The Joint Committee on Taxation released a report Thursday comparing the House and Senate versions of the Tax Cuts and Jobs Act, highlighting differences that include where tax brackets begin, the standard deduction, maximum rate on business income of individuals and the child tax credit.
For personal income tax, the House version of the tax bill consolidates the current seven income tax bracket rates to four but keeps the top marginal rate at 39.6 percent. The Senate version, on the other hand, keeps the seven brackets but reduces the top marginal rate to 38.5 percent. The House and Senate also both have slightly different rates for the standard deduction.
The House and Senate bills also treat pass-through income differently. The House bill introduces a top rate of 25 percent for members of pass-through entities while individual tax rates can go as high as 39.6 percent. The lower rate would apply to only 30 percent of income that can be categorized as qualified business income. The remaining 70 percent would be attributable to wages or labor income and be taxed at individual rates — a mechanism put in place to prevent tax avoidance maneuvers to characterize personal wages as business income. The Senate’s tax bill introduces a 23 percent deduction for pass-through income, bringing the top effective rate to 29.6 percent.
Both the Senate and House increase the child tax credit, but while the House increases it to $1,600, the Senate increases it to $2,000. The phase-out amount for joint filers comes at $230,000 for joint filers in the House version and at $500,000 in the Senate version. The House version creates a $300 per-person nonrefundable family tax credit for those not eligible for the child tax credit that would expire by 2023, whereas the Senate version would create a $500 nonrefundable tax credit for non-child dependents.
The House also repeals the alternative minimum tax for corporations and individuals, while the Senate retains both alternative minimum taxes but increases the exemption rate for individuals.
For homeowners, the House lowers the limitation on qualifying indebtedness for the mortgage interest deduction to $500,000, grandfathering in indebtedness incurred on or before Nov. 2, 2017, at $1 million. The Senate version keeps the mortgage interest deduction for new debt but eliminates the deduction for home equity interest indebtedness.
On the health care side, the House bill repeals medical expense deductions while the Senate retains them and decreases the floor for the medical expense deduction to 7.5 percent from 10 percent for taxable years 2017 and 2018. The Senate also reduces the penalty for failure to obtain health coverage under the Affordable Care Act to $0, while the House version doesn’t touch the penalty under the individual mandate.
The House version increases the estate tax exemption from $5 million to $10 million, reduces the gift tax rate from 40 percent to 35 percent for gifts made after Dec. 31, 2024, and repeals the estate and generation-skipping transfer taxes for estates of decedents dying, gifts made, and generation-skipping transfers made after Dec. 31, 2024. The Senate version doubles the basic exclusion amount for estate and gift tax purposes from $5 million to $10 million.
Martin J. Milita