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Personal exemptions would be eliminated in 2018 in favor of a much higher standard deduction in both the House and Senate proposals to reform the federal tax code, a change that could result in major modifications to income tax withholding processes for employers. Both the House bill, the Tax Cuts and Jobs Act (H.R. 1), and the Senate proposal, include more than a dozen payroll-related provisions that would be amended or eliminated from the tax code starting in 2018.
The House bill, approved Nov. 9 by the Ways and Means Committee, advanced to the House floor for a vote, which could occur as early at this week.
The tax proposal by the Senate would similarly eliminate the personal exemption from the tax equation. The Senate version of the bill, also called the Tax Cuts and Jobs Act (no bill number) was released Nov. 9. Additional amendments are possible this week.
The bills contain no payroll-related provisions that would be retroactive to Jan. 1, 2017.
Under the House and Senate proposals, employer payroll systems that deal with employee withholding allowances would face substantial changes. Eliminating the annual personal exemption amount would result in major modifications to the federal 2018 Form W-4, Withholding Allowance Certificate, and modify the withholding calculations to be applied for federal income tax withholding in 2018. The personal exemption is $4,050 for 2017 and is to be $4,150 in 2018, unless eliminated under the tax proposals. Under current law, a taxpayer generally may claim personal exemptions for the taxpayer, the taxpayer’s spouse, and dependents.
Because withholding allowances may be affected, payroll systems may need to be altered to no longer take into account withholding allowance amounts. Additionally, many states that require income tax withholding generally base withholding allowances on the federal Form W-4 to calculate state income tax withholding, so withholding taxes in those states also may be affected under the proposals.
Additional changes to withholding under the House bill would come in a proposed reduction in the number of tax brackets to four from seven, and adjustments in income thresholds for inclusion in those brackets. The House bill would set federal income tax brackets at 12, 25, and 35 percent and maintain the existing 39.6 percent rate for individuals earning more than $1 million.
The Senate plan has the top tax rate dropping to 38.5 percent from 39.6 percent and would apply the top rate to income starting at $500,000 for single filers, the proposal said. The other brackets are 10, 12, 22.5, 25, 32.5, and 35 percent. Additionally, like the House, the Senate proposal would increase the standard deduction for taxpayers with only marginal changes from the House proposal.
The House bill would repeal the tax exclusion for employee achievement awards, dependent-care assistance programs, adoption assistance programs, and otherwise qualified moving expenses. The proposal also would repeal the work opportunity tax credit, modify the Federal Insurance Contributions Act employer credit on tipped employee income, reduce the deductibility of entertainment expenses, and limit employer options in deducting executive pay that exceeds $1 million a year. The exclusion for dependent-care assistance programs would end after Dec. 31, 2022.
The Senate version of tax reform would change how employment status is determined for tax purposes and would create a 5 percent withholding requirement for payments up to $20,000 to those under contract providing services to service recipients. According to the Senate description, “for this purpose, a payment of such compensation is treated as a payment of wages by an employer to an employee.”
The Senate also would remove computer or peripheral equipment from the definition of listed property and modify the definition of luxury automobiles used for cents-per-mile personal use valuation. The corporate deduction associated with providing any qualified transportation fringe benefit to employees, and except for ensuring employee safety of employees, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee’s residence and place of employment, would be eliminated, similar to the House proposal.
The Senate plan would apply the 50 percent limit generally applicable to business entertainment expenses to include employer expenses associated with providing food and beverages to employees at an eating facility that meets de minimis fringe requirements, would eliminate the Section 401(k) catch-up contribution option for employees earning at least $500,000 in the previous year, and would apply a single aggregate limit on contributions to 457(b) plans and elective deferrals for employees under a Section 401(k) plan or Section 403(b) plan of the same employer.
The Senate proposal would repeal rules allowing additional elective deferrals and catch-up contributions under Section 403(b) plans and governmental Section 457(b) plans and include nonqualified deferred compensation as taxable income when there is no substantial risk of forfeiture. The House originally proposed a stricter application for excluding nonqualified plan amounts from taxation, but subsequent amendments to the bill eliminated the provision. Current law, including Section 409A, would be retained under the House version.
Under the Senate plan, employers would no longer be able top provide any tax-free moving expense reimbursements, matching the House proposal. Separately, the Senate’s plan would eliminate the tax-free bicycle transportation fringe benefit of $20 a month.
Not included in the Senate’s plan, but retained as part of the proposal now up for full House consideration, are the elimination of employer-provided educational assistance, tax-favored achievement awards, dependent-care assistance, tax-free adoption expense assistance, and the Work Opportunity Tax Credit.
To contact the reporters on this story: Michael Baer at firstname.lastname@example.org, Keith Hill at email@example.com, Laura Davison at firstname.lastname@example.org, and Colleen Murphy at email@example.com. To contact the editor on this story: Michael Trimarchi at firstname.lastname@example.org.
The payroll-related provisions of tax reform proposals from the House and Senate are summarized in a special Bloomberg Tax chart.
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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