The Senate Finance Committee revealed their version “Tax Cuts and Jobs Act” on November 9. The changes are too numerous to list, and this post focuses on the highlights of the proposal. Most of the changes are effective for tax-years beginning after 12/31/17.
Like the House Version, the Senate’s nearly doubles the standard deduction for each filing status, $24,000 for married-filing-joint, $18,000 for head-of-household, and $12,000 for all other 1040 filers; these changes take effect January 1, 2018. This version of the Tax Bill appears somewhat friendlier to lower and middle-income taxpayers.
Corporation and Business Benefits
The Bill eliminates the graduated corporate rate structure that tops at 35% and replaces it with a flat 20% rate. The proposal also eliminates high tax rate on personal service corporations. Unlike the House Bill, the Senate Bill delays implementation of these corporate rates for one year.
The Section 179 expense deduction increases to $1,000,000, and increases the phase-out threshold amount to $2,500,000. In addition, the 50% additional first-year depreciation deduction is increased to 100% for tax years 2018 through 2022.
The Bill eases the accounting burden and capitalization rules on small businesses. Businesses with average gross receipts of $15,000,000 or less over a three-year period will be able to use the cash method of accounting. Those same businesses are also exempt from capitalization rules of Section 263A, and inventory rules under Section 471.
Businesses will be able to immediately write-off investments in new equipment. Instead of the 25% rate of tax on certain “flow-through” income in the House version, the Senate Bill allows individual taxpayers to deduct 17.4% of “domestic qualified business income from partnerships, S corporations, and sole proprietorships. However, the deduction only applies to capital-intensive businesses; only service businesses with net income less than $75,000 ($150,000 for married couples filing jointly) get the deduction.
Under current law, the like-kind exchange provisions of Code Section 1031 apply to both real property and tangible personal property. Under the proposed bill only real property will be eligible for like-kind exchanges.
Alternative Minimum Tax Eliminated
Both versions of the Bill eliminate both the individual and corporate alternative minimum tax, primarily benefitting higher-income taxpayers.
Estate Tax Phased Out
The bill immediately increases the estate tax exclusion to $10,000,000 and completely eliminates the estate tax after five years.
Increase of Standard Deduction Reduced by Loss of Personal/Dependency Exemptions
The Senate proposal also eliminates the personal exemptions and dependency exemptions, ($4050 per exemption) which, for a married couple with one dependent, nullifies any benefit from the increased standard deduction; married couples with two or more dependents who use the standard deduction would actually see their benefits decrease from what they receive under current law.
Increase in Child Tax Credit and Creation of Other Dependent Credit
Under the Senate Bill, the loss of the personal and dependent exemptions is offset by an increase in the child tax credit from $1,000 to $1,650, and $0 to $500 for each non-child dependent, $50 and $300 more than the House version, respectively. These credits begin to phase-out at $1,000,000 for married couples, and $500,000 for all other filers.
Unlike the House Bill, the Senate Bill keeps seven individual tax brackets but lowers them each of them somewhat to 10%*, 12%, 22.5%, 25%, 32.5%, 35%, and 38.5%, respectively. The thresholds for each of the brackets increases and should benefit all taxpayers.
*(It is important to note that the elimination and replacement of the 10% with the 12% in the House version represented 20% increase in taxes for those wage earners at the poverty level.)
Major Cuts to Schedule A and Adjustments to Income
Unlike the House version, the Senate version eliminates the deduction for property taxes. The Senate version, like the House, eliminates the deduction for state and local income taxes; this impacts residents of high state income tax like California, New York, Oregon, etc.
The Senate version of the Bill keeps the $1,000,000 cap on acquisition indebtedness for the mortgage interest deduction but eliminates the deduction for home-equity interest.
Unlike the House Bill, the Senate version keeps the deduction for medical expenses, and both modify the adjusted gross income limitations on charitable donations (beneficial in most cases).
Both versions of the Bill repeal the overall AGI limitations on itemized deductions.
Additionally, the bill eliminates the deductions and adjustments to income for:
• Moving expenses except for members of the armed forces
• Personal casualty losses other than Federally declared disaster areas
• All itemized deduction subject to the 2% of AGI limitation
• Alimony* (Alimony will no longer be taxable)
Keeps 401K; Eliminates IRC Section 106
The bill leaves untouched, the deduction for 401(k) and other pension contributions. In addition, there are significant modifications including elimination of the catch-up contributions provisions for employees who receive wages of $500,000 or more during the year.
Changes to Sale of Residence Exclusion
The lived-in and owned holding period for the exclusion on the sale of a primary residence is increased from two out of five years, to five out of eight years, but does not phase-out the exclusion for higher income individual, like the House version.
Eliminated Employer-Provided Benefits
The Senate version retains the adoption credit, but like the House Bill eliminates the transportation fringe benefit, and the deduction for certain entertainment fringe benefits.
There are far too many factors for anyone to claim that this tax bill will help middle- income families. One suggestion is to grab your 2016 tax return and see how these changes would affect the outcome of your tax liability. If you need assistance, then ask your tax professional.