On Thursday, the House passed The Tax Cuts and Jobs Act by a vote of 227-205. The bill has undergone a series of markups or changes since its release two weeks ago. Some of these changes include establishing a 9% tax rate for the first $75,000 of business income earned by owners of a pass-though (who earn less than $150,000). For the active owners, 30% of the remaining business income will be taxed at 25%. For passive owners, all business income will be limited to the 25% tax rate. The final bill was changed to allow small businesses to continue to write off the interest on loans and also establishes a territorial tax system so multinational businesses won’t be taxed on earnings abroad. Please refer to the newsletter sent earlier this month for more details on the House bill.
Senate Finance Committee Proposed Bill
Also on Thursday, the Senate Finance Committee released their own proposed bill. While there are some similarities between the two bills, key differences will need to be resolved before moving forward. One major difference is the inclusion of seven tax brackets as opposed to the House’s three. The brackets are 10%, 12%, 22.5%, 25%, 32.5%, 35%, and 38.5%. Both bills increase the standard deduction to $12,000 for single filers and $24,000 for MFJ filers, however the Senate bill increases the standard deduction to $18,000 for head-of- household filers.
The Senate bill will retain the medical expense and alimony deductions, but will eliminate the state and local income and property tax deductions. The mortgage interest deduction will remain unchanged, but the bill eliminates home equity loan interest deduction. Another major difference in the two bills is the Senate’s inclusion of a provision to eliminate the legal requirement to buy health insurance or pay a penalty, also known as the individual mandate.
For businesses, the major difference in the Senate bill is to allow individuals to deduct 17.4% of pass-through income, however the deduction does not apply to specified service businesses. Similar to the House bill, the corporate tax rate will be reduced to 20%, but the new rate will not go into effect until 2019.
A vote on this proposed bill in the Senate is expected the week after Thanksgiving. If passed, the next step will be for differences in the Senate bill and the House bill to be reconciled. Senate Republicans will be pushing to reconcile quickly, with the potential to lose a seat in Alabama on December 12th, they understand their margin of victory will likely narrow. We will continue to advise as we become aware of additional information, but please feel free to contact us if you have any questions.