Republicans have overcome another significant obstacle in their pursuit of passing a tax bill to President Trump’s desk by Christmas.
In the early hours of Saturday, the Senate approved a comprehensive tax reform bill through a largely partisan vote.
Only one Republican, Senator Bob Corker from Tennessee, opposed the bill due to concerns over the deficit. The Congressional Budget Office projects the bill will incur a cost of $1.47 trillion over the next decade. Nonetheless, many Republicans assert that the bill will be self-financing through increased economic growth, despite contradicting analyses.
The Senate’s final version of the bill varies from the tax proposal passed by the House in mid-November. These discrepancies must be resolved, and both chambers need to vote on a final legislative package.
Stay updated as this unfolds. In the meantime, here are essential aspects of how the Senate bill will impact individuals and businesses, alongside its differences from the House proposal.
IMPACT ON INDIVIDUALS
Modification of individual income tax brackets: Currently, the individual tax code has seven brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
The Senate proposal maintains seven brackets but revises taxable income rates to:
– 10% (income up to $9,525 for individuals; up to $19,050 for married couples filing jointly)
– 12% (over $9,525 to $38,700; over $19,050 to $77,400 for couples)
– 22% (over $38,700 to $70,000; over $77,400 to $140,000 for couples)
– 24% (over $70,000 to $160,000; over $140,000 to $320,000 for couples)
– 32% (over $160,000 to $200,000; over $320,000 to $400,000 for couples)
– 35% (over $200,000 to $500,000; over $400,000 to $1 million for couples)
– 38.5% (over $500,000; over $1 million for couples)
In contrast, the House bill proposes only four brackets: 12%, 25%, 35%, and 39.6%.
Nearly doubles the standard deduction: Both the Senate and House bills are set to nearly double the standard deduction. For single filers, the Senate bill raises it to $12,000 from the current $6,350; for married couples filing jointly, it increases to $24,000 from $12,700.
This will significantly decrease the number of individuals choosing to itemize their deductions, as itemizing only benefits those whose total individual deductions surpass the standard deduction.
Eliminates personal exemptions: Currently, individuals can claim a personal exemption of $4,050 for themselves, their spouses, and each dependent. Both the Senate and House bills eliminate this option.
Related: Even with growth, the Senate tax bill still adds $1 trillion to deficits
Families with three or more children may find that this negates any potential tax relief they might receive from other provisions in the bill.
Eliminates the state and local income tax deduction and limits property tax breaks: Presently, itemizers can deduct their property taxes and state and local income or sales taxes.
The initial Senate bill proposed fully repealing SALT deductions but was amended to allow an itemized deduction for property taxes up to $10,000, resembling the House’s provisions.
Enhances the child tax credit: The Senate GOP bill raises the child tax credit to $2,000 per child, an increase from the current $1,000 and higher than the $1,600 proposed in the House bill.
Senate Republicans would extend the credit to any child under 18, up from the existing limit of under 17, but this restriction will revert to under-17 in 2025, just before the increase is set to lapse.
However, the additional $1,000 will not be accessible to the lowest income families if they do not owe federal income taxes, as this amount is non-refundable. Unlike the first $1,000, which is refundable, the second $1,000 does not allow families to receive government money even if their federal tax obligation is zero.
Additionally, the Senate bill significantly broadens eligibility for the credit by adjusting the income thresholds where the credit begins to phase out, increasing it to $500,000 for married filers from the previous $110,000.
Filers with dependents who are not qualifying children might qualify for a new $500 nonrefundable credit for each dependent. Conversely, the House bill proposes a new $300 credit for parents and dependents over 17.
Retains mortgage interest deduction: The Senate bill allows for the deduction of mortgage interest on debt up to $1 million.
In comparison, the House seeks to cap the loan limit at $500,000 for new mortgages.
Given the substantial increase in the standard deduction in both bills, the proportion of filers claiming the mortgage deduction would likely decline.
The Senate bill also introduces two alterations related to home financing: it eliminates interest deductions for home equity loans and extends the duration a homeowner must occupy a property to qualify for the full tax-free exclusions on gains when sold.
Maintains the Alternative Minimum Tax (AMT): While the original Senate bill, akin to the House bill, proposed abolishing the AMT, the final version retains it but increases the income exemption threshold.
The AMT, designed to ensure wealthy taxpayers contribute a minimum tax by disallowing various deductions, typically impacts earners between $200,000 and $1 million today.
Higher earners usually find they owe less tax under the conventional income tax code, thus paying that amount instead.
Retains estate tax but exempts most: Unlike the House GOP proposal, Senate Republicans propose keeping the estate tax.
However, they intend to double the exemption limits—currently set at $5.49 million for individuals and $10.98 million for married couples. Even at current levels, only 0.2% of estates incur the estate tax.
Increases the educator deduction: Teachers purchasing their own classroom supplies can currently deduct up to $250; the Senate bill raises that limit to $500.
In contrast, the House bill eliminates this deduction.
Expands medical expense deduction: Current itemizers can deduct medical and dental expenses exceeding 10% of their adjusted gross income.
While the House bill removes this deduction, the Senate bill retains it and temporarily lowers the threshold to 7.5% for the 2017 and 2018 tax years.
Repeals the individual mandate for health insurance: The intent behind this repeal is to offset the tax bill’s cost. It is anticipated to save money by reducing government spending on insurance subsidies, under the assumption that fewer individuals eligible for subsidies would seek insurance without a penalty.
However, experts warn that this could elevate premiums as healthier individuals might opt out of purchasing insurance.
IMPACT ON BUSINESSES
Reduces corporate tax rate … in a year: Like the House legislation, the Senate bill aims to decrease the corporate tax rate to 20% from 35%. However, the 20% rate will only become effective in 2019 under the Senate’s proposal. This delay reduces the measure’s initial ten-year cost.
Generous expensing rules: Senate Republicans propose allowing businesses to fully and immediately expense new equipment for five years, with a gradual phase-out at 20 percentage points per year thereafter. On the other hand, the House provision limits this to five years.
Lower taxes on pass-through business earnings: Most U.S. businesses function as pass-through entities rather than corporations. This means profits are passed to owners or partners, who pay taxes on them at individual rates.
Both the House and Senate bills propose reducing taxes on pass-through income.
The House bill lowers the top income tax rate to 25% from 39.6%, banning professionals (e.g., lawyers and accountants) from benefiting from the reduced rate and instituting a 9% rate for businesses earning less than $75,000.
Meanwhile, the Senate bill deduces 23% from filers’ pass-through income, an increase from the initial 17.4%.
The 23% deduction will not be accessible to service businesses, except for those with taxable incomes under $500,000 if married ($250,000 if single).
Prevents misusing pass-through tax breaks: If a pass-through owner or partner receives a salary from the business, that income will fall under regular tax rates.
To avoid individuals mischaracterizing wage income as business profit to obtain the pass-through deduction, the Senate bill restricts the deduction to half of the W-2 wages from the pass-through entity or their share. This W-2 limitation does not apply if the filer’s taxable income is below $500,000 if married or $250,000 if single.
Alters taxation for U.S. multinationals: Currently, U.S. firms pay taxes on all profits, regardless of where they earn them, with the possibility of deferring tax on foreign earnings until repatriation.
Critics argue that this “worldwide” tax structure disadvantages American companies since most foreign counterparts operate under a territorial tax system, avoiding taxes on foreign income.
The Senate bill suggests moving the U.S. to a territorial tax system. It includes various anti-abuse measures to prevent corporations with foreign profits from exploiting the tax code.
Furthermore, companies will be mandated to pay a one-time, low tax rate on existing overseas earnings: 14.5% on cash assets and 7.5% on non-cash assets (like foreign equipment). These rates are slightly above the House’s proposed rates of 14% and 7%, respectively.
