Senate Passes Tax Reform Package

 
In a highly consequential act, the Senate early Saturday (December 2, 2017) morning passed its version of a Tax Code overhaul. The bill significantly reduces corporate tax rates, temporarily reduces individual tax brackets, and partially offsets the cost of rate reductions by scaling back or eliminating many tax deductions. According to the Joint Committee on Taxation, the package will reduce revenues by $1.41 trillion over the next 10 years. The bill largely maintains today’s incentive structure for retirement savings but has consequential issues for higher education.
The Senate’s action follows the House’s approval of its own tax-reform package on November 2. For tax reform to become law, either the House must pass the Senate’s bill or the two chambers must iron out a compromise that then must pass both chambers. We expect this to happen within a matter of weeks – whereupon the bill will be presented to President Trump for his signature.
With this action, both the House and the Senate have passed their own versions of legislation that would overhaul the Tax Code for the first time since 1986. The proposed bills would have dramatic implications for American families, employers, and businesses. The House bill also contains a number of provisions that could impact the higher-education and nonprofit sectors.

Key takeaways

  • The bill makes no significant changes to retirement savings. Early calls to require contributions on an after-tax (Roth) basis did not materialize. And the final bill eliminates a provision in Committee-passed legislation to coordinate 403(b) and 457(b) contribution limits.
  • The bill would maintain the tax-free treatment of municipal bonds, but interest on private-activity bonds will become taxable going forward.
  • An amendment allows families to use 529 savings plans, originally intended for college savings, for K-12 education, including private school and home-schooling up to $10,000 per year.
  • Several provisions in the Senate-passed bill will impose taxes on nonprofits, including the largest private university endowments.

Senate Passes Tax Reform Package

Provision House, as passed Senate, as passed
House and Senate Tax Reform Proposals
Comparison of Key Provisions
Education Incentives Repeals student-loan interest deduction and the Sec. 127 employer-provided educational assistance credit No Provision
Higher-Education Endowments Taxes net-investment income at 1.4% for any institution with endowments more than $250,000 per student Taxes net-investment income at 1.4% for any institution with 500 tuition paying students and with endowments more than $500,000 per student
Sunset of individual provisions Generally individual tax changes are permanent, but a $300 per person family credit sunsets after 2022. All individual tax breaks -- including rate cuts and the doubling of the standard deduction – expire after 2025.
Individual Rates 4 Brackets: 12%, 25%, 35%, 39.6% 7 Brackets: 10%, 12%, 22%, 24%, 32%, 35%, 38.5%
Retirement Plans Modest retirement plan provisions. No mention of Rothification No mention of Rothification; Committee bill’s coordination of 401(k), 403(b) and 457 is eliminated
Nonqualified Deferred Compensation No changes to nonqualified deferred compensation No changes to nonqualified deferred compensation
Municipal Bonds Repeal tax-exempt status for Private Activity Bonds, advance refunding bonds, and tax credit bonds Repeal tax-exempt status for advance refunding bonds only
Standard Deduction & Exemptions Nearly doubles the standard deduction; repeals personal exemptions Similar to House
State and Local Tax (SALT) Deduction Repeals deduction for income and sales tax; maintains deduction for property tax, up to $10,000 Same as House
Mortgage Interest Deduction Deduction for existing mortgages preserved;  would cap deduction for newly purchased homes at $500,000 and disallow deduction for mortgages on second homes No provision (interest would remain deductible up to $1,000,000 in mortgage indebtedness). The deduction for home equity indebtedness would be eliminated.
Estate & Gift Tax Doubles the current estate and gift exemption of $5 million to $10 million; fully repeals in 2025 Doubles the exemption amount until 2026, then reverts to lower thresholds
Medical Expense Deduction Repealed Temporarily lowers the threshold for claiming the deduction from 10% of income to 7.5%
529 Plans Adds K-12 education to allowable expenses (up to $10,000 per year), and ability to contribute for unborn child. Additionally,  529 savings can be rolled over into ABLE accounts Same as House
Capital gains on stocks No Provision Requires first-in, first-out (FIFO) method
Alternative Minimum Tax (AMT) Repeal AMT Increases individual AMT exemption amounts and phase-out thresholds; maintains the current corporate AMT
Other Provisions of Note for Colleges and Universities Consolidates three existing higher-education tax credits (i.e., the American Opportunity Tax Credit [AOTC] and the Hope Scholarship Credit) into one modified AOTC.

Repeals the deductions for qualified education expenses, student-loan interest (up to $2,500), and employer-paid tuition.
No provision (maintains current law)

What’s next?

In order for tax reform to become law, (1) the House must take up and pass the Senate’s bill or (2) the two chambers must iron out a compromise, and that compromise then must be passed by both chambers. This process can carry through December – but in all events, Republicans stated goal is to have the bill presented to the President before Christmas.
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