By Candace Varner CPA
Candace Varner, CPA
Creative Planning Tax, LLC
Republicans in both the House of Representatives and the Senate have recently released their versions of the Tax Cuts and Jobs Act. The two proposals have key differences and are both still works in progress with changes being made almost every day. Below is a summary of both proposals as they currently stand as of November 16, 2017.
The House bill proposes replacing the current seven tax brackets with four:
12% for income up to $90,000 (all amounts married filing jointly)
25% for income from $90,001 to $260,000
35% for income from $260,001 to $1,000,000
39.6% on income over $1,000,000
The Senate proposal maintains seven brackets but adjusts the rates slightly and the income levels to which they apply. The 35% bracket would apply on income from $450,000- $1,000,000, and the top 38.5% would apply to income over $1,000,000. Currently the top bracket is 39.6% and begins at income over $480,050.
Business tax rates will also change under both proposals. Businesses structured as sole proprietorships, partnerships and S Corporations would be taxed at 25% under the House plan. Business owners can either allocate 70% of their pass-through income to wages (taxed at individual rates) and 30% to business income (taxed at 25%), or calculate the proportion of their income attributable to wages based on their capital investment, with the remainder allocated to business income. Professional services such as doctors, lawyers, accountants, and consultants do not qualify for the reduced rate.
The Senate proposal does not include a separate rate for pass-through income, but instead allows a 17.4% deduction for this type of income. The deduction does not apply to professional service income; instead professional service income is taxed at a lower rate for taxpayers with total income of less than $150,000 (married filing jointly).
Both proposals cut the corporate tax rate to 20% for businesses that are not operated as pass-through entities. The House plan makes this rate effective for 2018, the Senate’s plan in 2019.
Individual taxpayers will see large changes to their allowable deductions under both proposals. The plans eliminate personal exemptions, expand the standard deduction, and eliminate some itemized deductions. These changes will likely result in many taxpayers using the standard deduction rather than itemizing their deductions.
One of the most impactful changes is the repeal of state and local income tax deductions. Currently all income taxes paid to any state or locality are deductible on Federal income tax returns in the year they are paid. Both proposals eliminate this deduction, as well as limit or repeal the deduction for real estate property taxes. Charitable donations are still deductible, however taxpayers must itemize their deductions in order to see a benefit.
Both proposals also eliminate the alternative minimum tax, however, most of the deductions that were previously disallowed under the AMT system are eliminated in the new proposals.
Taxpayers with children will see a number of changes as well. Personal exemptions per child are repealed under both plans, replaced by the expanded standard deduction. The child tax credit is currently $1,000. The House plan would increase the credit to $1,600, plus an additional $300 credit for each parent. The Senate plan would increase the credit to $1,650, but also increase the income phase out to $1 million for joint returns. The deduction for up to $2,500 of student loan interest is eliminated under the House proposal, but maintained under the Senate proposal.
Some early discussions included proposals to reduce or eliminate retirement savings. Currently, the House plan makes no changes to 401(k), 403(b), 457(b), and IRA plan contributions. The Senate plan leaves the deductions largely the same, but eliminates catch-up contributions for taxpayers over age 50 who also have wages of $500,000 or more in the preceding year.
Most recently, the Senate has added a provision that repeals the requirement for each taxpayer to have health insurance coverage. The House has not added this provision as of now, but this provision, along with all other differences, will have to be reconciled before a bill can be presented to the President.
Both of the proposed bills include many more details which may affect your income taxes depending on your personal situation. We will continue to update you as any tax proposals are finalized, and are always available to answer any questions regarding this or any other topic.