Tax reform: What advisers need to know about the Senate bill
Some key differences from House bill include how mortgage deduction and estate taxes are treated.
Republican members of the Senate Finance Committee released their tax-reform bill on Thursday. Here are the highlights for financial advisers along with a comparison to the House bill, an amended version of which was approved on Thursday by a party-line vote in the House Ways and Means Committee.
Tax rates
Senate: Expands the zero tax bracket and maintains a 10% bracket. The plan “targets tax relief to the middle class while maintaining the existing tax distribution, and a 38.5% bracket for high-income earners,” the highlights state.
Here are the breakouts of the seven marginal tax rates under the Senate’s bill: 10% (taxable income up to $9,525 for single filers); 12% (over $9,525); 22.5% (over $38,700); 25% (over $60,000); 32.5% (over $170,000); 35% (over $200,000); and 38.5% (over $500,000).
House: Reduces the number of marginal income-tax rates to four: 12% (starting at $12,000 of taxable income for single filers), 25% ($45,000), 35% ($200,000) and 39.6% ($500,000).
401 (k) plans
Senate: No changes to pre-tax limit for tax-deferrals for contributions to 401(k)s and individual retirement accounts.
House: Same
Pass-throughs
Senate: A taxpayer “generally may deduct 17.4% of domestic qualified business income” from a partnership, S corporation, or sole proprietorship,” according to a detailed outline of the tax plan published by the Joint Committee on Taxation.
House: A portion of net income distributed from a pass-through business to an owner would be treated as business income and taxed at a 25% instead of the current individual rate. The amended bill approved by the House Ways and Means Committee on Thursday provides a lower tax rate for some small business owners. Tax rates could be as low as 9% for some income for an indivdual earning less than $75,000 through a pass-through business.
Estate tax
Senate: Doubles the current exemption of $5.49 million ($10.98 million for married couples). The federal estate tax, currently 40%, is levied at death.
House: Doubles exemption beginning in tax-year 2018 and repeals the tax beginning in 2024.
AMT
Senate: Repeals the alternative minimum tax.
House: Same
Mortgage deduction
Senate: Maintains the mortgage deduction for existing mortgages and for newly purchased homes up to $1 million.
House: Caps mortgage deduction at $500,000 for new homes.
Charitable deduction
Senate: Preserves deduction for charitable contributions
House: Same, with some minor changes
State and local tax deduction
Senate: Eliminates all state and local tax deductions.
House: Ends itemized deduction for state and local income and sales taxes, while allowing itemized deductions for up to $10,000 of property taxes.
Standard deduction
Senate: Doubles standard deduction from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples.
House: Same
Corporate tax rate
Senate: Sets corporate tax rate at 20%, but wants to delay it until 2019
House: Same, but change would take effect in 2018.
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