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December 4, 2017

Federal Tax Reform Moves One Step Closer To Final Passage

Early this past Saturday morning, members of the U.S. Senate passed their version of federal tax reform on a 51 to 49 vote. (Click here to see how your senators voted.) Before passing the bill, senators made several changes, including:

  • Adding a provision to allow the deduction of up to $10,000 in state and local property taxes (the House bill includes the same provision).
  • Changes to the deduction of income for pass-through companies; the individual Alternative Minimum Tax and how it is assessed; and to expensing for qualified business property and to the repatriation tax rate. (See the graph below for more detail).
  • Adding a provision that would allow medical expenses to be deducted if they exceed 7.5 percent of an individual’s adjusted gross income, or AGI. (Under current law, expenses must exceed 10 percent of AGI to be deducted).

The Senate bill differs substantially from the U.S. House of Representatives’ tax reform outline, which means lawmakers from the two chambers will have to settle their differences, and produce a final bill for both chambers to vote on, in a conference committee. That committee will starts its deliberations this week. House and Senate leaders hope the panel will conclude its work within 10 days, giving lawmakers time to debate and vote on a final bill before the December holidays.

Here are the major differences between the House and Senate bills and how each chamber handles the priorities the Metals Service Center Institute has outlined for federal tax reform:

PROVISION

HOUSE BILL

SENATE BILL

Individual Tax Rate

Permanently reduces the number of brackets to four. Rates would be 10%, 25%, 35%, and 39.6%. Eliminates the personal exemption, but nearly doubles the standard deduction. Eliminates the Alternative Minimum Tax (AMT).

Temporarily (through 2025) cuts tax rates to 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%. Eliminates the personal exemption, but nearly doubles the standard deduction. Increases the exemption for the AMT. These provisions also expire after 2025.

Pass-Through Tax Rate

Permanently reduces top rate to 25% for a portion of pass-through income. Uses a 70/30 rule to separate pass-through business income from wage income to determine what percent of income will receive the lower rate. The first $75,000 of income would be subject to a 9% rate for pass through owners who make up to $100,000.

Lowers most individual rates and includes a new business deduction equal to 23%. This provision would expire at the end of 2025 and is prohibited for anyone in a service business, except for married couples with taxable incomes under $500,000 and individuals with incomes under $250,000 if single.

Preserves existing business structure commonly referred as IC-DISC (Interest Charge Domestic International Sales Corporation), which will allow pass-through businesses to benefit from the international tax reforms included in the bill.

Corporate Tax Rate

Permanently reduces the rate to 20% starting in 2018. Repeals the corporate AMT.

Permanently reduces the rate to 20% starting in 2019. Retains the corporate AMT.

Estate Tax

Eliminates completely and permanently starting in 2024. Doubles the current exemption until then.

Gradually doubles the exemption to $11 million for individuals and $22 million for couples, but exemption returns to current level ($5.6 million for individuals/$11.2 million for couples) through 2025.

LIFO

Retains LIFO

Retains LIFO

Repatriation

Moves toward a territorial tax system. Businesses can repatriate cash at a 14% rate and noncash holdings at a 7% rate.

Moves toward a territorial tax system. Businesses can repatriate cash at a 14.5% rate and noncash holdings at a 7.5% rate.

Interest Deduction

Caps interest deduction at 30% of earnings before interest, taxes, depreciation, and amortization 

Caps interest deduction at 30% of earnings before interest and taxes

Expensing

Full expensing for five years for new equipment

Full expensing for five years for new equipment with shorter depreciation for buildings. Phases the provision out by 20 percentage points per year thereafter. Raises the Section 179 small business expensing cap to $1 million with a phase-out starting at $2.5 million. Shortens the depreciation of real property to 25 years

State & Local Tax Deduction

Allows deduction of up to $10,000 for property taxes

Allows deduction of up to $10,000 for property taxes

Health Care Mandate

Keeps the health insurance mandate in place

Repeals requirement that Americans be covered by health insurance

After the Senate passed its bill, President Donald Trump indicated that he would be willing to agree to a small increase in the corporate tax rate in order to gain more support for reform. House and Senate negotiators have not yet said whether they’re considering that idea.

If you have an opinion about either the House or Senate bill and what is in them, please tell your member of Congress. Contact information for every member of the Senate is here while information for all House members is here.

The conference committee mentioned above will be made up of select members of the House Ways and Means Committee and the Senate Finance Committee. It’s not clear yet which individuals have been chosen for that panel, so it’s a good idea to contact every member of both committees to make your voice heard. Contact information for those lawmakers can be found here for the Ways and Means Committee and here for the Finance Committee.