Tax Reform Provisions You May Have Missed and the State of Play

Less Publicized Provisions

In addition to the major provisions summarized below, most of which have been widely reported by tax professionals and the general media, there are certain provisions in each of the bills that may have gone unnoticed by some. These include:

• Timing of Income Inclusion. Under the Senate Bill, an accrual method taxpayer must include items of gross income in its gross income no later than the taxable year in which that item is taken into account in any applicable financial statement (including any GAAP financial statement, Form 10-K annual statement, audited financial statement or a financial statement filed with any Federal agency for non-tax purposes).
  • Observation. Among the businesses that could be affected by this provision is mortgage servicing. Under current law, the servicers generally pay tax on mortgage servicing income as cash is received. However, for financial statement purposes, they generally include the projected income stream into income when they acquire the mortgage servicing rights.
• Securities Sold on a First-in-First-out Basis. Under the Senate Bill, taxpayers selling only part of their holdings of a particular stock or security will no longer be able to identify which shares or securities are being sold. Instead, they will be deemed to sell on a first-in-first-out basis. Mutual funds and other regulated investment companies are excluded from the proposed change. However, persons holding shares of those regulated investment companies will be subject to the rule.
• Tax on Gain on the Sale of a Partnership Interest. The Senate Bill codifies Revenue Ruling 92-32 by treating gain recognized by a foreign person on the sale of an interest in a partnership as effectively connected with a U.S. trade or business if the partnership is engaged in a U.S. trade or business. The change reverses a recent Tax Court decision, which held that gain recognized by a foreign person on the sale of an interest in a partnership could not be subject to U.S. federal income tax solely because the partnership is engaged in a U.S. trade or business. For additional details on the Grecian Magnesite Mining case, please click here.
  • Observation. The Senate Bill also imposes a new 10 percent withholding tax on the sale unless a non-foreign affidavit is provided by the seller. In the event the buyer of such partnership interest fails to withhold, the partnership is responsible for the withholding tax under the Senate Bill. As a result, it is likely that most partnership agreements would treat the partnership’s payment of the withholding tax as a distribution to the buyer.
• Definition of U.S. Shareholder for Subpart F Purposes. Under current law, a U.S. person that owns at least 10 percent of the voting stock of a controlled foreign corporation (CFC) is a “U.S. shareholder” that is required to include its share of the CFC’s subpart F income in income currently (whether distributed or not). The Senate Bill expands the definition of a U.S. shareholder to include U.S. persons that own at least 10 percent of the value of a CFC. This expansion would cause some foreign corporations to become CFCs and would require additional persons to become subject to subpart F income inclusions from CFCs.
  • Observation. Under current law, a U.S. person that has owned at least 10 percent of the voting stock of a controlled foreign corporation (CFC) at any point during the five-year period prior to selling stock in such corporation is required to treat any gain recognized on such sale as ordinary income to the extent of such shareholder’s pro rata share of the corporation’s previously untaxed earnings and profits. The Senate Bill does not follow the change in the definition of U.S. shareholder for CFC purposes and conform the scope of this provision to include U.S. persons that own at least 10 percent of the value a CFC during the relevant period. This may be an oversight that will be addressed in future technical corrections legislation.
• Shareholder Contribution of Corporate Debt. Under current law, if a shareholder contributes the debt of a corporation to that corporation, the corporation is treated as having satisfied the debt with an amount of money equal to the shareholder’s basis in the debt. The House Bill repeals this provision.
  • Observation. This appears to be an unintended result. The committee report accompanying the House Bill describes the repeal as merely a conforming change linked to the proposal regarding capital contributions described more fully below.
• Tax Credits. For multinational companies subject to the anti-base erosion measures contained in the Senate Bill, many widely-used tax credits (including, among others, the investment tax credit and the production tax credit, but excluding the research and development credit) are eliminated in calculating a taxpayer’s regular tax liability for purposes of determining the taxpayer’s base erosion minimum tax (described more fully below).
  • Observation. This could have an adverse effect on the availability of tax equity financing for renewable energy and other projects entitled to credit-based subsidies.
• Miscellaneous Itemized Deductions. The Senate Bill temporarily repeals, for taxable years beginning after December 31, 2017 and before January 1, 2026, the deduction for certain miscellaneous itemized deductions. This prohibits the deductibility of certain expenses such as certain investment and employee business expenses.

The following summarizes the major provisions of the proposed tax legislation, and provides a comparison where there are differences between the House Bill and the Senate Bill. If enacted, the legislation will be effective for taxable years beginning after December 31, 2017, unless otherwise noted below.

Corporate Taxation

• Rates. Under current law, corporations are subject to a maximum tax rate of 35 percent.
  • House Bill. Reduces the corporate tax rate to a flat 20 percent rate.
  • Senate Bill. Same, but is not effective until taxable years beginning after December 31, 2018.
• Capital Investment. Under current law, a 50 percent write-off (subject to phase-out) is generally available for new property placed in service before January 1, 2020.
  • House Bill. Allows taxpayers to fully and immediately expense 100 percent of the cost of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. In addition, the 100 percent write-off is expanded to certain used property acquired by the taxpayer. Special prior law phase-out rules apply to property acquired before September 28, 2017 and placed in service after September 27, 2017.
  • Senate Bill. Same, but this benefit is not extended to used property.
• Dividend Received Deduction. Under current law, corporations are entitled to a 70 percent dividend received deduction (DRD) on dividends received from corporate subsidiaries. If the corporation receiving the dividend owns more than 20 percent, but less than 80 percent of the corporation paying the dividend, the DRD is 80 percent of the dividend received.
  • House Bill. Reduces the 80 percent DRD to 65 percent, and the 70 percent DRD to 50 percent.
  • Senate Bill. Same.
  • Observation. These downward adjustments are necessary to preserve the current law effective tax rates on dividends entitled to the DRD.
• Interest Deductions.
  • House Bill. Limits, with certain exceptions, the deduction in any taxable year for business interest to the sum of (i) business interest income for that year; plus (ii) 30 percent of the adjusted taxable income for the year. For this purpose, “business interest” is interest paid or accrued on indebtedness properly allocable to a trade or business. “Business interest income” is interest income properly allocable to a trade or business. “Adjusted taxable income” is a taxpayer’s taxable income, computed without regard to, among other items, business interest or business interest income, net operating loss deductions, and deductions for depreciation, amortization or depletion. Any disallowed interest may be carried forward indefinitely and, in the case of certain corporate taxpayers, preserved as a tax attribute in certain corporate acquisitions. The disallowance rule applies to taxable years beginning after December 31, 2017. The limitations on interest deductions contained in the “earnings stripping” rules of present Internal Revenue Code § 163(j) are repealed.
  • Senate Bill. Same, except “adjusted taxable income” is defined to mean taxable income, computed without regard to, among other items, any items of income, gain, deduction or loss, that are not properly allocable to a trade or business, any business interest or business interest income, the amount of any net operating loss deduction, and the 23 percent deduction for certain pass-through income (described more fully below). In addition, it preserves the current earnings stripping rules of Internal Revenue Code § 163(j).
  • See “Taxation of U.S. Multinational Entities—Interest Deductions” below for additional rules restricting interest deductions.
• Alternative Minimum Tax.
  • House Bill. Repeals the corporate alternative minimum tax (AMT). Also, allows a corporation with AMT credit carryforwards to claim a refund of 50 percent of the remaining credits (to the extent the credits exceed regular tax for the year) in taxable years beginning in 2019, 2020 and 2021, and allows a refund of all remaining credits in the taxable year beginning in 2022.
  • Senate Bill. Preserves current law.
• Net Operating Losses.
  • House Bill. For net operating losses (NOLs) arising in taxable years beginning after December 31, 2017, no carryback is permitted but losses can be carried forward indefinitely. Loss carryforwards are increased each year by an interest factor but are permitted to offset only 90 percent of taxable income for the year (computed without regard to the carryover). With respect to NOLs arising in years beginning before January 1, 2018, current law carryback and carryforward rules apply, but those losses, to the extent carried forward to taxable years beginning after December 31, 2017, are subject to the 90 percent limitation and are not entitled to the interest factor increase.
  • Senate Bill. Same, but generally eliminates the two-year carryback, does not increase NOLs by an interest factor, and limits loss carryforward offsets to 80 percent of taxable income for taxable years beginning after December 31, 2022.
• Like-Kind Exchanges.
  • House Bill. Limits tax-deferred like-kind exchange treatment to real property used in a trade or business or for investment, eliminating like-kind exchange treatment for other property such as automobiles and art. The new limitation generally applies to exchanges completed after December 31, 2017, unless property part of a like-kind exchange was either disposed of or received on or before that date.
  • Senate Bill. Same.
• Capital Contributions. Under current law, contributions to the capital of a corporation (including transfers of money or property to the corporation by a non-shareholder, such as a government entity) are tax-free to the corporation.
  • House Bill. Gross income of a corporation includes any contribution to its capital in excess of the value of stock received. The bill also applies to a contribution to an entity other than a corporation.
  • Senate Bill. Preserves current law.
  • Observation. These changes contained in the House Bill are intended to impose a tax on certain state and local incentives and concessions. However, as currently proposed, the provision is not limited to non-shareholder contributions. The accompanying committee report states that whether shares are actually issued in a pro rata contribution by shareholders does not determine whether the contribution is taxable to the corporation. However, it remains unclear the extent to which Treasury regulations and case law that deem share issuances to occur in certain circumstances would apply for purposes of the proposed legislation.
• Tax Credits and Private Activity Bonds.
  • House Bill. Repeals rehabilitation tax credits, the new markets tax credits, and the ability of taxpayers to deduct certain unused business credits. Certain other business tax credits (including in the energy sector) are also changed. In addition, the exemption for private activity bonds is repealed.
  • Senate Bill. Retains the rehabilitation tax credit, but limits the amount of the tax credit to certified historic buildings and spreads this credit over five years. The bill preserves current law regarding the new markets tax credits, the deductibility of certain unused business credits, tax credits in the energy sector, and the exemption for private activity bonds.
• Compensation Deductions.
  • House Bill. Expands the limitation on deductions for compensation in excess of $1 million in any year to compensation (in any form) paid to any proxy officer. In addition, once an employee is a proxy officer, the employee continues to be treated as such even if that status changes.
  • Senate Bill. Same.
• Entertainment Expenses.
  • House Bill. Broadens the limitation on the deductibility of expenses relating to entertainment, amusement, recreation activities, and certain other similar expenses.
  • Senate Bill. Same.

Partnership Taxation

• Rates. Under current law, income of pass-through entities (e.g., sole proprietorships, partnerships, limited liability companies, and S corporations) is allocated among the owners or shareholders, who pay the corresponding tax on their individual tax returns. As a result, the income (including business income) of pass-through entities is subject to ordinary individual income tax rates with a current maximum marginal rate of 39.6 percent.
  • House Bill. Reduces the rate for certain business income of pass-through entities to a maximum tax rate of 25 percent. Generally, passive investors in pass-through entities are subject to a lower effective tax rate than active investors: 100 percent of income from passive business activities (defined by reference to existing passive activity rules) qualifies for the reduced rate while generally only 30 percent of income from active business activities qualifies. The bill also includes anti-abuse rules designed to prevent taxpayers from turning what would otherwise be wage income (taxed at up to 39.6 percent) into business income taxed at the lower rate. Income from personal service businesses (e.g., accountants, lawyers, consultants, financial service providers, those in the performing arts, and those investing, trading or dealing in securities) is not entitled to the reduced rate.
  • Senate Bill. For taxable years beginning before January 1, 2026, non-corporate owners and shareholders of pass-through entities may take a deduction of up to 23 percent of their domestic “qualified business income.” For this purpose, qualified business income is defined as all domestic business income other than investment income (e.g., dividends (other than REIT dividends and qualified publicly traded partnership income), income equivalent to a dividend, interest income not allocable to a trade or business, short- and long-term capital gains, etc.). The deduction is limited to 50 percent of the W-2 wages paid by the business. This provision has the effect of reducing the top tax rate on pass-through domestic business income from 39.6 percent to approximately 29.6 percent. Income from specified service businesses (as defined in the House Bill) is not entitled to the deduction unless the owner’s income is less than $75,000 (if single; $150,000 for joint filers).
  • Observations. Fund managers and investment funds organized as pass-through entities will not benefit from either of these proposals.
• Carried Interest Provision. Under current law, any capital gain recognized by a taxpayer on the sale of an interest in a partnership is treated as long-term capital gain provided the taxpayer held such interest for more than one year.
  • House Bill. If a non-corporate taxpayer has a partnership interest received in connection with the performance of services (and not for the contribution of capital) in an applicable trade or business, any capital gain allocable to such taxpayer in respect of assets held by the partnership for more than one year that would have otherwise been treated as long-term capital gain will be converted into short-term capital gain unless the assets are held by the partnership for more than three years. An applicable trade or business means the business of raising or returning capital or investing in or developing specified assets. Specified assets consist of securities, commodities, real estate held for rental or investment, derivatives relating to the foregoing, and partnership interests to the extent of such partnership’s interest in the foregoing assets.
  • Senate Bill. Same.
  • Observation. Although the legislative language is not entirely clear, the committee report accompanying the House Bill indicates that the holding period is determined at the partnership level. Accordingly, a taxpayer holding a partnership interest may get the benefit of long-term capital gain treatment even if the taxpayer has held the partnership interest for three years or less.
• Self-Employment Tax.
  • House Bill. Repeals exclusions from self-employment tax for rental income and a limited partner’s distributive share of a limited partnership’s income.
  • Senate Bill. Preserves current law.
• Interest Deductions.
  • House Bill. With certain exceptions, limits the deduction in any taxable year for business interest to the sum of (i) business interest income for that year; plus (ii) 30 percent of the adjusted taxable income for the year. See “Corporate Taxation—Interest Deductions” above for relevant definitions. In the case of partnerships, this limitation applies at the entity level. Any interest disallowed is carried forward to the succeeding five taxable years.
  • Senate Bill. Same, except adjusted taxable income is calculated differently. See “Corporate Taxation—Interest Deductions” above.
  • See “Taxation of U.S. Multinational Entities—Interest Deductions” below for additional rules restricting interest deductions.
• Technical Terminations. Under current law, a partnership is treated as having been technically terminated if more than 50 percent of the total capital and profits interests of the partnership are sold or exchanged during any 12-month period.
  • House Bill. Repeals the technical termination rule.
  • Senate Bill. Preserves current law.

Taxation of U.S. Multinational Entities

• Modified Territorial System. Both the House and Senate Bills implement dramatic changes to the taxation of foreign income earned by U.S. businesses by adopting a modified territorial system of taxation, the most important features of which are summarized below. Should these provisions become law, U.S. multinationals will need to examine their foreign holdings to determine the extent to which reorganization of them will maximize their benefits from these new rules.
  • Participation Exemption System. Under current law, U.S. corporations are generally taxed on distributions of earnings from their foreign subsidiaries with a dividend-exemption system.
    • House Bill. Proposes a participation exemption system in which 100 percent of the foreign-source portion of dividends paid by a foreign corporation to a U.S. corporate shareholder that owns 10 percent or more of the foreign corporation are exempt from U.S. taxation. No foreign tax credit or deduction is allowed for any foreign taxes (including withholding taxes) paid or accrued with respect to any exempt dividend, and no deductions for expenses properly allocable to an exempt dividend (or stock that gives rise to exempt dividends) are taken into account for purposes of determining the U.S. corporate shareholder’s foreign-source income. A minimum holding period of 181 days is required in order for the exemption to apply.
    • Senate Bill. Generally, the same. The most important differences are the expansion of the participation exemption to cover the deemed-dividend portion of a corporation’s gain from the sale of stock of a 10 percent-owned foreign corporation, the denial of the exemption with respect to amounts for which the paying foreign corporation receives a benefit against foreign country taxes, and the increase of the minimum holding period to 365 days.
  • Repatriation of Prior Deferred Income.
    • House Bill. Ensures that the adoption of the participation exemption system does not allow foreign corporations’ previously untaxed deferred earnings (estimated to be approximately $2 trillion) to escape U.S. tax entirely by requiring a U.S. shareholder (as defined in the subpart F rules) to include as subpart F income, in its last taxable year beginning before January 1, 2018, its share of the foreign corporation’s earnings that have not been previously subject to U.S. tax. The earnings are classified either as cash or cash equivalents (including net accounts receivable) taxed at a rate of 14 percent or as earnings reinvested in the corporation’s business (e.g., in property, plant, and equipment) taxed at a rate of seven percent. The mandatory inclusion of untaxed deferred earnings applies to all U.S. shareholders even though only 10 percent corporate shareholders benefit from the participation exemption. A U.S. shareholder may elect to pay the tax liability in equal installments over a period of up to eight years without an interest charge. Each shareholder of an S corporation that is a U.S. shareholder may elect to defer payment of its tax liability without an interest charge until a triggering event occurs, such as a disposition of shares of the S corporation.
    • Senate Bill. Same, except that earnings deemed repatriated will be taxed at 14.5 percent and 7.5 percent, respectively, and the eight-year installment period for payment of the tax is back-loaded by requiring only eight percent of the tax to be paid in each of the first five years, 15 percent in the sixth year, 20 percent in the seventh year, and 25 percent in the eighth year.
  • Expansion of Subpart F Rules.
    • House Bill. Retains with modifications the subpart F regime for taxation of a CFC. To deal with the outbound shifting of income from intangible property to a CFC, a U.S. shareholder is subject to current U.S. tax on 50 percent of its share of foreign high returns (producing a 10 percent effective rate of tax on such income for a corporate shareholder). A foreign high return amount (FHRA) is measured as the excess of the U.S. shareholder’s share of its CFC’s net income over a routine return (seven percent plus the federal short-term rate) on the CFC’s aggregate adjusted basis in depreciable tangible property, adjusted downward for interest expense. FHRA does not include income effectively connected with a U.S. trade or business, subpart F income, insurance and financing income that meets the requirements for the active finance exemption from subpart F income, income from the disposition of commodities produced or extracted by the taxpayer or certain related-party payments. As with other subpart F income, the U.S. shareholder is taxed on FHRA earnings each year, regardless of whether it left those earnings offshore or repatriated the earnings to the United States.
    • Senate Bill. Also retains the current subpart F income regime with modifications but, instead of the House’s FHRA system, does so by creating a new category of subpart F income deemed to arise from high-value intangibles, known as “global intangible low-taxed income” (GILTI). Although similar, the GILTI regime differs from the FHRA system in a number of respects. Among other differences, the Senate Bill increases the effective tax rate on GILTI for a corporate U.S. shareholder from 10 percent to 12.5 percent for taxable periods after 2025 and imposes the ordinary individual income tax rates on a non-corporate U.S. shareholder’s share of a CFC’s GILTI for all years.
  • Additional Subpart F Changes.
    • House Bill. Among other changes, exempts a U.S. corporate shareholder of a CFC from tax on a CFC’s investments in U.S. property and modifies the deemed paid credit so that it applies on a current year basis only.
    • Senate Bill. Same, and also modifies the definition of “U.S. shareholder” to include a person who owns 10 percent or more of the value of the corporation.
• Interest Deductions.
  • House Bill. Limits the deductible net interest expense of a U.S. corporation that is a member of an international financial reporting group (IFRG) to the extent the U.S. corporation’s share of the group’s global net interest expense exceeds 110 percent of the U.S. corporation’s share of the group’s global EBITDA. Any disallowed interest expense is carried forward for up to five taxable years. For this purpose, an IFRG includes a group of entities that has at least one domestic corporation and a foreign corporation, prepares consolidated financial statements and has annual global gross receipts of more than $100 million.
  • Senate Bill. Reduces the deductible net interest expense of a U.S. corporation that is a member of a worldwide affiliated group by the product of such U.S. corporation’s net interest expense and the “debt-to-equity differential percentage” of the group. The debt-to-equity differential percentage of the worldwide affiliated group means the amount by which the total indebtedness of the U.S. corporations in the group exceeds 110 percent of the total indebtedness those corporations would have if their total indebtedness to total equity ratio were proportionate to the worldwide group’s ratio of total indebtedness to total equity. (The 110 percent benchmark is phased in, with the benchmark being 130 percent in 2018, 125 percent in 2019, 120 percent in 2020 and 115 percent in 2021.) Any disallowed interest expense is carried forward indefinitely.
• Anti-Base Erosion Measures.
  • House Bill. Imposes an excise tax (at the highest corporate rate) on certain payments made by domestic corporations to certain foreign corporations where the domestic corporation payor and the foreign corporation payee are part of the same IFRG. The tax is generally imposed on payments from a domestic corporation (i) that are deductible or includible by the U.S. payor in costs of goods sold, inventory or the basis of a depreciable or amortizable asset and; (ii) that the foreign corporation payee does not treat (or elect to treat) as effectively connected with a U.S. trade or business. For this purpose, an IFRG is generally any group of entities that prepares consolidated financial statements and has annual payments subject to the excise tax that meet certain thresholds. Payments to or from a partnership which is a member of an IFRG are treated as paid or received by the partners of that partnership.
  • Senate Bill. In lieu of an excise tax, requires an applicable corporation to pay a tax generally equal to its “base erosion minimum tax amount.” For this purpose, a corporation’s base erosion minimum tax amount is the excess of 10 percent of the corporation’s taxable income (determined without deductions for “base erosion payments”) over its regular tax liability (computed without regard to credits other than research and development credits). For certain banks and securities dealers, the income threshold is 11 percent. For taxable years beginning after December 31, 2025, the income threshold for the base erosion minimum tax amount is increased to 12.5 percent (13.5 percent for certain banks and securities dealers) and research and development credits are also subtracted from regular tax liability. A base erosion payment is generally any amount paid or accrued by a taxpayer to a foreign person that is a related party (generally, with a 25 percent affiliation threshold) and that either is deductible or is paid in connection with the acquisition of depreciable or amortizable property. The provision applies to corporations (other than RICs, REITs, and S corporations) with average annual gross receipts of at least $500 million for the preceding three years and a “base erosion percentage” of at least four percent. The base erosion percentage is generally the taxpayer’s base erosion tax benefits divided by its deductions (other than the 100 percent participation exemption dividends received deduction, net operating loss deductions, and the deduction that implements the reduced tax on GILTI (described more fully above)).
• Outbound Transfers. Under Internal Revenue Code § 367(a), a U.S. person generally is required to recognize gain with respect to certain transfers to a foreign corporation that would otherwise be tax-free. Internal Revenue Code § 367(a)(3) provides an exception from gain recognition for the transfer of certain property to be used by the transferee foreign corporation in the active conduct of a trade or business outside of the United States.

  In addition, Internal Revenue Code §§ 367(d)(2) and 482 contain special rules, with respect to transfers by a U.S. person of intangible property, in otherwise tax-free exchanges or to a related person, that require the U.S. transferor’s income to be increased in the future to reflect amounts that are commensurate with the income derived from the intangible (the so-called “super royalty” rules).

  • House Bill. Preserves current law.
  • Senate Bill. Repeals the exception provided by Internal Revenue Code § 367(a)(3) in respect of property used in the active conduct of a trade or business. With respect to Internal Revenue Code §§ 367(d)(2) and 482, revises the definition of intangible property to include goodwill, going concern value, workforce in place, and any other item of value or potential value that is not attributable to tangible property or the services of any individual. Such revisions direct the Internal Revenue Service to require the valuation of transfers of intangible property on an aggregate basis with other property or services transferred or on the basis of the realistic alternatives to such a transfer if the Internal Revenue Service determines that such basis is the most reliable means of valuation of such transfers.
  • Observation. It appears the Senate Bill provisions are intended to limit shifting income to foreign affiliates through intangible property transfers. The extent to which these provisions would do so is unclear.
• Inventory Income Sourcing.
  • House Bill. Allocates and apportions income from the sale of inventory property produced within and sold outside of the U.S. (or vice versa) between sources within and outside of the U.S. solely on the basis of the production activities with respect to the inventory.
  • Senate Bill. Same.
  • Observation. This change will likely reduce the amount of foreign source income realized by taxpayers exporting goods produced in the U.S. and, therefore, reduce their ability to utilize foreign tax credits.

Individual Taxation

• Rates. Under current law, ordinary income is subject to a seven-bracket progressive system: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent.
  • House Bill. Consolidates the seven existing tax brackets down to four: 12 percent, 25 percent, 35 percent, and 39.6 percent. For joint returns, the thresholds generally are as follows: $90,000 for the 25 percent bracket; $260,000 for the 35 percent bracket; and $1 million for the 39.6 percent bracket.
  • Senate Bill. Retains a seven-bracket system, but lowers the rates to 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 38.5 percent. For joint returns, the thresholds generally are as follows: $19,050 for the 12 percent rate; $77,400 for the 22 percent rate; $140,000 for the 24 percent rate; $320,000 for the 32 percent rate, $400,000 for the 35 percent rate; and $1 million for the 38.5 percent rate. The rates are effective for taxable years 2018 through 2025.
• Individual Mandate. Under current law, taxpayers must maintain “minimum essential coverage” for health insurance or pay a penalty (otherwise known as the “individual mandate”).
  • House Bill. Preserves current law.
  • Senate Bill. Effectively repeals the mandate by reducing the amount of the penalty to zero. The change is effective for taxable months after December 31, 2018.
• Standard Deduction. Under current law, the standard deduction for joint filers is $12,700.
  • House Bill. Increases the standard deduction for joint filers to $24,400.
  • Senate Bill. Increases the standard deduction for joint filers to $24,000, but is only effective for taxable years 2018 through 2025.
• Itemized Deductions. Under current law, taxpayers are allowed to take itemized deductions for medical expenses, mortgage interest expense (on up to $1.1 million of acquisition and home equity debt for joint filers), personal casualty losses, real estate taxes, state and local income taxes, charitable contributions, unreimbursed employee expenses, and tax preparation fees. The following chart compares the treatment of certain itemized deductions under the House and Senate Bills:

• Home Sale Gain Exclusion. Under current law, in order to exclude from taxable income up to $500,000 (for joint filers; $250,000 for other filers) of gain from the sale of a primary residence, taxpayers must have owned and lived in the residence for at least two of the last five years.
  • House Bill. Expands the residency requirement to five of the last eight years. Also, limits the use of the exclusion to only once every five years. The exclusion is phased out on a dollar-for-dollar basis for every dollar by which a taxpayer’s adjusted gross income exceeds $500,000 (for joint filers; $250,000 if single). The provision is effective for sales and exchanges completed after 2017.
  • Senate Bill. Same, but does not phase out the exclusion. The provision is effective for sales and exchanges during taxable years 2018 through 2025, but provides an exception for transactions completed pursuant to a binding, written contract in effect before January 1, 2018.
• Alternative Minimum Tax.
  • House Bill. Eliminates the individual AMT. Certain AMT credit carryforwards may be refunded beginning in 2019 to varying extents.
  • Senate Bill. Preserves the individual AMT, but increases (i) the exemption amount from $78,750 to $109,400 and (ii) the phase-out threshold from $150,000 to $208,400, in each case, for joint filers. These provisions are effective for taxable years 2018 through 2025.
• Child Tax Credits.
  • House Bill. Expands the child tax credit to cover dependents, increases the amount from $1,000 to $1,600, and increases the phase-out threshold from $115,000 to $230,000 (for joint filers). Certain other nonrefundable tax credits are repealed.
  • Senate Bill. For taxable years 2018 through 2025, increases the amount of the child tax credit from $1,000 to $2,000 and increases the phase-out threshold amount to $500,000 for all types of filers. For taxable years 2018 through 2024, increases the maximum age of a qualifying dependent from 17 to 18. The bill does not repeal certain nonrefundable tax credits that the House Bill repeals.
• Estate Tax.
  • House Bill. Increases the estate tax exemption to $10 million, up from the current $5 million limit, and repeals the tax entirely for tax years beginning after December 31, 2024.
  • Senate Bill. Same increase to the exemption amount, but does not repeal the tax.

If enacted, the changes to the U.S. tax code proposed by Congress would have substantial effects on taxpayers across all industries. We expect to publish summaries of provisions in the Senate Bill affecting the insurance industry and compensation. These summaries will be posted on our Tax Reform Developments and Insights webpage, which can be accessed by clicking here. Sidley will continue to monitor developments as they unfold.