SALT (state and local tax deductions)

And, now for the Senate Side

No Gravatar

So, what does the Senate version of this bill (HR-1) do?  By and large, the Senate bill matches HR-1.  But, there are some significant differences.  It’s not clear which house will prevail in their interpretation of the various changes (or that the Senate version passes at all).  But, again,  tax planning is critical-  we need to know what may happen.  We need to discern what changes this Senate version- if it passes- will have in conference, when the House and Senate work out the differences in their versions.

First of all, the Senate version of the Tax Cut and Jobs Act bill (sic) doesn’t eliminate all the tax brackets, like the House-passed bill has done.  But, it does lower the existing brackets.  The tax brackets are somewhat expanded- and the top rate is lowered to 38.5% from 39.6%.

Marginal Tax Rates, Senate bill 2017

The Senate bill handles the standard deduction the same way the house does.  Individuals lose their exemptions but do have the standard deduction raised to  $12K.  (That means if they are really single and not head of household, this is a gain of almost $ 2K.)  Married folks don’t fare as well- unless they are childless.  Because their deduction does increase to $24K, but if they have two or more children,  they lose at least $ 4000.  Head of households are in the same boat as married folks- if they only have one dependent, they gain $ 900- but lose significantly as the number of dependents increase.

The Senate bill ups the ante on the child credit, increasing the amount to $1650 per child.  This $ 650 additional credit (compared to the House bill) may counteract the loss in the standard deduction/exemption levels, as mentioned above.

While SALT (state and local taxes) are no longer deductible, the Senate version of the bill keeps the mortgage interest deduction viable as long as the value of a single (only one is allowed) mortgage is $ 1,000,000 or lower.  No home equity debt (or line of credit) interest shall be deductible.  Oh, the Senate version also allows property tax deductions to be included in one’s itemized deductions (Schedule A), up to $ 10,000 per year.

For those who have extraordinary levels of medical expenses, the Senate bill allows their continued deductibility.

The capital gains and qualified dividend special tax rates are also preserved under the Senate provisions.  (These range from 0%, 15% and 20%, depending upon one’s taxable income.)

When it comes to businesses, the Senate holds off adjusting the tax rate for a year (to 2019) to discern what the other changes are doing to the US budget.  And, as you can see from the chart below, it is critical to note that the tax rate is based upon profits.  Moreover, many US companies use all the loopholes that are still remaining in the tax code to avoid paying taxes.

What business REALLY pays in taxes

Regarding business credits, the R&D credit is preserved in the Senate version of the bill, as is the low-income housing credit (to induce business to create more residences for those at the lower end of the income spectrum).

The pass-through provisions are different from the House bill, as well.  Here the Senate bill demands that 17.4% of pass through income (proprietorships, partnerships, or S entities)  will be excluded from taxable income- unless the business is a service business.  Oh, wait, and that special tax rate applies so long as the taxable income does not exceed  $ 150K ($75K for single taxpayers).  This income threshold is not a “drop-dead number”; instead it is slowly phased out over the next $ 50K in taxable income ($25K for individuals).

And, hold on further.  The deduction is still limited to 50% of the W-2 income the individual derives from the pass-through entity.

What does this mean?   The tables below will yield that data.

Pass-through benefits, Senate Plan 2017Now, let’s see what happens in the markup sessions for each house- and how they reconcile any differences that result.

Roy A. Ackerman, Ph.D., E.A.

This concludes the discussion of the PROPOSED Senate bill; the House version has passed.  If you would like a complete copy of this discussion AND you are a subscriber to my blog, you can fill out the form below and you will receive a free (!) copy.

 

 

The Entire 7 Part Series on the “Tax Reform & Jobs Act”
Preamble 
Personal Taxes, part 1 
Personal Taxes, part 2 
Grad Students, private colleges
Biz Taxes, part 1
Biz Taxes, part 2 
Senate’s version changes 

Share this:
Share this page via Email Share this page via Stumble Upon Share this page via Digg this Share this page via Facebook Share this page via Twitter
Share

2 thoughts on “And, now for the Senate Side”

Comments are closed.