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Questions Remain for FAs Pondering New Tax Bills

November 20, 2017

Plenty of questions have been left on the table over how the latest round of Washington tax bills will affect financial advisors — particularly those set up as partnerships and other pass-through entities, InvestmentNews writes.

Sen. Ron Johnson, R-Wis., says the current plan favors corporations over pass-through entities, according to InvestmentNews. The proposed tax cut on pass-through businesses from 39.6% to 25% would not apply to advisors and other service businesses such as accounting firms, but it could present advisors with an opportunity to help their clients navigate the tax break to their advantage.

Treasury Secretary Steven Mnuchin, however, said Friday that 98% of pass-throughs bring in $500,000 or less in income, and the current plan would bring “substantial” tax reductions to them, according to Reuters.

In addition, changes to the Senate plan mean both bills would introduce new limits to carried-interest tax breaks benefiting investment managers, according to InvestmentNews.

House Republicans squeezed through their tax overhaul bill Thursday with no support from the Democrats, the New York Times writes. Later that day the Senate Finance Committee also approved its version of the tax bill, according to the paper.

The $1.5 trillion in tax cuts were approved with a vote of 227 to 205, with 13 Republicans voting against and no Democrats voting for it, the Times writes.

The bill drops the number of tax brackets from seven to four, cuts the corporate tax rate from 35% to 20% and eliminates or reduces several key deductions, including the one for state and local taxes, according to the paper. Among the 13 Republicans who voted against the bill, nine were from such high-tax states as New York and New Jersey and three were from California, the Times writes.

Following the vote in the House, the Senate Finance Committee voted 14 to 12 to go ahead with its own version of the tax bill, paving the way for a full Senate vote after Thanksgiving, according to the paper. But Republicans can only lose two votes among their ranks to push the bill through the full Senate, the Times writes.

The Senate bill varies from the House version in several regards. While the House tax bill increases child tax credits from $1,000 to $1,600, the Senate version raises them to $2,000, according to the paper. The Senate plan also drops the top marginal tax rate from 39.6% to 38.5% while the House bill keeps it the same, the Times writes. Furthermore, the Senate bill doesn’t fully repeal the estate tax as the House plan does, and while tax cuts in the House bill are permanent, they’ll be phased out in 2025 in the Senate version, according to the paper.

The Senate bill neglected mention of an amendment filed last Monday by Senate Finance Committee chair Orrin Hatch, R-Utah, that would have made so-called “catch-up” contributions in older Americans’ 401(k) plans taxable, according to the Wall Street Journal. Senate Republicans have also removed a provision to exclude people earning $500,000 from being able to make catch-up contributions, according to the paper.

Another provision in the Senate plan would prevent investors selling a part of their mutual fund stake from minimizing taxes in their tax-deferred retirement accounts, the Wall Street Journal writes. Under the plan, investors who bought funds in lots at various prices would be required to sell the lots off on a first-in, first-out basis, according to the paper. Currently, investors get to choose which lots they sell in order to offset other gains, the Journal writes.

The original Senate plan proposed applying the change to both investors and mutual fund companies, but lawmakers relented after protests from Vanguard Group, Eaton Vance and other fund firms, according to the paper. Effectively, the provision “will take tax planning out of the hands of investors and advisors, and it could make them less inclined to sell,” Tim Steffen, director of advanced planning with Robert W. Baird & Co., tells the Journal. The House bill doesn’t include the provision, according to the paper.

Approval of the Senate bill could be made more difficult by a report released yesterday alleging that the bill would in fact raise taxes on many Americans, the New York Times writes. The Joint Committee on Taxation concluded that the bill would raise taxes on workers earning between $10,000 and $30,000 in 2021 and on those earning $75,000 or less in 2027, according to the paper.

By Alex Padalka
  • To read the InvestmentNews article cited in this story, click here.
  • To read the New York Times article cited in this story, click here.
  • To read the New York Times article cited in this story, click here.
  • To read the Reuters article cited in this story, click here.
  • To read the Wall Street Journal article cited in this story, click here.
  • To read the Wall Street Journal article cited in this story, click here.