People from across the political spectrum have been united as they wait anxiously to see what’s going to make it into the unified version of the Tax Cuts and Jobs Act. Finally, the wait is over.
This sweeping tax reform is poised to impact nearly every part of the American economy and, now that the House and Senate versions have been conformed, it has moved to a final vote. The House voted on Tuesday, Dec. 19, and the Senate followed suit Wednesday, Dec. 20 — just in time for Congress to turn its attention to keeping the federal government open before the current continuing resolution expires on Friday, Dec. 22.
It’s Bigger Than a Bread Box
To pass the Senate with only a simple majority of votes – rather than a filibuster-proof supermajority – the tax bill needs to fit into the Senate’s reconciliation rules. Specifically, it can’t increase the deficit beyond what’s been budgeted over a 10-year period.
The Senate’s budget allows for a $1.5 trillion increase in the deficit, so, when working out the joint tax bill, it was crucial that the deficit increase stay within that limit. The Congressional Budget Office released their cost estimate for the tax reform bill, which shows that for the period from 2018 – 2027, the tax reform bill will reduce revenues by $1.649 trillion and will reduce spending by $194 billion, which leads to a deficit increase of $1.455 billion, just under the $1.5 trillion limit.
How Did They Do It?
In keeping their tax reform bill under the $1.5 trillion deficit-increase threshold, the Joint Committee on Taxation used every tool at their disposal — including implementing delays for some of the tax reforms and applying sunsets to others.
The water gets pretty muddy fairly quickly, so let’s take a closer look at the key provisions.
Personal Income Taxes
There are significant reductions to the personal income tax brackets effective for tax years 2018 – 2025, starting at the top and working down through the brackets. The standard deduction is doubled, while the personal exemption is eliminated. In an unexpected move, the individual alternative minimum tax (AMT) is retained, but with an increased exemption — designed to make the AMT apply to fewer taxpayers.
In a nod to Senator Rubio’s political maneuvering, the tax bill also includes a doubled child tax credit, which has a larger refundable portion. In addition to doubling the standard deduction, the tax bill limits the state and local tax deduction to $10,000 and caps the mortgage interest deduction to debt of $750,000.
The final tax bill also repeals the individual mandate under the Affordable Care Act, which means that there will no longer be a penalty applied to those who choose not to purchase health insurance. Some experts fear this repeal will lead to an increase in premiums and in the number of uninsured, thanks to individuals no longer being required to buy insurance. Opponents of the individual mandate point to the unstable marketplaces as evidence that the individual mandate hasn’t supported competition and growth to date.
Employers may see a slight decline in participation rates in their group health plans if employees choose to drop coverage when the mandate is removed.
In other news, the dependent care tax credit and the adoption tax credit – which were to be eliminated under the House version – survived the conference and will remain in their current form. Tuition assistance will also remain untouched, while parking and transit plans will see certain changes, including the elimination of the tax deduction for employer contributions to employees’ Section 132 plans.
Finally, the tax exemption for contributions to an employer-sponsored group health plan will remain untouched, which is considered a big win for employers and employees alike.
Corporate Taxes
Adjustments to the personal income tax rates aren’t as dramatic a change as the new tax regime for businesses.
C corporations will see their income tax rate dropped from 35% to 21% — higher than the 20% rate originally included in the various drafts of the tax bill. Pass-through businesses will now get a 20% deduction applied to all taxable income, up to $315,000 of income (for married joint filers), which is phased out above that threshold. This deduction is also limited for professional service businesses.
Unlike the individual AMT, the corporate AMT is fully repealed. In yet another departure from the changes on the individual tax side, these corporate tax amendments aren’t scheduled to sunset.
Estate, Gift and GST Taxes
The process of negotiating conformity between the House and Senate versions of the tax bill meant that, sometimes, it was the House’s version that set policy; other times, the Senate’s version was the final option.
For the estate, gift and GST taxes, the Senate’s version of tax reform won the day. Under the final negotiated bill, the estate, gift and GST tax exemption amounts are doubled from $5 million to $10 million per individual, and indexed for inflation.
This doubling of the exemption amounts applies from Jan. 1, 2018 – Dec. 31, 2025. On Jan. 1, 2026, the exempt amounts drop back down to $5 million, although they’d still be indexed for inflation.
So, What’s Next?
The bill will now head to the White House for the President’s signature, giving Republicans their first legislative accomplishment of this Administration.
We’ll be with you – and this tax bill – right ‘til the end and every step of the way. And, in case you haven’t gotten enough analysis of the tax bill, feel free to go through a thorough recap from our partners and industry advocates at AALU.
