By Michael S. Neubauer, CPA, CVA, MBA
This is the fourth blog in a continuing series from PICPA’s Federal Taxation Committee planned for the next few months to keep our members informed about the tax reform effort, with only the facts and no political spin.
Many Americans are wondering what actions they should take prior to the end of the year for tax purposes. This is normal for this time of year, but what is unique is that we don’t yet have a clear picture of what the tax law will look like in 2018. While the U.S. House of Representatives passed its version of tax reform (Tax Cuts and Jobs Act), the Senate’s version of the bill (yet to be voted on at the time this is being written) includes significant differences.
To give an idea of the differences between the two, and how they compare to current tax law, consider an example family that includes a married couple with three children and annual income of $100,000. Let’s say itemized deductions for this family total $16,500 annually. The composition of these deductions is not relevant for this purpose as the total is less than the $24,000 standard deduction included in both the House and Senate versions of the bill. In this situation, under current tax law, total tax after application of the Child Tax Credit totals $5,555. Under the Senate’s version of the bill, the result is $2,739; whereas the House’s version comes in at $4,320. This family would be receiving a reduction in taxes in both cases, but the reduction is more significant under the Senate’s version.
This difference becomes less pronounced for a married couple that has no children. The Senate’s bill allows a Child Tax Credit of $2,000 per child, whereas the House version allows a credit of $1,600 per child (both impose income limitations on this credit). Using the same example cited above, but this time with no children in the household, the total tax under current tax law arrives at $10,378. The Senate’s version would be $8,739, and the House version results in a $9,120 tax. In this situation, taxpayers will once again see a reduction in taxes, but the difference between the two proposals is less drastic.
It is important to note that both of these examples only consider currently proposed tax changes for the 2018 tax year. The Senate’s version calls for the reduced tax rates to expire after 2025, resulting in significant tax increases at that point. The House’s version proposes permanent tax cuts.
If you would like to see how this potential tax legislation impacts your tax computation for 2018, MarketWatch provides a calculator that even allows you to take itemized deductions into consideration. While the calculator does not include all provisions of the two tax proposals, it does provide a good comparison for those who have simpler tax filings.
The examples above are relatively simple, and the results can be significantly different depending on an individual’s tax situation and the character of their income and deductions. This is especially true for owners of pass-through entities, as the provisions related to how this income is taxed are vastly different in the House and Senate versions.
Where We Are Now
On Nov. 16, the House of Representatives approved its version of the tax reform bill. That same day, the Senate Finance Committee approved its version, leading the way for the full Senate to vote on it. A vote had been expected to take place the week of Nov. 27, 2017. If the Senate passes its version of the bill, which is not a certainty given the narrow majority that Republicans hold, the House can either accept this version or begin to negotiate the differences with the Senate in an effort to arrive at a mutually acceptable bill. Given the significant differences between the two – particularly the permanency of the tax cuts as well as whether lower corporate tax rates are effective in 2018 or 2019 – it seems likely that negotiations and modifications will take place.
Stay tuned to PICPA’s CPA Now blog for more updates as the process evolves.
Michael S. Neubauer, CPA, CVA, MBA, is a partner at McGill, Power, Bell & Associates LLP, with offices in Erie, Franklin, Grove City, and Meadville, Pa., as well as Weirton, W.Va. Neubauer is a member of the PICPA Federal Taxation Committee.
Other blogs in the Federal Taxation Committee Series:
For more information on 2017's landmark federal tax reform, check out the Federal Tax Reform Guide
presented by the Pennsylvania CPA Journal