32 Key Differences Between the House and Senate Tax Reform Bills

(Parker Tax Publishing November 2017)

The House passed its version of Tax Cuts and Jobs Act ("House Bill") on November 16, 2017, and the Senate Finance Committee approved the Senate's version of the tax bill ("Senate Bill") on the same day. As the Senate prepares to debate its measure, there remain dozens of differences between the two proposals.

A rundown of 32 key differences between the House and Senate Bills follows.

Update: This article has been updated to reflect the version of the Senate Bill that was approved by the Finance Committee on November 16, 2017.

Individual Tax Reform

1. Individual Mandate Repeal. The Senate Bill would repeal the individual shared responsibility payment enacted as part of the Affordable Care Act, effective with respect to health coverage status for months beginning after December 31, 2018.

The House Bill does not contain this provision.

2. Tax Rates and Brackets. The Senate Bill would keep the same number of tax brackets as under current law - seven and reduce the top tax rate to 38.5 percent. The tax rates in the Senate Bill are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 38.5 percent, effective for tax years beginning after December 31, 2017, and ending before January 1, 2026.

The House Bill would reduce the number of tax brackets to four, but would keep the current-law highest tax rate of 39.6 percent. The tax rates in the House Bill are 12 percent, 25 percent, 35 percent, and 39.6 percent.

3. State and Local Tax Deduction. The Senate Bill would repeal the deduction for state and local taxes, effective for tax years beginning after December 31, 2017, and ending before January 1, 2026.

The House Bill would repeal the deduction for state and local taxes except it would allow a deduction of up to $10,000 for property taxes.

4. Mortgage Interest Deduction. The Senate Bill would continue to allow the current law mortgage interest deduction rule for a qualified residence, which allows an interest deduction on a mortgage of up to $1,000,000 ($500,000 in the case of a married individual filing a separate return) in the case of a principal residence and one other residence. However, the Senate Bill would repeal any interest deduction on home equity debt, effective for tax years beginning after December 31, 2017, and ending before January 1, 2026.

The House Bill would limit the primary residence interest deduction to mortgages of $500,000 ($250,000 in the case of a married individual filing a separate return) and also repeal any interest deduction on a second home and on home equity debt.

5. Deductions for Medical Expenses, Teacher Expenses, Casualty Losses, Etc. The House Bill would repeal deductions for medical expenses, casualty losses, theft losses, adoption expenses, qualified tuition and related expenses, teacher expenses, and student loan interest.

The Senate Bill does not contain these provisions. However, the Senate Bill does contain a provision that would increase the deduction for teacher expenses from $250 to $500. The Senate Bill would also allow casualty losses but would limit such losses to those incurred in presidentially-declared disaster areas, effective for tax years beginning after December 31, 2017, and ending before January 1, 2026.

6. Education-Related Incentives. The House Bill includes provisions aimed at eliminating many education-related incentives, such as the elimination of the deduction for student loan interest and the deduction for qualified tuition and related expenses, as well as the elimination of the exclusions from income of certain educational assistance programs and qualified tuition reduction programs.

The Senate Bill does not contain these provisions.

7. Miscellaneous Itemized Deductions. The Senate Bill would repeal the deduction for miscellaneous itemized deductions (which includes deductions for expenses for the production of income, such as investment advice, IRA custodian fees, etc.), effective for tax years beginning after December 31, 2017, and ending before January 1, 2026.

The House Bill would repeal many deductions that are classified as miscellaneous itemized deductions, such as business expenses incurred by an employee (e.g., a home office deduction), but does not specifically repeal the deduction for miscellaneous itemized expenses. Thus, the House Bill would leave intact deductions for expenses relating to the production of income.

8. Child Tax Credit. The Senate Bill would allow a child tax credit of $2,000, but the credit would phaseout for anyone with modified adjusted gross income over $500,000, effective for tax years beginning after December 31, 2017, and ending before January 1, 2026.

The House Bill would allow a child tax credit of $1,600 credit, but the credit would phaseout for couples who file jointly and have income over $230,000, and all other individuals with income over $115,000.

9. Elderly and Disabled Credit. The House Bill would repeal the elderly and disabled credit.

The Senate Bill does not contain this provision.

10. Exclusion of Gain on the Sale of a Principal Residence. Both the House Bill and the Senate Bill would extend the length of time a taxpayer must own and use a residence to qualify for the exclusion of gain on the sale of a principal residence. However, the provision is the Senate Bill is only effective for tax years beginning after December 31, 2017, and ending before January 1, 2016. The House Bill also phases out the exclusion by one dollar for every dollar a taxpayer's modified adjusted gross income exceeds $250,000 ($500,000 if married filing a joint return).

The Senate Bill does not contain the phase-out provision.

11. Tax Break for Passthrough Business Income. The House Bill would generally tax an individual's qualified business income from a partnership, S corporation, or sole proprietorship at a rate no higher than 25 percent. However, a special 9 percent rate would be created in lieu of the individual tax rate of 12 percent for income from pass-thru entities for the first $75,000 of net business taxable income for an active owner or shareholder with taxable income under $150,000. This rate would be phased in over five years. Qualified business income means, generally, all net business income from a passive business activity plus the capital percentage of net business income from an active business activity, reduced by carryover business losses and by certain net business losses from the current year, as determined under the provision.

The Senate Bill, taking a fundamentally different approach, would allow a taxpayer other than a corporation to deduct an amount equal to the lesser of (1) the combined qualified business income amount of the taxpayer, or (2) an amount equal to 17.4 percent of the excess of the taxable income of the taxpayer for the tax year, over any net capital gain of the taxpayer for the tax year. The term "combined qualified business income amount" means, with respect to any tax year, an amount equal to (1) 17.4 percent of the aggregate amount of the qualified REIT dividends and qualified cooperative dividends of the taxpayer for the tax year, plus (2) for each qualified trade or business carried on by the taxpayer, the sum of the lesser of (i) 17.4 percent of the taxpayer's qualified business income with respect to the qualified trade or businesses, or (ii) 50 percent of the W-2 wages with respect to the qualified trade or businesses. The Senate Bill provides an exception to using the W-2 wage limit amount where a taxpayer's taxable income for the tax year does not exceed a threshold amount ($250,000 or $500,000 in the case of a joint tax return). Qualified business income is defined as the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. The term "qualified items of income, gain, deduction, and loss" means items of income gain, deduction, and loss to the extent such items are effectively connected with the conduct of a U.S. trade or business and are included or allowed in determining taxable income for the year. There are exceptions for certain investment items. Qualified business income does not include reasonable compensation paid to the taxpayer, guaranteed payments described in Code Sec. 707(c), and payments described in Code Sec. 707(a) for payments to a partner for services rendered with respect to the trade or business.

The deduction would not apply to specified service businesses (i.e., any trade or business activity involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services), or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. However, there is an exception for specified service businesses which is based on the taxpayer's income and which applies where the taxpayer's taxable income is less than the sum of the threshold amount (i.e., $250,000, or $500,000, in the case of a joint return) plus $50,000 ($100,000 in the case of a joint return).

12. IRS Levy Relief. The Senate Bill would extend from nine months to two years the period for returning the monetary proceeds from the sale of property that has been wrongfully levied upon by the IRS. The proposal also extends from nine months to two years the period for bringing a civil action for wrongful levy. The proposal is effective with respect to: (1) levies made after the date of enactment; and (2) levies made on or before the date of enactment provided that the nine-month period has not expired as of the date of enactment.

The House Bill does not include this provision.

13. Deduction for Meals Provided at Convenience of Employer. The Senate Bill disallows an employer's deduction for expenses associated with meals provided for the convenience of the employer on the employer's business premises, or provided on or near the employer's business premises through an employer-operated facility that meets certain requirements. The proposal would be effective for meals provided after December 31, 2025.

The House Bill does not contain this provision.

14. Combat Zone Tax Benefits. The Senate Bill would grant combat zone tax benefits with respect to the Sinai Peninsula of Egypt, if as of the date of enactment of the proposal, any member of the Armed Forces of the United States is entitled to special pay under Section 310 of title 37, United States Code (relating to special pay; duty subject to hostile fire or imminent danger), for services performed in such location. This benefit would last only during the period such entitlement is in effect. The proposal would generally be effective for the first tax year ending after June 9, 2015, and any subsequent tax year beginning before January 1, 2026.

The House Bill does not include this provision.

15. Head of Household Due Diligence Requirements. The Senate Bill directs the Secretary of the Treasury to issue due diligence requirements for paid preparers in determining eligibility for a taxpayer to file as head of household. A penalty of $500 would be imposed for each failure to meet these requirements.

The House Bill does not include this provision.

16. Installment Agreements User Fees. The Senate Bill would generally prohibit increases in the amount of user fees charged by the IRS for installment agreements for agreements entered into on or after the date that is 60 days after the date of enactment.

The House Bill does not include this provision.

17. Simplified Filing for Senior Citizens. The Senate Bill requires that the IRS publish a simplified income tax return form designated a Form 1040SR, for use by persons who are age 65 or older by the close of the taxable year. The form is to be as similar as possible to the Form 1040EZ.

The House Bill does not include this provision.

Business Tax Reform

18. Corporate Tax Rates. The Senate Bill would eliminate the graduated corporate rate structure and instead tax corporate taxable income at 20 percent, effective for tax years beginning after 2018. The Senate Bill would also eliminate the special tax rate for personal service corporations.

The House Bill would eliminate the graduated corporate rate structure and instead tax corporate taxable income at 20 percent, effective for tax years beginning after 2017. The House Bill would tax personal service corporations at 25 percent.

19. Section 179 Expensing. The Senate Bill would provide a maximum Code Sec. 179 expense deduction of $1,000,000, with a phase-out threshold of $2.5 million.

The House Bill would provide a maximum Code Sec. 179 expense deduction of $5 million, with a phase-out threshold of $20 million.

20. Bonus Depreciation. The provisions in the House Bill and the Senate Bill regarding 100 percent additional first-year depreciation (bonus depreciation) are generally the same. But, the Senate Bill would expand the definition of qualified property eligible for bonus depreciation to include qualified film, television and live theatrical productions, effective for productions placed in service after September 27, 2017, and before January 1, 2023.

The House Bill does not contain this provision.

21. Sale of Partnership Interests. The Senate Bill would (1) treat gain or loss from the sale or exchange of a partnership interest as effectively connected with a U.S. trade or business to the extent that the transferor would have had effectively connected gain or loss had the partnership sold all of its assets at fair market value as of the date of the sale or exchange, and requires that any gain or loss from the hypothetical asset sale by the partnership be allocated to interests in the partnership in the same manner as nonseparately stated income and loss; (2) modify the definition of substantial built-in loss on transfers of a partnership interest; and (3) take into account charitable contributions and foreign taxes in determining the limitation on a partner's share of partnership loss.

The House Bill does not contain these provisions.

22. Recovery Period for Residential Rental Property. The Senate Bill would shorten the alternative depreciation system recovery period for residential rental property from 40 years to 30 years, effective for property placed in service after December 31, 2017.

The House Bill does not contain this provision.

23. Contributions of Capital. The House Bill would repeal the provision in Code Sec. 118 under which, generally, a corporation's gross income does not include contributions of capital to the corporation. Further, the House Bill would provide that a contribution to capital, other than a contribution of money or property made in exchange for stock of a corporation or any interest in an entity would be included in the gross income of a taxpayer.

The Senate Bill does not contain this provision.

24. Employer Credit for Paid Family and Medical Leave. The Senate Bill would allow eligible employers to claim a general business credit equal to 12.5 percent of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave if the rate of payment under the program is 50 percent of the wages normally paid to an employee. The credit would be increased by 0.25 percentage points (but not above 25 percent) for each percentage point by which the rate of payment exceeds 50 percent.

The House Bill does not include this provision.

25. Changes to ESBT Rules. The Senate Bill would allow a nonresident alien individual to be a potential current beneficiary of an electing small business trust (ESBT). The Senate Bill would also provide that a charitable contribution deduction of an ESBT would not be determined by the rules generally applicable to trusts but rather by the rules applicable to individuals. Thus, the percentage limitations and carryforward provisions applicable to individuals would apply to charitable contributions made by the portion of an ESBT holding S corporation stock.

The House Bill does not include this provision.

26. Deductibility of Penalties and Fines. The Senate Bill would deny a deduction for any otherwise deductible amount paid or incurred (whether by suit, agreement, or otherwise) to, or at the direction of, a government or specified nongovernmental entity in relation to the violation of any law or the investigation or inquiry by such government or entity into the potential violation of any law. However, an exception is provided for payments that the taxpayer establishes are either restitution (including remediation of property) or amounts required to come into compliance with any law that was violated or involved in the investigation or inquiry, that are identified in the court order or settlement agreement as restitution, remediation, or required to come into compliance. In the case of any amount of restitution for failure to pay any tax and assessed as restitution under the Code, such restitution is deductible only to the extent it would have been allowed as a deduction if it had been timely however, no deduction is allowed unless the identification is made. Restitution or included remediation of property does not include reimbursement of government investigative or litigation costs. The proposal applies only where a government (or other entity treated in a manner similar to a government under the provision) is a complainant or investigator with respect to the violation or potential violation of any law. An exception also applies to any amount paid or incurred as taxes due. The provision is generally effective for amounts paid or incurred on or after the date of enactment.

The House Bill does not include this provision.

27. Citrus Plants Casualty Losses. The Senate Bill would provide a special deduction rule for costs incurred by persons other than the taxpayer in connection with replanting an edible crop for human consumption following loss or damage of citrus plants due to casualty, effective for costs paid or incurred after the date of enactment.

The House Bill does not include this provision.

28. Limit on NOL Deductions. The Senate Bill would limit a business's net operating loss deduction to 90 percent (80 percent in the case of tax years beginning after December 31, 2022) of taxable income (determined without regard to the deduction), effective for losses arising after December 31, 2017.

The House Bill would limit a business's net operating loss deduction to 90 percent of taxable income (determined without regard to the deduction) in taxable years beginning after December 31, 2017.

29. Sexual Harassment or Sexual Abuse Settlements. The Senate Bill would provide that no deduction is allowed for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement.

The House Bill does not include this provision.

Retirement-Related Tax Reform

30. Hardship Distributions. The House Bill would modify the rules governing hardship distributions to make it easier to get such distributions and would delete the requirement that an employee be prohibited from making elective deferrals and employee contributions for six months after the receipt of a hardship distribution.

The Senate Bill does not contain this general provision but does allow for hardship withdrawals with respect to Mississippi Delta areas damaged by 2016 flooding.

31. Contributions to Retirement Accounts of Levied Amounts Returned by IRS. The Senate Bill would add a provision that, if an amount withdrawn from an IRA ("original IRA") or employer-sponsored plan pursuant to a levy is returned to an individual by the IRS, the individual may contribute the amount returned, and any interest thereon, either to the original IRA or to the employer-sponsored plan, if permissible, or to a different IRA to which a rollover from the original IRA or employer-sponsored plan would be permitted. The contribution is allowed without regard to the normally applicable limits on IRA contributions and rollovers. The proposal applies to a levied amount that is returned to the individual because the levy on the original IRA or employer-sponsored plan (1) was wrongful, or (2) is determined to be premature or otherwise not in accordance with administrative procedures.

The House Bill does not include this provision.

Estate Tax Reform

32. Estate Tax Repeal. The Senate Bill doubles the estate and gift tax exemption amount by increasing the basic exclusion amount provided in Code Sec. 2010(c)(3) from $5 million to $10 million. The $10 million amount is indexed for inflation occurring after 2011. The proposal would be effective for decedents dying, generation-skipping transfers, and gifts made after December 31, 2017, and before January 1, 2026.

The House Bill has the same proposal, but it also permanently repeals the estate and generation-skipping transfer tax for decedents dying, and generation-skipping transfers made, after 2024.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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