An enormous step in the tax reform process was taken over the weekend when the Senate passed their version of the Tax Reform Bill in the wee morning hours of Saturday, December 2, 2017. The bill passed by the slimmest of margins: a 51-49 vote with only one Republican opposing the bill.

The Senate’s bill differs from the bill proposed by the House of Representatives in a few areas. The two legislative bodies will hold a conference in an effort to mend these discrepancies in the near future. Republicans remain determined to get a bill passed by the end of the calendar year, so this conference is expected to take place soon. In other words, the debate is not quite over just yet.

Here are a few highlights from the Senate’s bill and how it relates to the proposed bill from the House. All proposals would go into effect for tax years beginning after December 31, 2017 and would expire on December 31, 2025, unless otherwise noted.

FOR INDIVIDUALS

• Seven tax brackets with reduced rates, including a 38.5% top tax bracket.  The number of brackets (seven) is consistent with current law. However, the marginal tax rates are lower and accompanied by higher income thresholds that will produce tax cuts for many individuals. The tax brackets consist of the following marginal rates: 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%. The House bill proposes only 4 tax brackets with the top rate staying at its current 39.6%.
• Individual tax brackets only last until 2025.  The individual tax cuts under the Senate plan are temporary, but there is speculation that the individual tax cuts could be extended while they are in effect during the next few years. Under the House bill, both individual and corporate tax cuts would be permanent.
• Doubles standard deduction and eliminates personal exemptions.  Both of these changes are consistent with the House bill.  This will largely decrease the amount of taxpayers that itemize their deductions.
• Child tax credit increased to $2,000 per child.  This is larger than the $1,600 per child credit proposed by the House.  However, the $1,000 increase is nonrefundable.  Therefore, many low income families will not receive the benefits of an increased child credit.
• Retains deduction of medical expenses.  Unlike the House proposal, the Senate aims to keep the deduction for medical expenses. They even reduced the AGI threshold to 7.5% for 2017 and 2018.
• Mortgage interest deduction remains the same.  The Senate bill will leave this deduction unchanged from current law. The House bill limits the mortgage interest deduction to $500,000 in home loans.
• Repealing of Obamacare’s individual mandate.  There would no longer be a penalty for those who do not have health insurance under the Senate’s plan. This will likely increase the amount of uninsured individuals and make insurance more expensive for those who purchase it. This repeal would be permanent.
• Doubles estate tax exemption amount.  The estate tax exemption will be doubled from $5.5 million to $11 million.  This is consistent with the House bill, except the House proposes repealing the estate tax altogether in 2023.
• Revised Alternative Minimum Tax.  The Senate bill proposes a revised plan for the individual and corporate AMT.  The House bill completely repeals the AMT.

FOR BUSINESSES

• Deduction for pass-through income.  The Senate bill allows for 23% of business income from a partnership, S corporation, or sole proprietorship to be deducted.  The House bill also proposes a reduction to taxes paid on pass-through income.  However, the House lowered the maximum tax rate for a portion of pass-through income to 25% rather than making a portion of the income deductible. Service firms are not qualified for the tax reduction under both the Senate and House bills.
• Corporate tax rate reduced to 20%.  This is reduction is consistent with the House bill. However, the Senate bill would impose the reduced rate beginning in 2019 rather than right away.
• Fully expensing of depreciable assets for 5 years.  The Senate bill would allow for immediate expensing for all qualified property until December 31, 2022. The provisions would then be reduced by 20 percentage points in the following years.

HBE will continue to monitor the status of proposed changes and provide updates as soon as they become available.  If you are wondering how the potential tax reform may affect your specific situation, please do not hesitate to contact our team to set up a proactive tax planning meeting.

For a list of additional tax planning suggestions, please click here.