December 11, 2017 – The Senate made some last minute changes to their bill from the original Committee on Finance version before passage. Some changes brought their bill more in line with the House’s bill, while others pushed them even further apart. Below are a few of the more important revisions.
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In order to fit within the rules, the Senate changed the individual provisions to sunset in the year 2025. This means without an extension in the future, the individual taxes will go back to the current rules. The corporate ones will remain permanent.
Unlike the House which eliminated the medical expense deduction, the Senate bill not only keeps this but lowers the threshold for deductibility from 10% back to the 7.5% from a couple of years ago for the next 2 years.
Like the House, the Senate has allowed for up to $10,000 of property taxes to be deducted as an itemized deduction. This will have a limited effect as most of the other deductions, such as state and local income taxes will still be disallowed.
To push things even further apart on the Child Tax Credit, the Senate increased their credit value to $2,000 from their original $1,650. The phase out level still remains at the increased $500,000 for joint filers.
The Alternative Minimum Tax is being retained for both individuals and corporations by the Senate. On the individual side this is anticipated to have a smaller impact due to state and local taxes no longer being deductible and an increase in the exemption amount. On the corporate side, however, this is anticipated to cause some issues as the AMT rate of 20% is identical to the anticipated regular tax rate of 20%. The biggest concern is that some popular credits for large corporations, such as Research and Development, are not allowed to offset the AMT tax.
For pass-throughs, the Senate has retained their method of using a deduction against business income for qualifying businesses rather than a lower tax rate, but has increased it from their original 17.4% to 23%. This would effectively make the income taxable at an effective 30% rate for those in the top tax bracket (77% income @ 38.5%). A W-2 limitation also goes into effect once taxable income of the pass-through holder rises above $500,000 for Married Joint filers ($250,000 for everyone else). There is still a list of service companies which are ineligible for this new rate once the taxpayer’s taxable income rises above that same level. Also since this provision is contained in the individual section of the tax bill, it is set to expire in the year 2025 along with the other individual changes.
To further enhance the benefit for purchasing qualified property, the Senate changed their original sunset of the 100% “Bonus”expensing in 2023 to a phase-out of 20% each year beginning in 2023 through 2027.
To conform to the House provisions, the Senate has modified both the dividends received deduction (to 65% and 50% from the current 80% and 70%) and the deduction for research and developmental expenditures (requiring capitalization and amortization rather than deduction for any expenses not taken as a credit).
On the international front, the Senate increased the tax rates to come more in line with the House version. For deferred overseas-held earning and profits the rate for liquid holdings would be 14.5% and illiquid 7.5% (House is 14% and 7%).
Now that both the Republican Congress and the Senate have each passed their respective versions of a Tax Cuts and Jobs Act, it’s time for the next step. Both bills have gone to a reconciliation conference and whatever comes out as the final version will need to pass a vote in both chambers again.
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About the Author
Victoria S. Carlin CPA
Victoria has over 27 years of experience in providing tax consulting, compliance and tax audit representation to closely held businesses, delivering a full range of tax services in federal, multi‐state, and cross-border tax laws and regulations for partnerships, S and C corporations, and individuals.