Changes to Senate tax bill affect pass-throughs, Roths

Modifications make it easier for some advisers to get a business tax break, repeal the ability to recharacterize Roth accounts, and add uncertainty by making individual cuts temporary and injecting health care into the debate

Nov 15, 2017 @ 2:25 pm

By Greg Iacurci

The Joint Committee on Taxation released a modified version of the Senate GOP tax bill late Tuesday that offers a mixed bag of pros and cons for financial advisers and their clients.

Primarily, in a huge departure from its original proposal, as well as the legislation put forth by the House, the Senate would "sunset" any tax reforms on the individual side of the ledger after eight years. Current tax law would come roaring back in 2026 unless further action was taken in the interim.

"Having this uncertainty for tax rates for individuals is a concern," said Paul Auslander, director of financial planning at ProVise Management Group.

Any changes the Senate ultimately makes to marginal income tax rates, pass-through income, deductions (e.g., medical expenses, state and local taxes), the estate tax and alternative minimum tax, and child tax credit would not be permanent. (Changes to business tax rates would be permanent, however.)


Beyond the sunset provision, the amended bill — officially, the Chairman's Modification to the Chairman's Mark of the "Tax Cuts and Jobs Act" — modifies treatment of pass-through businesses, seemingly to advisers' benefit.

The original Senate tax bill, released Nov. 9, offers a 17.4% deduction on domestic qualified business income for pass-through entities. However, the proposal excluded from tax relief many service businesses, such as financial services, set up as sole proprietorships, partnerships or S corporations, which is how many advisers structure their firms. (This differs from the House's treatment.)

The amended Senate bill makes it easier for service corporations, including financial advisers, to receive a tax benefit, said Tim Steffen, director of advanced planning in Robert W. Baird & Co.'s private wealth management group.

The proposal raises the income threshold allowing advisers to qualify for the tax break. Service corporations qualify if a family's taxable income is less than $500,000; previously, that threshold was $150,000.

Further, the original bill put a cap on the tax break for pass-throughs, limiting the amount to 50% of the taxpayer's W-2 wages. Now, that provision wouldn't apply for couples with income below $500,000, or $250,000 for individuals.


The modifications also repeal recharacterizing Roth IRA conversions.

The stoppage of recharacterizations, a popular strategy with financial advisers, was included in the House bill (which passed the Ways and Means tax-writing committee on Nov. 9) and has now emerged in the Senate bill.

"This would not be something that would come back in 2026," Mr. Steffen said. "It would be a permanent repeal."

A Roth conversion allows a taxpayer to switch a traditional, or pretax, individual retirement account to an after-tax account. A recharacterization undoes the conversion.


The modified bill includes a repeal of the Affordable Care Act's individual mandate, requiring individuals to be covered by a health plan or be subject to a tax.

Some financial advisers are concerned that injecting politics around health care into the tax discussion makes it more unlikely Republicans will have enough congressional votes to accomplish tax reform, which could send ripples through the stock market.

"My biggest problem is by putting an Obamacare repeal back into this thing, they're potentially shooting themselves in some tender body part," said Leon LaBrecque, managing partner at LJPR Financial Advisors.

This is the issue above all others that most concerns Mr. Auslander. The prospect of tax cuts has partly fueled the stock market's growth this year, and failure to pass a bill would likely lead to "a correction and a slowdown," he said.

"It's disappointing because they have an opportunity to do something good here," he said.


If final tax legislation were to contain a sunset provision for individual taxes, it's likely Congress will work to modify the cuts or make them permanent in the intervening time period, some advisers said.

Indeed, that's what happened with several of the provisions included in the tax-cut package enacted under President George W. Bush in the early 2000s.

The Senate bill also changes marginal tax rates, increases the estate-tax exemption (so it would apply to fewer people) and repeals the AMT and several popular tax deductions. The modified Senate bill made further reductions to a few of the income tax bracket rates (dropping the proposed 22.5%, 25% and 32.5% brackets to 22%, 24% and 32%, respectively, though income levels within some of them also changed).

"My guess is many of the things, they'd find a way to make them permanent," Mr. Steffen said. "Otherwise, you're looking at a significant tax increase in 2026."


What do you think?

View comments

Recommended for you

Upcoming Event

Nov 13


Best Practices Workshop

For the sixth year, InvestmentNews will host the Best Practices Workshop & Awards, bringing together the industry’s top-performing and most influential firms in one room for a full-day. This exclusive workshop and awards program for the... Learn more

Featured video


Women advisers pick up business development tips from the pros

Nearly 200 female financial advisers attended the InvestmentNews Women Adviser Summit in Denver, the third of four cities in 2018.

Latest news & opinion

Envestnet Tamarac partners with Schwab, TD on digital account openings

Auto-filling documents designed to make onboarding more efficient for RIAs and more convenient for clients.

Universal life insurance lawsuits underscore product risk

Sudden cost increases could cause clients to pay much higher annual premiums — or lapse their policies.

10 least affordable U.S. cities for renters

Based on average salaries and rents, here are the least affordable U.S. cities for renters, according to

10 countries where your clients should consider retiring

These countries offer the greatest security for their retirees, according to the 2018 Natixis Global Retirement Index.

10 most affordable U.S. cities for renters

Here are the U.S. cities that are most affordable for renters, according to Business, which compared the cost of rent to average salaries.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print