$156,150 | 22.5% | $77,400-$120,000 | 22% | $77,400-$140,000 |
| 28% | $156,150-$237,950 | 25% | $120,000-$390,800 | 24% | $140,000-$320,000 |
| 33% | $237,950-$424,950 | 32.5% | $390,800-$450,000 | 32% | $320,000-$400,000 |
| 35% | $424,950-$480,050 | 35% | $450,000-$1,000,000 | 35% | $400,000-$1,000,000 |
| 39.6% | $480,051+ | 38.5% | $1,000,000+ | 38.5% | $1,000,000+ |
- Child Tax CreditA 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. : The child tax credit would be expanded further than in the original proposal and under current law. The new proposal would increase the child tax credit from $1,000 under current law to $2,000 (from $1,650 in the introduced bill). It would also increase the phaseout to $500,000 for married filers from the current law phaseout of $110,000. The phaseout, however, is decreased from $1,000,000 in the original proposal.
- Individual Mandate Penalty: Under the new proposal, the individual mandate penalty for not having qualifying health insurance would fall to $0, effectively repealing the requirement.
- Expiring Provisions: All individual income tax changes, excluding the move to Chained CPI and the elimination of the individual mandate penalty, would expire effective December 31, 2025. This includes the individual income tax rate cuts, the expanded child tax credit, the repeal of personal exemptions, and the expanded standard deductionThe 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 (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. .
Business Tax Changes
- Pass-Through Income: The new proposal would expand the number of businesses in service industries that could claim the special 17.4 percent deduction. Most service industries are disallowed the deduction, but there is an exception for smaller businesses by which they can claim the deduction regardless of industry classification. The new limit would be $500,000 for married filers and $250,000 for individuals, increased from $150,000 and $75,000 respectively in the introduced bill. The Chairman’s Mark also makes the bill’s W-2 provisions more generous, but expanded it to include sole proprietors.
- Temporary 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. : The temporary full expensing provision is broadened to include qualified property for film, television, and live theater productions.
- Net Operating Losses: Starting in 2024, net operating loss (NOL) carryforwards would be limited to 80 percent of taxable incomeTaxable 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. , down from 90 percent.
- Research and Experimental Expenditures: Under the new proposal, Research and Experimental (R&E) expenditures would need to be amortized, instead of deducted, starting in 2026.
- Business Tax Trigger: The proposal would also create a federal tax trigger. If federal revenues from October 1, 2017, to September 30, 2026, exceed $27.487 trillion by more than $900 billion, several business tax increases would not take effect for the 2026 tax year. These are the changes to NOLs and international base-erosion rules.
- Reduced Alcohol Excise Taxes: The proposal would lower the excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. rate on beer, wine, and distilled spirits.