Last week, the Senate Finance Committee unveiled its version of the Tax Cuts and Jobs Act revealing many differences from the House proposal. Earlier this month, the House Ways and Means Committee introduced its tax plan.
Both plans call for a significant increase in the standard deduction, the elimination of the alternative minimum tax (AMT), and a reduction in corporate taxes. While many of the themes and provisions of the tax bills are consistent, there are key differences highlighted in the Senate plan.
Here are some key differences in the Senate version:Individual income and estate taxes
- Seven brackets (instead of 4) including 10%, 12%, 22.5%, 25%, 32.5%, 35%, and a top rate of 38.5% ($500,000 for singles, $1 million for couples)
- Retains the deduction for mortgage interest at $1 million of indebtedness (House version reduced to $500,000)
- Completely eliminates the state and local tax deduction (House version retains a deduction for local property taxes capped at $10,000)
- Retains the estate tax and doubles the lifetime exclusion amount to $10 million per individual (adjusted for inflation)
- Like the House version, the proposal reduces the corporate tax rate to 20% but delays implementation until 2019
- Unlike House version, there is no separate tax rate for pass-through entities. Business owner can deduct 17.4% of pass-through income from taxes
- Tax rate for repatriated earnings (cash) at 10% vs. House rate of 12%
Additional key differences:
Retirement The Senate version does not eliminate Roth IRA conversions, but does eliminate retirement plan catch-up contributions at higher income levels (more than $500,000 in wages).
Education Unlike the House version, which streamlines various tax credits and eliminates the deduction for student loan interest, there are no significant changes to education credits and deductions in the Senate version.
These separate bills will be marked up and eventually presented for votes by the respective committees (Senate Finance and House Ways and Means). Assuming the bills progress from the committees, there would eventually be broader votes in each chamber followed by a process to reconcile both bills.
With many differences between the two versions, it is not clear how many of the provisions will ultimately be approved by both the Senate and the House. Both proposals include many changes to tax deductions and credits in an effort to offset the impact of tax reductions. Eliminating or limiting deductions, for example, could have a significant impact on an individual’s overall financial plan. Investors will want to monitor the process and also consult an advisor for advice on tax planning strategies.