Republicans in the U.S. Senate last week released a plan for overhauling the federal tax code that differs on a number of key provisions from the proposal by U.S. House Republicans.
As Alert went to print, proposed changes to the Senate plan were being discussed, including a repeal of the individual mandate to have health insurance. The House Republican plan passed on Thursday.
Individual impacts from the Senate and House plans may differ depending on business or personal situations. Of particular concern to Californians is the deductibility of state income taxes, the cap on mortgage deductions in the House proposal, and the tax brackets because California is a higher-cost state in which to live.
The Senate plan eliminates all state and local tax deductions, whereas the House proposal permits property tax deductions up to $10,000.
The Senate plan retains the current mortgage interest deduction ($1 million), rather than capping it at $500,000, as the House plan does.
Like the House proposal, the Senate plan cuts the top corporate tax rate to 20% (from 35%), but delays the start of the lower rate until 2019 (versus 2018 for the House proposal).
The Senate plan keeps the seven individual tax brackets (the House plan reduces the number of brackets to four), but drops the top rate slightly, to 38.5% (from the current 39.6%).
Like the House plan, the Senate proposal raises the threshold for the estate tax to $11 million of inheritance (versus $5.49 million today). But the Senate plan retains the estate tax, rather than repealing it in 2024 as the House plan does.
The Senate proposal preserves the deductibility of medical expenses, rather than eliminating that option as the House plan does.
For many small businesses organized as “pass-through” companies, like sole proprietorships, partnerships and S corporations that currently pay taxes at the owners’ individual rates, the Senate plan will create a 17.4% income deduction. The effect will be to lower the top rate to 31.8% compared to the current 39.6%. Some “service businesses,” such as consulting, engineering, law, medicine and financial services companies making more than $75,000 a year ($150,000 for married couples) may not take the deduction.
The House plan proposes a tax rate of 25% for pass-through businesses.
The Senate proposes a 12.5% tax on certain foreign profits from intangible assets like patents and copyrights, whether those assets are located in the United States or abroad. The House proposes a new global minimum tax of 10% on income that subsidiaries of U.S. companies earn anywhere in the world.
Similarities between the Senate and House plans include:
• nearly doubling the standard deduction to $12,000 individual/$24,000 married filing joint (Senate) or $12,200 individual/$24,400 married filing joint (House), versus $6,530/$12,700 today.
• eliminating the personal exemption.
• eliminating the alternative minimum tax.
• net operating losses (NOL). Both plans repeal the two-year carryback except for farm losses. Losses are limited to 90% of taxable income in future years. The 20-year limit on NOL carryforwards is repealed.
• leaving 401(k) retirement plans largely unchanged.
• changing the current unlimited deduction for business interest to limit net interest to 30% of modified taxable income.
• increasing the child tax credit. This week the Senate tax committee chair proposed increasing the credit from the current $1,000 per child to $2,000 (versus $1,650 in last week’s proposal); the House increases the credit to $1,600 per child.