Don't Mess With Taxes

The tax dueling has officially begun.

The Senate on Thursday, Nov. 9, released its answer to the House's H.R. 1, officially title the Tax Cuts and Jobs Act.

UPDATE, Thursday, Nov. 16, 2017: The House passed H.R. 1. Prospects for the Senate's tax reform bill, however, are muddier.

While resolving difference in the two doesn't demand quite as many steps as in the 10 Duel Commandments outlined in the still incredibly popular Broadway (and touring company) musical Hamilton, it's still going to be one of the biggest face-offs in recent Washington, D.C., legislative history.

Here's a look at some of the key areas where differences must be resolved and the few places where the House and Senate agree on tax changes.

Tax brackets
Currently we have seven tax brackets for ordinary (that's our basic salary or wage) income, starting at 10 percent and topping out at 39.6 percent.

The House bill goes big, or rather smaller, here. Representatives want to collapse the seven rates/income brackets to four: 12 percent, 25 percent, 35 percent and 39.6 percent for income over $1 million.

Senators stick with seven but tweak the current rates/income brackets. They propose 10 percent, 12 percent, 22.5 percent, 25 percent, 32.5 percent, 35 percent and 38.5 percent for married jointly filing millionaires+ ($500,000 for single taxpayers).

Capital gains income
Investment income get more favorable tax treatment under current law. That would continue under both the House and Senate tax plans.

Under existing law, filers in the 10 percent and 15 percent tax brackets generally pay no — that's right, zero, zilch, nada — tax on gains from the sale of long-term investments, i.e., those held for more than one year, or qualifying dividends.

Taxpayers in the 25 percent, 28 percent, 33 percent and 35 percent tax brackets pay 15 percent tax on such investment earnings. If you're in the top 39.6 percent tax bracket, your capital gains rate is 20 percent.

Both the House and Senate keep the 0 percent, 15 percent and 20 percent capital gains/qualifying dividends rates and align them with their tax brackets that correspond to the existing ones.

Higher income taxpayers, however, will be distressed to learn that both bills keep (for now) the 3.8 percent net investment income tax (NIIT) that was created as part of the Affordable Care Act, aka Obamacare.

Alternative Minimum Tax (AMT)
The bipartisanly-hated alternative minimum tax (AMT) may have finally met its match. This parallel tax that requires certain taxpayers figure their tax bills twice and pay the higher bill, is eliminated in both bills. And the AMT its outta here in both bills.

Estate Tax
The estate tax, however, lives. Sort of. This tax on the value of assets left after death remains (for now) in the Senate bill. Senators, however, propose doubling the exemption so that fewer families would pay it. The House bill would kill it.

Exemptions and Standard Deductions
Both the House and Senate will increase the current standard deduction amounts. Each bill calls for nearly doubling current standard deductions for all filers.

That substantial increase would mean that almost all (around 90 percent by many analyses) taxpayers would be able to claim the standard deduction instead of itemizing.

To get these bigger deductions, though, both House and Senate tax plans eliminate personal exemptions. Currently, that's $4,050 per taxpayers, his or her spouse and qualifying dependents. The exemption amount, if tax reform doesn't happen, would go to $4,150 in 2018.

State and local tax taxes (SALT)
The House originally wanted to do away with state and local tax write-offs, but it blinked a bit. H.R. 1 would let taxpayers deduct up to $10,000 in property taxes paid. The state and local income tax deduction, however, is gone.

The Senate, which doesn't have GOP members from high-tax states like California, New York or New Jersey, didn't have any political pressure to surrender a batch of money that could help keep its bill's numbers in the range to allow it to be considered under reconciliation.

That's important because it means the Senate could pass its tax bill with a simple majority instead of 60 votes. And that's why the Senate tax reform bill does not allow for any SALT deductions.

Other deductions and tax credits
Both the House and Senate keep the mortgage interest deduction, but with different limits.

The House bill would allow the residential loan itemized deduction, but only on a filer's main residence. Existing home loans of all amounts are grandfathered. However, if this provision is enacted, the loan threshold on future eligible mortgage interest deduction would be loans of $500,000.

The Senate would keep the mortgage interest deduction on new home loans of up to $1 million.

As for many other popular tax breaks, the Senate is more generous than the House.

The upper chamber would keep the adoption tax credit, Schedule A itemized claims for medical expenses (subject to 10 percent of adjusted gross income) and the above-the-line deductions for some teacher expenses, alimony payments, moving costs and student loan interest.

The House bill originally called for an end to all those tax breaks, but during markup of its bill this week the Ways and Means Committee restored the adoption tax credit.

Both bills increase the child tax credit, which currently provides $1,000 per qualifying youngster. The House would bump it to $1,600 per child, while the Senate's hike is $1,650.

Steps to get a unified tax bill: The Senate's decision to craft its own tax bill has made the path to any final tax reform enactment much rockier.

True, as noted at the start of this post, the formal resolution of the two dueling bills entails fewer than Hamilton's 10 steps.

1. The House passes its bill and sends it to the Senate. The goal of House GOP leaders is to do so before Representatives leave for Thanksgiving.
2. The Senate substitutes its bill's language for the provisions of H.R. 1, passes that redone bill and ships it back across Capitol Hill to the House.
3. The House rejects the Senate changes and a conference committee is created to reconcile the differences.
4. The House approves the new conference tax reform plan.
5. The Senate approves the new conference tax form plan.
6. The measure is signed into law by the president.

Republicans on Capitol Hill want all this to happen before the end of the year.

Or there's one more step. The effort to craft one tax reform bill that can clear both the House and Senate bogs down and eventually stalls.

More tax plan possibilities: If Republicans are really committed to rewriting the tax code, I see two other options.

Either they revise their timeline and agree to work on contentious tax issues beyond the artificial Dec. 31 deadline, preferably with Democratic input as happened with the last big Internal Revenue Code rewrite in 1986.

Or they ruin the December holidays for everybody.

My money, sadly, is on the second possibility. Happy(?) Holidays!