United States—Senate Passes Its Version of Tax Reform | KPMG | GLOBAL

United States – Senate Passes Its Version of Tax Reform Bill

United States – Senate Passes Its Version of Tax Reform

This report notes changes between the two versions and summarizes the individual taxation components of the two bills.

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Early Saturday morning, December 2, 2017, after a long night of debate and negotiation, the U.S. Senate passed its version of the Tax Cuts and Jobs Act, H.R. 1. The bill was passed on a 51-49 vote, attracting no votes from Democratic or independent Senators, and losing the vote of only one Republican.1

WHY THIS MATTERS

Enacting comprehensive tax reform was a fundamental campaign promise of President Trump. Tax reform has also been a longstanding goal of the Republican Party, and control of both houses of Congress as well as the Executive Branch presents a rare opportunity to enact broad reform without input from the opposition. The proposed legislation makes many changes to individual taxation that could have an impact on mobility and tax reimbursement programs.

Bill Passes Senate with Several Changes

The bill the Senate passed contains several changes from the “Chairman’s Mark” that was approved by the Senate Finance Committee in November. This GMS Flash Alert notes those changes, and summarizes the individual taxation components of the two bills.

Congress has signaled its goal to finalize this legislation by the end of the year. This ambitious deadline means that differences between the two versions of the bill must be resolved quickly. The “reconciliation” process being used enables the Senate to pass a bill on a simple majority vote, avoiding the need to attract votes from the minority party. Still, varying opinions and needs of certain Senators and Congressmen may make consensus difficult, and the reconciliation process places limits on the types of compromises that can be made. So although progress is quickly being made, enactment of a final bill is far from certain.

The following is a discussion of differences between the Chairman’s Mark and the bill as passed that pertain to individual taxation, as well as an updated summary of the differences between the House and Senate bills that takes into account the final version of the Senate bill.

Itemized Deduction for Real Property Tax

Whereas the House bill proposes to limit the itemized deduction for property tax paid on real estate to $10,000, the Chairman’s Mark proposed to eliminate that deduction entirely. However, the Senate bill as passed conforms to the House proposal.

Itemized Deduction for Medical Expenses

The House bill would repeal the deduction for medical expenses.  The Senate bill, however, would retain the deduction and further, would lower the threshold for deduction to 7.5 percent of adjusted gross income (AGI) from the current law threshold of 10 percent of AGI for tax years 2017 and 2018.  The lower threshold for taxpayers age 65 or over would apply retroactively to 2013 through 2018.  

Allowable Expenditures for 529 Plans

The Senate bill adds a provision that expands allowable expenditures to be paid from the tax-advantaged section 529 education saving plans. The bill would include in the definition of such expenditures those made for elementary and secondary education at public, private, and religious schools, as well as for expenditures related to home schooling.

Alternative Minimum Tax

The House bill would repeal the Alternative Minimum Tax (AMT), but the Senate bill would retain it with modifications. The AMT, which is intended to ensure that higher-income taxpayers with high levels of deductions pay a minimum tax, disallows many deductions but allows a large exemption. The Senate bill would raise the AMT exemption to $109,400 for a married couple filing jointly (half that for separate filers), and to $70,300 for single taxpayers (under current law the amounts are $86,200 and $55,400 respectfully). Those exemptions would be phased out for taxpayers with AMT income in excess of $208,400 for a married couple filing joint (half that for separate filers) and $156,300 for single taxpayers (from $164,100 and $123,100 respectively under current law). AMT tax rates and brackets under the Senate bill would remain the same as currently enacted.

Deduction for Teacher Expenses

The Senate bill would double the special deduction for teacher expenses from $250 to $500 for tax years 2018 through 2025. The House bill proposes to eliminate that deduction.

Ordinary Income Tax Rates

The following table illustrates the differences between the Senate and House bills, and 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 $38,7000 12% $9,526 to $38,7000
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 Joint   Married Filing Joint   Married Filing Joint
Tax Rate If taxable income is: Tax Rate If taxabe 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

As noted in prior Flash Alerts, the Senate bill eliminates 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 may pay more tax as a married couple than they would as two single individuals.

House Bill versus Senate Bill Comparison Chart

  House Senate
Expiration of Provisions Only a few of the provisions expire, as noted in the chart below. Important Note: All individual tax proposals in the Senate bill are temporary and would expire after December 31, 2025. Beginning in tax year 2026, taxation of individuals would revert to 2017 law, as adjusted for inflation.
Ordinary Income Tax Rates

Reduces brackets to four:

12%; 25%; 35%; 39.6%

Significantly expands income level for top tax bracket but adds a phase-out of the 12% bracket for high-income taxpayers.

Retains seven bracket structure with some modifications to rates:

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

Significantly expands income level for top tax bracket.

Rates and brackets revert to 2017 law in 2026, as adjusted for inflation.

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

Almost doubles amount of standard deduction:

$24,400 Married Filing Jointly

$12,200 Single

$18,300 Head of Household

Additional standard deduction for blind and elderly repealed.

Almost doubles 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.

Amounts revert to 2017 levels, inflation adjusted, in 2026.

Personal Exemption Repealed. Suspended until 2026.
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 mortgage on a second home. 

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. 

Retains deduction for interest paid on 2nd home mortgage. 

Repeals deduction on home equity debt.

Rules revert to 2017 law in 2026.

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).

Same as House bill, but reverts to 2017 law in 2026.
Charitable Contributions Generally retained. Deduction limit increased to 60% of AGI instead of 50% for cash contributions. Same as House bill, but reverts to 2017 law in 2026.
Medical Expense Deduction Repealed. Threshold for deduction lowered from 10 percent to 7.5 percent of AGI, effective for tax years 2017 and 2018. Reverts to 10 percent in 2019.
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. 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. All reinstated in 2026.
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. Suspended until 2026.
Exclusion for Gain on Sale of Residence

Increased 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.

Increased 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.

Reverts to 2017 law in 2026.

Child Tax Credit

Increased the credit to $1,600 per child. 

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

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

Increased the credit to $2,000 per child. 

Lifted income limits allowing more taxpayers to qualify. 

Increases age limit for qualifying child by one year

Added a $500 nonrefundable credit for other dependents.

Reverts to 2017 law in 2026.

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. Retained, but with higher exemption amounts and phase-out thresholds. Reverts to 2017 amounts in 2026.
Estate Tax / GST Increases exemption from $5 million to $10 million. Repealed after 2023. Increases exemption from $5 million to $10 million, with no repeal.
Exclusion for Employer Provided Moving Expense Reimbursement (other than military) Repealed. Suspended until 2026.
Moving Expense Deduction (other than military) Repealed. Suspended until 2026.
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.
Affordable Care Act Not applicable. Repeals the “individual mandate” whereby a penalty can be imposed for failure to maintain minimum essential coverage as required under the Patient Protection and Affordable Care Act. This repeal is achieved by reducing the shared responsibility payment to zero.

FOOTNOTE

1  For the text of the bill, click here. (PDF 16.6 MB)

RELATED RESOURCES

For the latest information on U.S. tax reform efforts, see KPMG’s Outlook for U.S. Tax Reform page, which is updated frequently.

For past coverage of developments specific to individual taxation and global mobility, see the following KPMG United States GMS Flash Alerts:

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.

© 2018 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.

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