On November 9, 2017, the Senate Finance Committee released detailed tax reform policy proposals[1], which would make major changes to the Internal Revenue Service Code. The Senate framework has a number of key differences from the House bill released last week. Of note: delaying the reduction of the corporate tax rate until 2019, fully repealing the state and local tax deduction, and keeping the estate tax. Taxpayers will continue to have uncertainty in planning for 2018 taxes. Expect additional action from the Senate after the Thanksgiving holiday.

Business Tax Provisions

  • Permanently reduce the corporate tax rate to 20% beginning in 2019 (rather than 2018).
  • Create a 17.4% deduction on income taxes for certain pass-through entity owners of all income levels, vs. a reduced tax rate of 25%.
  • Repealing the corporate alternative minimum tax (AMT), beginning in 2018 (same as House bill).
  • Full and immediate expensing of new equipment placed in service after September 27, 2017. This provision would be permanent (currently a five-year provision).
  • Limiting deductions for “business interest.”
  • Eliminating various deductions and credits, such as the Section 199 domestic production deduction.

Individual Tax Provisions

  • Reformed tax rate structure, maintaining the 10% bracket and providing a 38.5% bracket for high-income earners. Individual taxpayers brackets modified to rates of 10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5% (the House would replace the current rates with four rates of 12%, 25%, 35% and 39.6%)
  • Repealing the individual AMT.
  • Increase the standard deduction to $24,000 for joint returns and surviving spouses, $18,000 for single parents, and $12,000 for individuals. This is up from $12,700, $9,300, and $6,350 under current law.
  • Retain the home mortgage interest deduction, preserved for existing mortgages and maintained for new mortgages up to $1 million (limited to interest on new home mortgages of $500,000 or less under the House bill).
  • Repeal the deduction for state and local taxes in full. The House plan retains the state and local property tax deduction up to $10,000.
  • The estate tax exemption would be doubled, however, the estate tax itself would not be repealed at any point.
  • Retain retirement savings programs including 401(k)s and IRAs.

Apart from the differences listed above, the Senate plan would retain:

  • provisions that provide “education relief for graduate students”;
  • the adoption credit;
  • the child and dependent care credit;
  • the deduction for charitable contributions;
  • the deduction for medical expenses;
  • the earned income tax credit; and
  • the enhanced standard deduction for the blind and elderly.

International Tax Provisions

  • Eliminate the current “worldwide” system of U.S. taxation and change to a territorial system.
  • Make it “simpler and less onerous for American multinationals to bring foreign earnings back to America.”
  • Eliminate incentives for companies to shift jobs, profits and intellectual property overseas, and create incentives for companies to both locate in, and bring economy activity back to, America.
  • Repeal the DISC and IC-DISC regimes.
  • Impose a one-time transition tax on deferred foreign earnings that is calculated differently than under the House bill.

Additional Resources

For information on the House bill, see our previous blog post here.

The Barnes Dennig Tax Team will keep you informed of any updates and changes as they occur, please reach out if you have any questions about the proposed changes above, and a member of the tax team will contact you.

[1] https://www.jct.gov/publications.html?func=startdown&id=5032