Federal Tax Bulletin: The 2017 Tax Cuts and Jobs Bill

For the first time in 30 years, Congress is tackling major tax reform. The last time the tax code was overhauled, it was 1986. Back then, the tax code was a brief 30,000 pages, compared to the approximately 70,000 pages it is today.

 

You’ve seen both sides of the Senate face off on provisions in the tax reform bill. Some senators have posted videos detailing handwritten changes. It’s hard to tell fact from fiction and truth from partisanship. At the end of the day, what is contained in the 2017 Tax Reform Bill, where does it stand now, and what happens next? Read on for an independent, objective update.

 

There will be more updates before year-end, to be sure. On December 6, the Senate voted mostly along party lines to go to conference with the House of Representatives.

 

The Tax Cuts and Jobs Bill: A Brief History

There are currently two different reports that will need merged into one and approved by both chambers before the bill is sent to the President for final approval. The House of Representatives approved the Tax Cuts and Jobs Bill on November 16. Then, about two weeks later on December 2, the Senate approved its amendments. The next four days saw heated exchanges between Democrats and Republicans, but ultimately the Senate voted on December 6 to go to conference with the House.

 

Two Roads to the Same Destination

Major differences that need resolved between the House and Senate include:

  • Alternative Minimum Tax
    • House wants to repeal AMT, and the Senate wants to keep the AMT for corporations and raise the individual AMT exemption  
  • Tax Brackets
    • House proposes four tax brackets, and the Senate proposes seven but changing the income ranges
  • Healthcare Individual Mandate
    • House maintains the individual mandate penalty for health insurance (the fee for being uninsured), and the Senate votes to repeal it

 

Other Differences

  • Estate Tax
  • Pass-through tax rate
  • Mortgage interest deduction
  • Local and state tax deduction
  • Depreciation for capital investments
  • Tax treatment of interest

 

Among the biggest differences is treatment of pass-through taxable income. Lobbyists expect the final bill to be closer to the Senate’s version, which calls for a 23 percent pass-through income deduction (on the first 50 percent of wage income) for qualifying businesses. The provision would expire at the end of 2025. The House version, on the other hand, is slightly more complicated, requiring businesses to take 70 percent of income as wages with a 25 percent pass-through income tax rate. The House version also has a lower tax rate for businesses earning less, and has provisions to benefit businesses with high capital investments.  

 

On the individual side, a contentious issue is the potential elimination of state and local tax breaks. Getting rid of these tax breaks could substantially increase taxes for residents of states with higher income taxes, because they could no longer itemize if the SALT provision is passed. However, eliminating the SALT deduction is one of the primary means of cutting costs across the board. A possible compromise could be placing a maximum amount on the SALT deduction.

 

There are areas where both sides of Congress agree, such as:

  • Repeal the individual exemption of $4,050 for single filers and $8,100 for married filers
  • Increase the standard deduction by about double
  • Increase the child tax credit, with phaseouts and expiring provisions
  • Keep the state and local tax property tax deduction with a max of $10,000
  • Expand 529 college savings accounts to apply to some primary and secondary education expenses
  • 20 percent corporate tax rate, with varying effective dates
  • Increase in Section 179 expensing, with varying caps
  • Adding a repatriation tax for businesses with foreign profits

 

Overall, lobbyists think the final bill will be closer to the Senate version, and for one reason: it will cost less. Part of the tax reform requirement is that it will not add to the federal deficit outside of a 10-year budget window (known as The Byrd Rule).

 

What Happens Next?

The House is expected to take up the bill the week of December 11, at which point both chambers will begin negotiating the final version of the legislation. From there, it’s expected that the Republicans – who are championing the legislation – will attempt to pass the tax reform into law before the end of the year.

 

It’s possible that a bill could be introduced in the future aimed at streamlining or changing processes with the IRS. For now, there aren’t specific measures targeting this.

 

There will undoubtedly be more updates over the next few weeks. Be sure to follow Naden/Lean on social media for the latest news on tax reform.