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Wednesday November 14, 2018

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Senate Tax Cuts and Jobs Act

On November 9, the Senate Finance Committee released its version of the Tax Cuts and Jobs Act. The Senate Finance Committee press release stated the bill would provide "fiscally responsible middle-class tax relief by cutting tax rates across the board, reducing the tax burden on American job creators and modernizing our tax system."

The Senate Finance Committee release summarized the main provisions of their comprehensive tax bill.
  1. Tax Rates - There are seven brackets ranging from 0% to 38.5%. The top rate applies to taxpayers with income over $500,000 for single filers and $1 million for married couples. A goal of the bill is to provide tax relief for middle-income taxpayers.
  2. Standard Deduction - The standard deduction is nearly doubled to $12,000 for single filers and $24,000 for married couples. With this larger standard deduction, an estimated nine out of ten taxpayers will not itemize and may use a postcard tax return.
  3. Family Provisions - In an effort to help families, the Child Tax Credit is increased to $1,650. The Dependent Care Tax Credit and Adoption Tax Credit are both retained.
  4. Charitable Contributions - The permitted deduction for most donors increases from the prior amount of 50% of adjusted gross income to 60%.
  5. Mortgage Interest - A taxpayer may deduct mortgage interest on a primary residence with loans valued up to $1 million.
  6. Medical Deductions - If a taxpayer itemizes, he or she may continue to deduct qualified medical expenses.
  7. Retirement Plans - The existing rules for IRAs, 401(k) plans, 403(b) plans and other types of retirement plans are maintained.
  8. Earned Income Tax Credit (EITC) - The tax credit for lower-income persons is continued.
  9. Alternative Minimum Tax (AMT) - The AMT is repealed.
  10. Estate Tax - The bill doubles the exemption to $10 million plus indexed increases. A couple in 2018 could have a basic exclusion amount of $21.96 million.
Editor's Note: This objective explanation of the Senate tax bill is offered as a service to our readers. The Senate Finance Committee will start a markup of the bill on November 13, 2017. Because the Senate is in recess over Thanksgiving week and will need to pass a budget for 2018 in December, the calendar is very busy. It will be difficult under Senate rules to proceed through the Senate Finance Committee markup, pass a bill, have a conference with the House and pass the final bill prior to the end of this year. It now seems quite likely that passage of tax reform may occur in the first quarter of 2018.

Ways and Means Committee Passes Tax Bill

On November 9, the House Ways and Means Committee passed the Tax Cuts and Jobs Act (H.R. 1). The bill is expected to be presented to the full House of Representatives for a vote next week.

House Ways and Means Committee Chairman Kevin Brady (R-TX) stated, "Today, the first and oldest Committee in Congress passed transformational tax reform legislation that charts a new course for the country. We reaffirmed for all of the families and main street businesses struggling to get by that relief is on the way - relief from a broken tax code, from a slow-growing economy, from stagnant wages and from jobs fleeing overseas."

The Ways and Means Committee Ranking Member is Richard Neal (D-MA). He opposed the bill and noted, "I believe the bill before us today is a bad deal for millions of Americans, particularly those in the middle class. The legislation, which was crafted solely by the majority party behind closed doors and which was not made public until late last week, puts the wealthy and well-connected first, while forcing millions of American families to watch as their taxes go up. That is simply not what the American people asked us to do and it is not something that the Democrats on this committee can support."

The White House welcomed the passage of the bill by the Ways and Means Committee. Treasury Secretary Steven Mnuchin supported the bill and noted, "The Tax Cuts and Jobs Act released last week by the House Ways and Means Committee is a critical first step to a stronger economy that benefits all Americans. Lackluster growth below 2% has sometimes been referred to as the new normal. I want to assure you that this will never be normal for me, for President Trump or for the American people. President Trump is committed to moving forward on economic policies that will create sustained growth of 3% or higher - that is what the people deserve."

Editor's Note: There still is a major question of whether this bill can receive a favorable vote by the House of Representatives. Several Republican members from New York, New Jersey, California and Illinois are expected to oppose the bill because it eliminates the state and local income tax deduction. Speaker Ryan (R-WI) and Chairman Brady will be attempting to build a majority vote in favor of the bill.

House and Senate Tax Bill Differences

Even if both the House and Senate pass their respective versions of the Tax Cuts and Jobs Act in December 2017 or January 2018, there will be a Conference Committee to agree on a final bill.

The bills currently have many differences.
  1. Tax Rates - The House has three rates and the Senate seven. The top House rate is 39.6% and the top Senate rate is 38.5%.
  2. Standard Deductions - The House and Senate agree that the standard deduction should increase to $12,000 for single filers and $24,000 for married couples.
  3. Mortgage Interest - The House allows deductions for loans up to $500,000, while the Senate will permit deductions for loans up to $1 million.
  4. State and Local Taxes (SALT) - The Senate repeals all of the SALT deductions. The House retains deductions for property taxes.
  5. Child Credit - The House increases the child credit to $1,600, while the Senate raises it to $1,650. The House also offers a $300 family tax credit for five years to those who do not qualify for the regular child tax credit.
  6. Medical Deductions - The House repeals medical deductions and the Senate retains them.
  7. Corporate Tax Rate - Both the House and Senate set a 20% top rate, but the Senate delays the change for one year.
  8. Passthrough Businesses - The House creates a top pass-through rate of 25% with an assumption of 70% wage income at a higher rate and 30% business income at a lower rate. The Senate bill includes a 17.4% reduction in the rate for pass-through income.
  9. Alternative Minimum Tax (AMT) - Both House and Senate repeal AMT.
  10. Estate Tax - Both House and Senate double the basic exclusion amount to $10 million plus indexed increases. The House repeals the estate tax in 2023.
Editor's Note: There are also multiple differences in the corporate and international tax provisions. The Conference Committee is likely to be involved in a fairly extended process to resolve all of these differences.

Applicable Federal Rate of 2.4% for November -- Rev. Rul. 2017-21; 2017-46 IRB 1 (17 Oct 2017)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2017. The AFR under Section 7520 for the month of November will be 2.4%. The rates for October of 2.2% or September of 2.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2017, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.

Published November 10, 2017
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