Days after the Senate announced the details of their version of the Tax Cuts and Jobs Act, the real work began: marking it up. Sen. Orrin Hatch (R-UT), as Chair of the Senate Committee on Finance, has released the "Chairman’s Mark" to the Act. The "Chairman's Mark" describes proposed changes to the plan.
Here are some of the highlights which affect individual taxpayers and small businesses:
Tax rates
We currently have seven (7) tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
- The House bill proposed four (4) tax rates: 12%, 25%, 35% and 39.6%.
- The Senate bill, as initially proposed, would keep seven (7) brackets and reduce the top marginal rate to 38.5%.
- Under the proposal as outlined in the Chairman's Mark, the Senate would keep (7) rates as before but would lower the rates in the middle.
Here's how the plan would stack up against the 2018 rates for single taxpayers:
And for married taxpayers filing jointly:
For more 2018 tax rates, click here.
Child Tax Credit
The credit is currently $1,000 and is refundable.
- Under the House bill, the child tax credit would be increased to $1,600 per child under 17 - subject to phaseout - with an additional $300 credit for each parent as part of a consolidated family tax credit. The first $1,000 would be refundable.
- Under the Senate bill, the child tax credit would be bumped to $1,650, with a much higher phaseout for ($1 million for married couples filing jointly). As with the House bill, the first $1,000 would be refundable.
- Under the proposal as outlined in the Chairman's Mark, the child tax credit would be increased to $2,000 and phaseouts would begin at $500,000 for married couples filing jointly.
Obamacare Individual Mandate
- Under the original House and Senate proposals, the mandate would still be in play.
- Under the proposal as outlined in the Chairman's Mark, the individual mandate penalty would be eliminated beginning in 2019.
Above The Line Deductions
Currently, you can claim certain above-the-line expenses (meaning that you can claim them even if you do not itemize).
- Under both proposals, most above-the-line deductions would be eliminated, including those for student loan interest, moving expenses and out of pocket expenses for teachers.
- Under the proposal as outlined in the Chairman's Mark, the above-the-line expense limit for teachers would stay in effect but the limit would be increased to $500 (it's currently $250).
Pass-Through Entities
Businesses use structures like limited liability companies (LLCs) or S corporations to pass-through income to the owners, escaping tax at the company level: Income is taxed at individual rates.
- Under the House proposal, businesses conducted as sole proprietorships, partnerships, and S corporations would be taxed at a rate of 25%. Businesses that offer "professional services" like doctors, lawyers, accountants, designers, and consultants wouldn’t qualify for the reduced rate under the proposal. Other business owners can choose to categorize 70% of their income as wages (and pay the individual tax rate) and 30% as business income (taxable at 25%) OR set the ratio of their wage income to business income based on the level of their capital investment.
- Under the Senate proposal, pass through income would be allowed a 17.4% deduction. As with the House bill, certain professional services, are excluded from the tax break - except those individuals with income up to $75,000 ($150,000 for married taxpayers filing jointly).
- Under the proposal as outlined in the Chairman's Mark, more businesses could claim the special 17.4% deduction. Certain professional service which were formerly excluded - like lawyers - would now be included so long as their income was no more than $500,000 for married taxpayers filing jointly and $250,000 for individuals. Additionally, the markup would limit the amount of the 17.4% deduction to 50% of the taxpayer’s W-2 wages (including wages subject to wage withholding, elective deferrals, and deferred compensation); the W-2 wage limit would not apply to taxpayers with taxable income of less than $500,000 for married taxpayers filing jointly or $250,000 for individuals (phaseins apply).
No More Free Lunches
Say goodbye to those free lunches. Under the proposal as outlined in the Chairman's Mark, employers would no longer be able to deduct expenses for meals provided for the convenience of the employer on the employer’s business premises.
New Tax Form
Simple, right? You can file on a postcard, right? Under the proposal as outlined in the Chairman's Mark, not only are tax forms not shrinking much, there would be a new tax form. The federal form 1040SR (get it?) would be for use by persons who are age 65 or older by the end of the taxable year and would be "as similar as possible to the Form 1040EZ." The difference is that the use of form 1040SR would not be limited by taxable income or by certain income types. (For more on the form 1040EZ and other forms 1040, click here.)
IRS Funding.
You're thinking more budget cuts, right? Despite the fact that the IRS has experienced significant cuts since 2010, the Senate doesn't wish to continue down that path, saying, as part of the Chairman's Mark:
The proposal expresses the sense of the Senate that politically motivated budget cuts are counterproductive to deficit reduction, diminish the IRS's ability to adequately serve taxpayers and protect taxpayer information, and reduce the IRS's ability to enforce the law.
Earlier this year, President Trump suggested cutting the Internal Revenue Service (IRS) budget by $239 million.
Expiration Dates
You didn't really think this was going to be permanent, right? As with the Bush tax cuts of 2000, not all of the proposed changes will be permanent. Tax cuts which will increase the deficit without bipartisan support must have a time stamp. In this case, all individual income tax changes, except the elimination of the individual mandate penalty, would expire at the end of 2025. This includes the individual income tax rate cuts, the increased standard deduction, and the expanded child tax credit.
Worth noting: Those corporate tax rates? They would be permanent.
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You can review the Senate's initial bill summary here and you can review the first version of the House bill here (links will download as a pdf). You can read my summary of the House plan here. And you can find out how the two plans are different (and alike) here.
Finally, you can read the Chairman's Mark here (downloads as a pdf).
