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.
- 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.
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.