Both Senate and House tax bills include payroll items

As we go to press, the Senate version of the tax reform bill was being debated by the full Senate. Meanwhile the House passed its version of the Tax Cuts and Jobs Act, H.R 1, on November 16, 2017. The payroll provisions of each are highlighted below.

Tax rate decreases

House version. The current seven tax brackets would be consolidated and simplified into four brackets: 12%, 25%, 35%, and 39.6%, in addition to an effective fifth bracket at zero percent in the form of the enhanced standard deduction. For example for married taxpayers filing jointly, the 25% bracket threshold would be $90,000, the 35% bracket threshold would be $260,000, and the 39.6% bracket threshold would be $1 million. The tax rates would be indexed for inflation and would generally be effective for tax years beginning after 2017.
Senate version. There would be seven tax brackets in effect for 2018. For example, Not over $19,050 10% of the taxable income Over $19,050 but not over $77,400 $1,905 plus 12% of the excess over $19,050 Over $77,400 but not over $140,000 $8,907 plus 22% of the excess over $77,400 Over $140,000 but not over $320,000 $22,679 plus 24% of the excess over $140,000 Over $320,000 but not over $400,000 $65,879 plus 32% of the excess over $320,000 Over $400,000 but not over $1,000,000 $91,479 plus 35% of the excess over $400,000 Over $1,000,000 $301,479 plus 38.5% of the excess over $1,000,000, effective for taxable years beginning after December 31, 2017, but would sunset on December 31, 2025.

Standard deductions increased

House version. The standard deductions would be increased to $24,400 for joint filers (and surviving spouses) and $12,200 for individual filers. Single filers with at least one qualifying child could claim a standard deduction of $18,300. The amounts would be adjusted for inflation after 2019. For example, the standard deduction for joint filers would be $24,400 in 2018, effective for tax years beginning after 2017.
Senate version. The amount of the standard deduction would be increased to $18,000 for married individuals filing a joint return and for head-of-household filers, and $12,000 for all other taxpayers. The amount of the standard deduction would be indexed for inflation for taxable years beginning after December 31, 2018. The additional standard deduction for the elderly and the blind would not be changed, effective for taxable years beginning after December 31, 2017, but would sunset on December 31, 2025.

Personal exemptions repealed

House version. The deduction for personal exemptions and the personal exemption phase-out would be repealed, effective for tax years beginning after 2017. The 2018 annual personal exemption amount is currently scheduled to increase to $4,150.
Senate version. The deduction for personal exemptions would be repealed. effective for taxable years beginning after December 31, 2017, but would sunset on December 31, 2025. The 2018 annual personal exemption amount is currently scheduled to increase to $4,150.

Employer-provided education repealed

House version. Currently, employer-provided education assistance is excluded from income. The exclusion is limited to $5,250 per year and applies to both graduate and undergraduate courses. The education assistance must be part of a written plan of the employer that does not discriminate in favor of highly compensated employees. The deduction for qualified tuition and related expenses would be repealed. The exclusion for qualified tuition reduction programs and the exclusion for employer-provided education assistance programs would be repealed. The repeals would be effective for amounts paid or incurred after 2017.
Senate version. No provision.

Charitable mileage rate

House version. The current 14 cent-per-mile flat rate would changed to be a rate which takes into account the variable cost of operating an automobile, effective for amounts paid or incurred after 2017.
Senate version. No provision.

Medical savings accounts

House version. Now an individual may claim an above-the-line deduction for contributions to an Archer Medical Savings Account (MSA) and exclude from income employer contributions to an MSA. In general, Archer MSAs may be set up by an individual working for a small employer and who participates in the employer’s high-deductible health plan. The total amount of monthly contributions to an Archer MSA may not exceed one-twelfth of 65% of the annual deductible for an individual with a self-only plan and one-twelfth of 75% of the annual deductible for an individual with family coverage. Distributions from the accounts used to pay qualified medical expenses are not taxable. Archer MSA balances may be rolled over on a tax-free basis to another Archer MSA or to a Health Savings Account (HSA). Under the provision, no deduction would be allowed for contributions to an Archer MSA, and employer contributions to an Archer MSA would not be excluded from income. Existing Archer MSA balances, however, could continue
to be rolled over on a tax-free basis to an HSA. The provision would be effective for tax years beginning after 2017.
Senate version. No provision.

Employer-provided housing

House version. The exclusion for housing provided for the convenience of the employer and for employees of educational institutions would be limited to $50,000 ($25,000 for a married individual filing a joint return) and would phase out for highly compensated individuals (income of $120,000 for 2017, as adjusted for inflation) at a rate of one dollar for every two dollars of adjusted gross income earned by the individual beyond the statutory threshold of being highly compensated. The exclusion also would be limited to one residence, effective for tax years beginning after 2017.
Senate version. No provision.

Employee achievement awards

House version. Currently, employee achievement awards are excluded from employees’ income. To qualify for the tax exclusion, an employee achievement award must be given in recognition of the employee’s length of service or safety achievement at a ceremony that is a meaningful presentation. Furthermore, the conditions and circumstances cannot suggest a significant likelihood that the payment is disguised compensation. The employee is taxed to the extent that the cost (or value, if greater) of the award exceeds the employer’s deduction for the award. The employer’s deduction for employee achievement awards for any employee in any year cannot exceed $1,600 for qualified plan awards, and $400 otherwise.
A qualified plan award is an employee achievement award that is part of an established written program of the employer, which does not discriminate in favor of highly compensated employees. In addition, the average award (not counting those of nominal value) may not exceed $400. The provision would repeal the exclusion for employee achievement awards, so that such awards would constitute taxable compensation to the recipient. The provision also would repeal the restrictions on employer deductions for such awards, effective for tax years beginning after 2017.
Senate version. No provision.

Dependent care assistance

House version. The value of employer-provided dependent care assistance programs are excluded from employees’ income up to a limit of $5,000 per year ($2,500 for married filing separately) to help pay for work-related expenses of caring for a child under the age of 13 or spouses or other dependents who are physically or mentally unable to care for themselves. Work-related expenses are those that help an individual work or look for work. Dependent care assistance programs must be part of a written plan of the employer that does not discriminate in favor of highly compensated employees. The exclusion for dependent care assistance programs would be repealed, effective for tax years beginning after 2017.
Senate version. No provision.

Moving expense reimbursements repealed

House version. Under current law, qualified moving expense reimbursements provided by an employer to an employee are excluded from the employee’s income. Qualified moving expenses are payments received by an individual from an employer as a payment for or reimbursement of expenses by an employee that would be deductible as moving expenses under Code Sec. 217 if directly paid or incurred by the individual. The exclusion for qualified moving expense reimbursements would be repealed, effective for tax years beginning after 2017. However, the current law on moving expenses would be retained for member of the Armed Services on active duty.
Senate version. The exclusion from gross income and wages for qualified moving expenses would be repealed for moving expense reimbursements, effective for taxable years beginning after December 31, 2017. In addition, the bill would generally repeal the deduction for moving expenses. However, the rules providing for exclusions of amounts attributable to in-kind moving and storage expenses (and reimbursements or allowances for these expenses) for members of the Armed Forces of the United States (or their spouse or dependents) would not be repealed, effective for taxable years beginning after December 31, 2017, but would sunset December 31, 2025.

Fringe benefits

House version. No deduction would be allowed for entertainment, amusement or recreation activities, facilities, or membership dues relating to such activities or other social purposes. In addition, no deduction would be allowed for transportation fringe benefits, benefits in the form of on-premises gyms and other athletic facilities, or for amenities provided to an employee that are primarily personal in nature and that involve property or services not directly related to the employer’s trade or business, except to the extent that such benefits are treated as taxable compensation to an employee (or includible in gross income of a recipient who is not an employee). The 50% limitation under current law also would apply only to expenses for food or beverages and to qualifying business meals under the provision, with no deduction allowed for other entertainment expenses. Furthermore, no deduction would be allowed for reimbursed entertainment expenses paid as part of a reimbursement arrangement that involves a tax-indifferent party such as a foreign person or an entity exempt from tax. The provision would be effective for amounts paid or incurred after 2017. The provision could affect what fringe benefits employers offer to employees.
Senate version. No deductions would be allowed for (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues for any club organized for business, pleasure, recreation or other social purposes, or (3) a facility or portion used in connection with any of the specific items. The proposal would repeal the present-law exception to the deduction disallowance for entertainment, amusement, or recreation that is directly related to (or, in certain cases, associated with) the active conduct of the taxpayer’s trade or business (and the related rule applying a 50% limit to such deductions). While taxpayers would still be able to deduct 50% of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel), the proposal expands the 50% limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes. For taxable years beginning after December 31, 2025, an employer’s deduction for expenses associated with meals provided for the convenience of the employer on the employer’s business premises, or provided on or near the employer’s business premises through an employer-operated facility that meets certain requirements would be disallowed.
In addition, the proposal would disallow a deduction for expenses associated with providing any qualified transportation fringe to employees of the taxpayer, and except as necessary for ensuring the safety of an employee, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee’s residence and place of employment effective to amounts paid or incurred after December 31, 2017.

Fringe benefits tax-exempt entities

House version. Tax-exempt entities are situated similarly to taxable entities with regard to providing their employees with transportation fringe benefits, and on-premises gyms and other athletic facilities, as such benefits pass from the employer to the employee free of tax at both levels. Employers subject to federal income tax may deduct the costs of such benefits, with tax-exempt entities not needing to deduct the costs of such benefits, and their employees may exclude the values of such benefits from their taxable incomes. Tax-exempt entities would be taxed on the values of providing their employees with transportation fringe benefits, and on-premises gyms and other athletic facilities, by treating the funds used to pay for such benefits as unrelated business taxable income, thus subjecting the values of those employee benefits to a tax equal to the corporate tax rate, effective for amounts paid or incurred after 2017.
Senate version. No provision.

Employer-provided child care

House version. The credit for employer-provided child care would be repealed, effective for tax years beginning after 2017.
Senate version. No provision.

Work Opportunity Tax Credit

House version. Currently, an employer may claim a Work Opportunity Tax Credit (WOTC) credit equal to 40% of qualified first-year wages of employees belonging to certain targeted groups. Such qualified wages are subject to various limits between $6,000 and $24,000, varying by the specific targeted group. The WOTC would be repealed, effective for wages paid or incurred to individuals who begin work after 2017.
Senate version. No provision.

Tip credit modified

House version. An employer may claim an income tax credit equal to its share of FICA taxes attributable to tips received from customers in connection with the provision of food or beverages if tipping is customary for that employer’s customers. The credit is available only to the extent such tips exceed the amount of tips that the employer uses to meet the minimum wage requirements for the employee under the Fair Labor Standards Act, as it was on January 1, 2007, namely $5.15 per hour. An employer may not claim a deduction for any amount taken into account in determining the credit. The credit would be modified to reflect the current minimum wage so that it is available with regard to tips reported only above the current minimum wage rather than tips above $5.15 per hour. Additionally, all restaurants claiming the credit would be required to report to the IRS tip allocations among tipped employees (allocations at no less than 10% of gross receipts per tipped employee rather than 8%), which is a reporting requirement now required only of restaurants with at least ten employees effective for tips received for services performed after 2017.
Senate version. No provisions

Pension plan contributions

House version. No provision.
Senate version. There would be a single aggregate limit to contributions for an employee in a governmental Code Sec. 457(b) plan and elective deferrals for the same employee under a Code Sec. 401(k) plan or a Code Sec. 403(b) plan of the same employer. Thus, the limit for governmental Code Sec. 457(b) plans is coordinated with the limit for Code Sec. 401(k)and 403(b) plans in the same manner as the limits are coordinated under present law for elective deferrals to Code Sec. 401(k) and Code Sec. 403(b) plans.
The proposal repeals the special rules allowing additional elective deferrals and catch-up contributions under Code Sec. 403(b) plans and governmental Code Sec. 457(b) plans. Thus, the same limits apply to elective deferrals and catch-up contributions under Code Sec. 401(k) plans, Code Sec. 403(b) plans and governmental Code Sec. 457(b) plans.
The proposal repeals the special rule allowing employer contributions to Code Sec. 403(b) plans for up to five years after termination of employment.
The proposal also revises application of the limit on aggregate contributions to a qualified defined contribution plan or a Code Sec. 403(b) plan (that is, the lesser of (1) $54,000 (for 2017) and (2) the employee’s compensation). The amount is scheduled to increase to $55,000 for 2018. As revised, a single aggregate limit applies to contributions for an employee to any defined contribution plans, any Code Sec. 403(b) plans, and any governmental Code Sec. 457(b) plans maintained by the same employer, including any members of a controlled group or affiliated service group, effective for plan years and taxable years beginning after December 31, 2017.

Bicycle reimbursement repealed

House version. No provision.
Senate version. The exclusion from gross income and wages for qualified bicycle commuting reimbursements would be repealed, for taxable years beginning after December 31, 2017, but would sunset December 31, 2025.

Length of service awards

House version. No provision.
Senate version. The aggregate amount of length of service awards that may accrue would be increased for a bona fide volunteer with respect to any year of service to $6,000 and adjusts that amount to reflect changes in cost-of-living for years after the first year the proposal is effective. In addition, under the provision, if the plan is a defined benefit plan, the limit applies to the actuarial present value of the aggregate amount of length of service awards accruing with respect to any year of service. Actuarial present value is to be calculated using reasonable actuarial assumptions and methods, assuming payment will be made under the most valuable form of payment under the plan with payment commencing at the later of the earliest age at which unreduced benefits are payable under the plan or the participant’s age at the time of the calculation, is effective for taxable years beginning after December 31, 2017.

Sinai combat zone

House version. No provision.
Senate version. For purposes of the following provisions of the Internal Revenue Code for the applicable period, a qualified hazardous duty area will be treated in the same manner as if it were a combat zone as determined under Code Sec. 112. The applicable period is the portion of the first taxable year ending after June 9, 2015, which begins on such date, and any subsequent taxable year beginning before January 1, 2026.

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