- The Senate passed a tax reform bill with key last-minute changes.
- The Senate version retains the alternative minimum tax with modifications.
- A House-Senate conference committee will take on the task of ironing out the differences.
The Senate passed the Republican tax reform bill last weekend but not before making a number of amendments to secure votes and ensure that budgetary requirements were met. Following hours of negotiations, the “Tax Cuts and Jobs Act” was passed with a narrow 51–49 vote in the early morning.
The original Senate proposal had noteworthy differences from the House-approved version. The last-minute amendments did not resolve all of the differences between the two versions, and it remains the task of a House-Senate conference committee to iron out the differences before a final vote.
Here are some of the key last-minute changes:
Individual income taxes
Property tax deduction added
- To align the bill with the House version, a deduction for up to $10,000 in annual property taxes was added. It is important to note that the deduction for state and local income and sales taxes is still repealed in both versions.
- In an unexpected move, the Senate restored the alternative minimum tax (AMT), largely to provide additional revenue to offset other provisions in the bill.
- The Senate bill modifies the AMT by increasing the exemption amount by 40% to $70,300 for individuals and $109,400 for couples (adjusted for inflation). The AMT exemption amount refers to the amount of income you can exclude before calculating AMT liability.
- The AMT exemption is phased out at higher income levels. These levels were also increased in the bill, to $156,300 for individuals and $208,400 for couples. Above these thresholds, the AMT exemption amount is reduced by $1 for every $4 in income.
Short-term relief for medical expenses
- The Senate bill was modified to lower the income threshold for deducting medical expenses from 10% of adjusted gross income (AGI) to 7.5% of AGI for the next two years.
- The deduction for income derived from pass-through entities was increased to 23%. The original Senate plan called for a deduction of 17.4%. Still, the deduction is not allowed for many professional services businesses such as legal firms.
- The provision that allows full expensing of capital improvements for five years was modified so that it gradually phases out. From September 27, 2017, through the end of 2022, 100% of capital improvements can be treated as immediate expenses for tax purposes. This amount is phased out in annual increments to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026.
- To create more revenue, the Senate agreed to increase the repatriation rate on assets held overseas to 14.49% for cash and 7.49% for non-liquid holdings. The rates in the initial Senate proposal were 10% and 5%, respectively.
Members of the Senate and the House will enter into a conference committee to reconcile respective versions of the bills in order to deliver one version, which will be to be sent to the President’s desk to be signed. If they are able to negotiate terms on a reconciled version, it’s likely that more of the Senate provisions will prevail. This is due to the fact that the margin to pass this legislation through the Senate is much slimmer given the narrow (52–48) Republican majority. If the Senate Republicans lose more than two votes, the legislation will not proceed.
Investors will continue to monitor the bill’s progress. It may be a good time to consider meeting with a financial advisor or tax expert to review current tax planning strategies. Both versions of the legislation contain some key differences, such as the future of the AMT, and certain deductions that are used by many taxpayers.