US – Senate Finance Committee Approves Tax Reform Bill | KPMG | GLOBAL

United States – Senate Finance Committee Approves Tax Reform Bill

US – Senate Finance Committee Approves Tax Reform Bill

This report covers the changes and additions proposed in the U.S. Senate’s tax reform bill as compared to the original Senate mark and highlights certain differences between the Senate bill and the House bill.

1000

Related content

flash-alert-2017-168

On November 16, 2017, the U.S. Senate Finance Committee completed its markup of a tax reform bill and approved the bill.  The bill now moves to procedurally required consideration by the Budget Committee, followed by consideration by the full Senate.  The bill as approved by the Finance Committee (“the SFC bill”) incorporates a number of changes from the original reform proposal (the “Chairman’s mark”) considered by the Finance Committee.1  These changes were introduced via a Chairman’s modified mark and a manager’s amendment. 

Also on November 16, 2017, the U.S. House of Representatives voted to approve its version of H.R. 1, the Tax Cuts and Jobs Act (“the House bill”).2

As regards the procedure to be followed from this point, the full Senate may vote on its bill after the Thanksgiving recess (November 20-24).  If the Senate approves a version of the SFC bill, then both houses of Congress are likely to meet in a conference committee to try to reach agreement on a unified tax bill.  It is also possible that the House will vote to approve the same bill as the Senate with no modifications.  Once the identical bill has been approved by both houses of Congress, it can be signed into law by the President.

WHY THIS MATTERS

These developments in the U.S. Senate and House of Representatives represent a major step towards the possible passage of tax reform legislation.  This reform would represent the most significant overhaul of the U.S. Internal Revenue Code for over 30 years and would introduce major changes for individuals and businesses.

This GMS Flash Alert discusses the changes and additions proposed by the SFC bill as compared to the original Chairman’s mark and highlights certain differences between the SFC bill and the House bill. 

Proposals Stricken

The SFC bill deletes the following proposals which were included in the Chairman’s mark:

  • proposed changes to nonqualified deferred compensation;
  • proposed worker classification safe harbor;
  • ten percent tax on early withdrawal from section 457(b) plans; and
  • elimination of retirement plan catch-up contributions for employees earning over $500,000.

Modified Proposals

Introduction of Expiration Date

The SFC bill would make most of the proposed reform proposals for individual tax temporary, whereas the original Chairman’s mark and the House bill would have made most of them permanent.  The SFC bill does this by adding an expiration date to the individual tax reform proposals, with the result that they would expire after December 31, 2025.  This expiration date would not apply to the proposal to require use of chained CPI to index certain tax thresholds currently indexed using ordinary CPI, or to the proposal to reduce the Affordable Care Act (ACA) individual shared responsibility payment (the “individual mandate”) to zero. The proposed repeal of the Alternative Minimum Tax (AMT) would also expire after December 31, 2025.

As a result, for 2026 and subsequent tax years, the Code provisions would revert to their 2017 form, save to the extent that indexed values had been adjusted for inflation during intervening years, or the repeal of the ACA individual mandate.

Ordinary income tax rates

The SFC bill changes the individual income rate structure from that proposed in the original Chairman’s mark.  The modified version retains the seven-rate structure but slightly reduces three of these rates: the 22.5-percent rate is reduced to 22-percent; the 25-percent rate is reduced to 24 percent; and the 32.5-percent rate is reduced to 32 percent.  In addition, certain of the thresholds at which the rates apply are adjusted.

The table below illustrates the differences between the SFC bill and the House bill, and also compares these to the rates under current law:

2018 Current Law House Bill Senate Bill
Single Single Single
Tax Rate If taxable income is: Tax Rate If taxable income is: Tax Rate If taxable income is:
10% $0 to $9,525  12%   $0 to $45,000   10% $0 to $9,525
15% $9,526 to $38,700 12% $9,526 to $38,700
25% $38,701 to $93,700 25%   $45,001 to $200,000 22% $38,701 to $70,000
28% $93,701 to $195,450 24% $70,001 to $160,000
33% $195,451 to $424,950 35% $200,001 to $500,000 32% $160,001 to $200,000
35% $424,951 to $426,700 35% $200,001 to $500,000
39.6% $426,701 or more 39.6% $500,001 or more 38.5% $500,001 or more

 

2018 Current Law House Bill Senate Bill
Married Filing Jointly Married Filing Jointly Married Filing Jointly
Tax Rate If taxable income is: Tax Rate If taxable income is: Tax Rate If taxable income is:
10% $0 to $19,050 12%   $0 to $90,000   10% $0 to $19,050
15% $19,051 to $77,400 12% $19,051 to $77,400
25% $77,401 to $156,150 25%   $90,001 to $260,000   22% $77,401 to $140,000
28% $156,151 to $237,950 24% $140,001 to $320,000
33% $237,951 to $424,950 35%   $260,001 to $1,000,000   32% $320,001 to $400,000
35% $424,951 to $480,050 35% $400,001 to $1,000,000
39.6%  $480,051 or more 39.6% $1,000,001 or more 38.5% $1,000,001 or more

 

2018 Current Law House Bill Senate Bill
Married Filing Separate Married Filing Separate Married Filing Separate
Tax Rate If taxable income is: Tax Rate If taxable income is: Tax Rate If taxable income is:
10% $0 to $9,525 12% $0 to $45,000 10% $0 to $9,525
15% $9,526 to $38,700 12% $9,526 to $38,700
25% $38,701 to $78,075 25% $45,001 to $130,000 22% $38,701 to $70,000
28% $78,076 to $118,975 24% $70,001 to $160,000
33% $118,976 to $212,475 35% $130,001 to $500,000 32% $160,001 to $200,000
35% $212,476 to $240,025 35% $200,001 to $500,000
39.6% $240,026 or more 39.6% $500,001 or more 38.5% $500,001 or more

 

2018 Current Law House Bill Senate Bill
Head of Household Head of Household Head of Household
Tax Rate If taxable income is: Tax Rate If taxable income is: Tax Rate If taxable income is:
10% $0 to $13,600 12%   $0 to $67,500   10% $0 to $13,600
15% $13,601 to $51,850 12% $13,601 to $51,800
25% $51,851 to $133,850 25%   $67,501 to $200,00   22% $51,801 to $70,000
28% $133,851 to $216,700 24% $70,001 to $160,000
33% $216,701 to $424,950 35%   $200,001 to $500,000   32% $160,001 to $200,000
35% $424,951 to $453,350 35% $200,001 to $500,000
39.6% $453,351 or more 39.6% $500,001 or more 38.5% $500,001 or more

KPMG NOTE

One of the effects of the changes to the individual income tax structure introduced by the SFC bill is to eliminate the “marriage penalty” in relation to ordinary income tax rates by making the tax rates for married couples filing jointly double those of single individuals at all levels of taxable income.  Under current law and under the House bill, when two spouses have similar levels of income, they can pay more tax as a married couple than they would as two single individuals.  

Child Tax Credit

The SFC bill would increase the child tax credit to $2,000 (from $1,650 in the original Chairman’s mark).  It would also reduce the threshold of income at which the credit starts to phase out for married taxpayers filing jointly from $1,000,000 to $500,000 – the same threshold that would apply to single taxpayers.  The House bill proposed to increase the child tax credit to $1,600.  

KPMG NOTE

The increase proposed by the SFC bill to the income threshold at which the child tax credit begins to phase out (from $110,000 for married taxpayers under current law to $500,000) would substantially increase the number of taxpayers eligible for the credit.  

Recovery Period for Real Property

The SFC bill would shorten the alternative depreciation system recovery period for residential rental property from 40 years to 30 years (25 years in the original Chairman’s mark), effective for property placed in service after December 31, 2017.  This recovery period would apply to rental properties in a foreign country.  

New Proposals

The SFC bill includes a number of new tax reform proposals that were not included in the original Chairman’s mark.  These new proposals include:

  • a permanent repeal of the “individual mandate” whereby a penalty can be imposed for failure to maintain minimum essential coverage as currently required under the ACA.  This repeal is achieved by reducing the shared responsibility payment to zero;
  • increased contributions permitted to ABLE programs for the benefit of disabled individuals;
  • the allowance of rollovers from qualified tuition programs (i.e. 529 accounts) to ABLE accounts (similar to the treatment provided in the House bill);
  • an exclusion from gross income for certain student loans discharged on account of the death or disability of the student (similar to the treatment provided in the House bill);
  • simplified filing requirements for individuals over 65 years of age;
  • similar treatment to the House bill to allow deferral on certain stock settled stock options or RSUs;
  • repeal of the rule allowing recharacterization of IRA contributions;
  • disallowance of an employer deduction for meals provided on the employer’s premises for the convenience of the employer (effective for tax years after December 31, 2025);
  • creation of an employer credit for paid family and medical leave.

House versus Senate comparison chart

  House Senate
Expiration of provisions Only a few of the provisions expire as noted in the chart below. Most individual tax proposals in the Senate bill are temporary and would expire after December 31, 2025.
Ordinary Income Tax Rate

Reduced brackets to four.

12%; 25%; 35%; 39.6%

Significantly expanded income level for top tax bracket but added a phase-out of the 12% bracket for high-income taxpayers

Retained seven bracket structure with some modifications to rates.

10%; 12%; 22%; 24%; 32%; 35%; 38.5%

Significantly expanded income level for top tax bracket

Capital gain / Qualified Dividend rate Retained. Breakpoints for the 15% and 20% rates are the same as current law, except the breakpoints would be adjusted for inflation after 2017. Same as House proposal.
3.8% Net Investment Income Tax Retained Retained
Standard Deduction

Almost doubled amount of standard deduction 

$24,400 Married Filing Jointly

$12,200 Single

$18,300 Head of Household

Almost doubled amount of standard deduction

$24,000 Married Filing Jointly

$12,000 Single

$18,000 Head of Household

Additional standard deduction for blind and elderly retained.

Personal Exemption Repealed Repealed
Home Mortgage Interest

Home mortgage interest deduction limited to $500,000 of acquisition debt for loans entered into after November 2, 2017. Prior home acquisition loans up to $1 million grandfathered. 

No deduction for interest paid on 2nd home mortgage. 

Repeals deduction on home equity debt for loans entered into after November 2, 2017.

Home mortgage interest deduction retained at $1 million of acquisition debt. 

Retained deduction for interest paid on 2nd home mortgage. 

Repealed deduction on home equity debt.

State and Local Property Tax Deduction

Limited to $10,000 of taxes paid

U.S. property taxes only (foreign real property taxes no longer deductible).

No property tax deduction
Charitable Contributions Generally retained. Deduction limit increased to 60% of AGI instead of 50% for cash contributions Generally retained. Deduction limit increased to 60% of AGI instead of 50% for cash contributions
Medical Expense Deduction Repealed Retained
Other Itemized Deductions Eliminates most other itemized deductions such as state and local income tax, state and local sales tax, employee business expenses, non-disaster casualty losses and tax preparation expenses. (Deductions for casualty losses from some recent hurricanes would be retained.)
Eliminates most other itemized deductions such as state and local income tax, state and local sales tax, employee business expenses, non-disaster casualty losses and tax preparation expenses. (Deductions for federally-declared disasters would be retained).
Alimony Repeals deduction for payor and inclusion of income for recipient Current treatment remains - payor gets deduction, recipient pays tax
Limitation on Itemized Deductions Repealed Repealed
Exclusion of Gain on Sale of Residence

Increases time period of ownership and use from 2 out of 5 years to 5 out of 8 years. 

Available once every 5 years. 

Phased out for joint filers at $500,000 AGI.

Increases time period of ownership and use from 2 out of 5 years to 5 out of 8 years.

Available once every 5 years. 

No phase-out.

Child Tax Credit

Increases the credit to $1,600 per child. 

Adds a $300 credit for non-child dependents which sunsets after 2023.

Adds a $300 "family flexibility" credit which applies to taxpayer and spouse and sunsets after 2023.

Increases the credit to $2,000 per child.

Increases age limit of qualifying child to 18.  

Raises income limits allowing more taxpayers to qualify. 

Adds a $500 nonrefundable credit for other dependents.

Requires a Social Security Number for each qualifying child.

Earned Income Tax Credit Retained Retained
Adoption Credit Retained via manager's amendment Retained
Child and Dependent Care Credit Repealed Retained
Education Credit Combined to one credit, allows portion of credit for 5th year No changes to current education credits
Student Loan Interest Deduction Repealed Retained
Individual AMT Repealed Repealed
Estate Tax / GST Increased exemption to about $11 million. Repeal after 2023. Increased exemption to about $11 million. No repeal after 2023.
Exclusion for Employer Provided Moving Expense Reimbursement (other than military) Repealed Repealed
Moving Expense Deduction (other than military) Repealed Repealed
Exclusion for Employer Provided Housing Limited to $50,000 annually ($25,000 for married individuals filing separate). Subject to phase-out for "highly compensated employees" (i.e. with wages over $120,000). Retained
Retirement Savings Current rules for 401(k) and Roth IRAs generally retained. Current rules for 401(k) and Roth IRAs generally retained.
Affordable Care Act Individual Mandate Retained Permanently repealed by reducing the shared responsibility payment to zero.

FOOTNOTES

1 See the text of the Senate Modified Mark, the Manager’s Amendment, and the original Senate Mark.

For discussion of the Senate mark, see GMS Flash Alerts 2017-164 (November 10, 2017) and 2017-165 (November 13, 2017).

2 For discussion and analysis of the House bill, see GMS Flash Alerts 2017-157 (November 2, 2017), 2017-161 (November 7, 2017), and 2017-162 (November 9, 2017).

Join KPMG LLP’s Global Mobility Services for a webinar December 12, 2017

KPMG LLP’s Global Mobility Services will be hosting a webinar on December 12, 2017 at 2 pm EST: Tax Reform – Potential Implications for a Globally Mobile Workforce. To register, please click here.

The above information is not intended to be "written advice concerning one or more Federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230 as the content of this document is issued for general informational purposes only.

The information contained in this newsletter was submitted by the KPMG International member firm in the United States.

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Flash Alert is an Global Mobility Services publication of KPMG LLPs Washington National Tax practice. The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Connect with us

 

Request for proposal

 

Submit