Tax Reform Bills Approved in House, Senate; Differences Remain

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By Keith Hill

Tax reform is progressing on Capitol Hill as the House passed a bill and two Senate committees approved a measure, but differences remain in several payroll-related provisions of the proposals.

The House and Senate versions would repeal the personal exemption amounts, possibly complicating federal withholding methods for 2018, if passed into law.

The House bill would repeal the exclusion for employee achievement awards, adoption-assistance programs, and reimbursements for qualified moving expenses. The exclusion for dependent-care assistance programs would end after Dec. 31, 2022. The Senate bill did not address the employee achievement awards, dependent-care assistance, or adoption-assistance exclusions, but it would end the repeal of the qualified moving expense exclusion starting Jan. 1, 2026, and revert it to the form that existed before Jan. 1, 2018.

Regarding employer-provided educational assistance, the House bill would repeal the ability of employers to provide up to $5,250 annually in tax-free educational assistance to employees and would disallow educational institutions from providing tax-free educational assistance to their workers, effective after 2017. The Senate bill does not address employer-provided educational assistance.

Increased Standard Deduction

The House and Senate bills provide for a higher standard deduction than what now exists. Starting in 2018, the basic standard deduction amounts would be increased under the Senate bill to $12,000 for single individuals and married individuals filing separately, $18,000 for heads of household, and $24,000 for married individuals filing jointly, including surviving spouses. These enhanced amounts would expire starting Jan. 1, 2026.

The House bill would increase the standard deduction to $12,200 for single individuals and married individuals filing separately, $18,300 for heads of household, and $24,400 for married individuals filing jointly, including surviving spouses, effective starting Jan. 1, 2018.

One of the biggest differences in the House and Senate bills involves federal individual income tax rates and seven existing brackets. The House bill would have four tax brackets: 12, 25, 35, and 39.6 percent.

The Senate bill would have the seven tax brackets at 10, 12, 22, 24, 32, 35, and 38.5 percent. These brackets would expire starting Jan. 1, 2026. An earlier version of the Senate plan set the tax brackets at 10, 12, 22.5, 25, 32.5, 35, and 38.5 percent.

The seven federal tax brackets now in effect have rates of 10, 15, 25, 28, 33, 35, and 39.6 percent.

The House and Senate bills would apply the top rates to married individuals filing jointly and earning more than $1 million, and to single filers, married individuals filing separately, and heads of household earning more than $500,000.

The House bill would disallow employer deductions for entertainment, amusement, or recreation activities. The Senate bill would disallow employer deductions for expenses associated with meals provided for the employer’s convenience on, or near, the employer’s business premises through an employer-operated facility that meets certain requirements. The Senate provision would be repealed if revenue targets from Oct. 1, 2017, to Sept. 30, 2026, were met.

Some Provisions Not Addressed

The House bill does not address withholding on payments made to contractors. A Senate provision, which would have imposed a 5 percent withholding requirement for payments up to $20,000 to those under contract providing services to service recipients, was removed.

The Senate bill does not address the work opportunity tax credit, which would be repealed under the House bill. Both bills would retain the earned income tax credit.

Regarding employer-sponsored retirement plans, the House bill does not address the elimination of catch-up contributions for high-wage employees. A Senate provision, which would have prevented employees earning at least $500,000 from making catch-up contributions for a year, was removed from the bill.

Neither the House nor the Senate bills contain payroll-related provisions that would be retroactive to Jan. 1, 2017.

Roads to Passage

If differences remain after any Senate passage of its tax-cut proposal, there are several ways to come up with one bill that could eventually be sent to President Donald Trump to approve.

A House and Senate conference committee could draft a compromise bill that would be sent back to both chambers for passage. Alternatively, either the House or Senate could adopt and vote on the bill passed by the other chamber.

However the differences are resolved, Congress is hoping to have a tax reform bill passed and sent to Trump by the end of the year. Although the House has voted on its bill, a Senate Finance Committee staff member told Bloomberg Tax on Nov. 21 that the Senate leadership has not decided when its bill would reach the floor for a vote.

The House’s Tax Cuts and Jobs Act (H.R. 1) was approved Nov. 9 by the Ways and Means Committee and passed by the full House on Nov. 16. The bill would eliminate the deduction for personal exemptions, effective for tax years starting Jan. 1, 2018.

The Senate originally released a tax plan, also called the Tax Cuts and Jobs Act, that was approved Nov. 16 by the Finance Committee and Nov. 28 by the Budget Committee.

Under legislative text released Nov. 21 (no bill number), the Senate bill would end the repeal of personal exemptions starting Jan. 1, 2026, and restore them to the form that existed before Jan. 1, 2018.

To contact the reporter on this story: Keith Hill in Washington at khill@bloombergtax.com. To contact the editor on this story: Michael Baer at mbaer@bloombergtax.com.

For More Information

For more information: Updated payroll-related provisions of the tax reform proposals from the House and Senate are summarized in a special Bloomberg Tax chart.

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