Senate Finance Committee modifies tax reform proposal

By Alistair M. Nevius

After two days of markup, the Senate Finance Committee released a revised chairman’s mark of its version of the Tax Cuts and Jobs Act late on Tuesday. Among the many changes, the revised bill would sunset almost all tax changes affecting individuals after Dec. 31, 2025. This allows the bill to conform to the Senate’s budget reconciliation process, which requires bills to not increase the federal deficit for more than 10 years. The repeal of the alternative minimum tax would also sunset after 2025.

Individual changes that are indexed for inflation would not sunset; nor would changes affecting businesses.

The Senate Finance Committee is reportedly planning to vote on the marked-up bill later this week.

Here are highlights of some of the changes.

Individuals

Tax rates: The revised mark would modify the individual income tax rates to be the following:

Single taxpayers and married taxpayers filing separately

Taxable income over

But not over

Is taxed at

$0

$9,525

10%

$9,525

$38,700

12%

$38,700

$70,000

22%

$70,000

$160,000

24%

$160,000

$200,000

32%

$200,000

$500,000

35%

$500,000

 

38.5%


Heads of households

Taxable income over

But not over

Is taxed at

$0

$13,600

10%

$13,600

$51,800

12%

$51,800

$70,000

22%

$70,000

$160,000

24%

$160,000

$200,000

32%

$200,000

$500,000

35%

$500,000

 

38.5%


Married taxpayers filing joint returns and surviving spouses

Taxable income over

But not over

Is taxed at

$0

$19,050

10%

$19,050

$77,400

12%

$77,400

$140,000

22%

$140,000

$320,000

24%

$320,000

$400,000

32%

$400,000

$1,000,000

35%

$1,000,000

 

38.5%


Estates and trusts

Taxable income over

But not over

Is taxed at

$0

$2,550

10%

$2,550

$9,150

24%

$9,150

$12,500

35%

$12,500

 

38.5%


Child tax credit:
The child tax credit would be increased to $2,000, and the threshold for the phaseout would start at $500,000 for married taxpayers filing joint returns.

Passthrough income deduction: The modified bill would continue to allow individuals to deduct 17.4% of “domestic qualified business income” passed through from a partnership, S corporation, or sole proprietorship. The amount of the deduction would generally be limited to 50% of the taxpayer’s allocable or pro rata share of W-2 wages of the partnership, S corporation, or sole proprietorship. However the W-2 wage limit would not apply to taxpayers with taxable income not exceeding $500,000 for married taxpayers filing jointly and $250,000 for other individuals. The W-2 wage limit would be phased in for taxpayers whose taxable income exceeds these amounts.

The deduction would not apply to specified service businesses, except in the case of a taxpayer whose taxable income does not exceed $500,000 (for married individuals filing jointly; $250,000 for other individuals). The benefit of the deduction for service providers would be phased out for taxpayers whose taxable income exceeds these amounts.

Individual mandate: In a new measure, the bill would reduce the penalty under Sec. 5000A for failure to maintain health insurance coverage to zero – effectively repealing the so-called individual mandate from the Patient Protection and Affordable Care Act, P.L. 111-148. This would be effective for months beginning after Dec. 31, 2018.

Tax returns for those over 65: The bill would require the IRS to publish a new Form 1040SR, designed to be a simplified tax return for individuals who are over age 65.

Recharacterization of IRA contributions: The bill would repeal the rule that allows IRA contributions of one type (traditional or Roth) to be recharacterized as a contribution of the other type.

Businesses

NOLs: The modified bill would limit businesses’ net operating loss deductions to 80% of taxable income, beginning after 2023.

Employer-provided meals: The bill would disallow 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.

Credit for paid leave: The bill would create an employer credit for paid family and medical leave. The credit would equal 12.5% of wages paid to qualifying individuals on family or medical leave if the individual is receiving 50% of normal wages. The credit would increase (but not above 25%) for wages for which the rate of payment is over 50%.

Alistair M. Nevius (Alistair.Nevius@aicpa-cima.com) is The Tax Adviser’s editor-in-chief, tax.

Newsletter Articles

PRACTICE MANAGEMENT

Tax software survey

Our annual survey offers a look at how CPAs judged their tax preparation software in a wide range of types of practices.

NEWS

Congress enacts tax reform

Here are many of the most important provisions in the new law that affect both individual taxpayers and businesses. All changes were effective Jan. 1, 2018, except as noted.