Small business taxation, corporate tax rates, and changes to popular deductions are just some of the many complex changes to the Tax Code being debated in Congress. At the time this article was posted, the Senate is expected to approve, along party-lines, a sweeping overhaul of the Tax Code written by Senate Republicans. The House has already approved its tax bill, also along party-lines. If the Senate passes a tax bill, House and Senate conferees will seek to resolve differences between the two bills. Conferees will likely aim to reach an agreement quickly to send a bill to the White House before year-end.
Not since 1986 has such an extensive re-write of the Tax Code been attempted in Congress. In September, Republicans in Congress unveiled a tax overhaul framework. They followed-up with legislation in November. Almost daily, proposals have been revised as legislation moves through the House and Senate.
Several proposals have generated the most debate. They include:
- Repeal of the state and local tax deduction
- A new tax regime for pass-through income
- Lower corporate tax rate
- ACA individual mandate
- Medical expense deduction
State and local tax deduction. The House bill repeals the state and local tax deduction but would permit taxpayers to deduct up to $10,000 in property taxes. State and local income taxes, or state and local general sales taxes, would not be deductible. In contrast, the Senate bill repeals the state and local tax deduction with no exception for property taxes.
Pass-through income. Both bills would change how pass-through income is taxed. The proposals are extremely technical, raising questions of how easily small businesses would understand and implement the new rules. The House bill generally taxes pass-through income at a maximum rate of 25 percent. The Senate bill calls for a 17.4 percent deduction. The bills have different definitions of what income would be eligible for the new tax treatment. Another significant difference relates to time. The Senate bill’s deduction would be temporary, expiring after 2025. The House bill is permanent.
Corporate tax rate. The House and Senate bills both lower the corporate tax rate to 20 percent. Again, the difference is time. The Senate bill would kick-in after 2019. The House bill would reduce the corporate tax rate after 2017.
Individual mandate. Individuals who do not have minimum essential health coverage must pay a penalty (known as a shared payment) when they file their tax returns. No payment is due if the individual is exempt from the requirement. The Senate bill – but not the House bill – repeals the individual mandate. Because of Senate rules, the Senate bill does not repeal outright the individual mandate but it makes the amount of the payment $0.
Medical expense deduction. Taxpayers who itemize their deductions, and who met other requirements, may be able to deduct certain medical expenses. According to the IRS, taxpayers deducted approximately $85 billion in medical expenses in 2015. The House bill repeals the medical expense deduction. The Senate bill, in contrast, preserves the deduction.
Other deductions and credits. Both bills make significant changes to some popular credits and deductions, like the child tax credit. The House bill proposes to make these changes permanent. The Senate bill envisions temporary changes, generally expiring after 2025.
These and other proposals touch every individual and business. If a tax bill passes Congress, tax planning in 2018 and beyond will look very different from 2017 and prior years. Please contact our office if you have any questions about tax legislation and tax planning.