House Passes Sweeping Tax Reform Package as Senate Continues Consideration

 

Background

November 17, 2017 –The House recently passed the Tax Cuts & Jobs Act (H.R. 1), bringing Republicans a step closer towards enacting tax reform by the end of year. Meanwhile in the Senate, the Finance Committee is aiming to clear its own version of the Tax Cuts & Jobs Act. Attention will then shift to the Senate floor, where prospects for passage are less clear.

Key takeaways

  • Both the House-passed bill and the bill under Senate consideration would make no or modest changes to tax benefits associated with retirement plans, nonqualified deferred compensation, municipal bonds, and inside buildup for life insurance/annuities.
  • There could, however, be adverse impacts on mortgage products, large endowments, insurance products used for estate planning, and life insurers generally (through the application of a surtax on life insurance reserves).
  • Additionally, changes to student loan interest deductions and qualified education expenses could also have adverse implications for higher education institutions.

Where we stand

The Tax Code was last overhauled in 1986, and many say it’s due for fundamental restructuring. After more than a decade of examination and debate in Congress, today’s passage is the most significant development yet in the push to change the Tax Code.
The House bill passed on a 227-205 vote – which included no Democrats and all but 13 Republicans. Those Republicans who broke ranks did so primarily due to the bill’s new limits on deductibility of state and local taxes, which will particularly affect taxpayers in high-tax states like California, Connecticut, Maryland, New Jersey, and New York.
Across the Capitol, the Senate Finance Committee also passed its version of tax reform. The House and Senate bills are somewhat similar, but include important differences. Earlier this week, Finance Chairman Orrin Hatch (R-UT) added to the Senate package a full repeal of the Obamacare individual health-coverage mandate – a move that will raise considerable revenue but also add political complexity. Because of this repeal, many revenue raisers that had been in the initial Chairman’s Mark have been removed, including the initially proposed (and problematic) provisions to tax nonqualified deferred compensation (NQDC) upon vesting and to prohibit catch-up retirement plan contributions from high-income employees. While Chairman Hatch had suggested he would require Rothification of all catch-up contributions, he ultimately opted against adding in such a provision. But as it now stands, the Senate package would coordinate contribution limits across 401(k), 403(b), and 457 plans so an employee would get a single $18,000 limit across plans.

Next steps

We expect the Finance Committee to approve on a party-line vote its modified package imminently. We then anticipate the Senate will bring the bill to the floor for a vote after the Thanksgiving recess – as early as the week of November 27.
Assuming the Senate passes its bill, there are two potential paths forward: (1) the House must pass the Senate’s bill or (2) the two chambers must iron out a compromise in conference, 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. We expect President Trump to sign any tax-reform bill presented to him.

For more information

Please refer to the chart below for a summary of the key provisions in the House-passed bill and the proposal before the Senate. We’ll closely monitor the progress of the tax reform proposals and update you when appropriate.

House and Senate Tax Reform Proposals Comparison of Key Provisions

Provision House, as passed by Ways & Means Committee Senate, as amended last by Chairman
House and Senate Tax Reform Proposals Comparison of Key Provisions
Individual Rates 4 Brackets: 12%, 25%, 35%, 39.6% 7 Brackets: 10%, 15%, 22.5%, 25%, 32.5%, 35%, 38.5%
Retirement Plans No mention of Rothification
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 Same as House
State and Local Tax (SALT) Deduction Repeals deduction for income and sales tax; maintains deduction for property tax, up to $10,000 Full repeal
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 indebtednes
Estate & Gift Tax Doubles the current estate and gift exemption of $5 million to $10 million; repeals the estate and generation-skipping taxes after 2023 Doubles the current estate and gift exemption of $5 million to $10 million
Medical Expense Deductions Repeal No Provision
529 Plans Adds K-12 education to allowable expenses, and 529 savings can be rolled over into ABLE accounts 529 savings can be rolled over into ABLE accounts
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. Same as House
Corporate Tax Rate Top rate reduced from 35% to 20%, effective 2018 Top rate reduced from 35% to 20%, effective 2019
Life Insurance Companies Current version replaces initially proposed taxes on company reserves, DAC, and Dividends Received Deduction (DRD) with an 8% surtax on the industry (surtax is said to be a placeholder) Changes in capitalization rates for DAC
Net Interest Expensing Limitation on net interest expense deductibility to 30% of adjusted taxable income (i.e., EBITDA) Limitation on net interest deductibility to 30% of adjusted taxable income (defined under Senate tax-reform bill as EBIT, not EBITDA)
Net Operating Loss (NOL) New NOL permitted to offset 90% of taxable income; carryforward indefinitely Same as House
Alternative Minimum Tax (AMT) Repeal AMT Same as House
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, and employer-paid tuition.
No Provision
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