What advisers need to know about the differences in the Senate and House tax bills

Major variations include provisions on stock sale timing, pass-through policies and the alternative minimum tax

Dec 4, 2017 @ 2:53 pm

By Mark Schoeff Jr.

Republicans in Congress have entered the last leg of their race to achieve sweeping tax-reform legislation by the end of the year. The Senate passed its tax bill on Saturday, and now it will have to be reconciled with the House's version before it can be sent on to President Donald J. Trump.

"The Senate bill is much more complicated because of the provisions on pass-throughs and the sunsetting of many provisions," said Tim Steffen, director of advanced planning at Robert W. Baird & Co. "There are meaningful differences between the two that are going to have to be resolved somehow."

Mr. Steffen spent the weekend putting together a comprehensive chart comparing the provisions of the House and Senate legislation. Here are some areas that financial advisers will want to watch:

Timing of investment sales

Senate: Investors who sell part of their position in a stock would have to sell the first shares they bought first. They could no longer cherry-pick for tax advantage.

House: No provision.

"This rule takes away the planning strategies we use at year-end when doing charitable-giving or capital- gains planning," Mr. Steffen said.

Treatment of pass-through businesses

Senate: Allows a 23% deduction on income generated by a sole proprietorship, partnership, S Corporation and other businesses in which the owner pays business taxes on his or her personal return at rates of up to 39.6%. The deduction applies to couples who earn less than $500,000 from the pass-through. Caps on the deduction start to phase in above $500,000.

House: Allows a 25% tax rate on a portion of the pass-through income that is determined through a formula in the bill. A lower rate would apply to the first $75,000 of income.

Alternative minimum tax

Senate: Raises the exemption to $109,400 for married couples and $70,300 for singles.

House: Repeals the AMT.

State and local income, sales and property taxes

Senate: Repeals state and local income and sales tax deducions while allowing a property tax deduction of $10,000.

House: Same

Mortgage interest

Senate: Allows current mortgage deduction up to $1 million but eliminates the deduction for home-equity loans.

House: Limits deduction to $500,000 on new home purchases but grandfathers in existing mortgages. Also eliminates deduction on second homes.

Estate and gift taxes

Senate: Doubles the exemption to $11.2 million but maintains 40% rate for estate and gift taxes.

House: The House estate tax provisions are the same as the Senate's until the House eliminates the estate tax in 2024.

Roth recharacterizations

Senate: Recharacterizations of traditional or Roth contributions and conversions would no

longer be allowed.

House: Same

Health care reform

Senate: Eliminates the individual mandate provision, which requires companies and indivduals to buy health care insurance.

House: Does not eliminate it.

Income tax brackets

Senate: Seven brackets of 10%, 12%, 22%, 24%, 32%, 35% and 38.5%.

House: Four brackets of 12%, 25%, 35% and 39.6%.

Standard deduction

Senate: Doubles standard for married couples to $24,000 and for singles to $12,000.

House: Same.

Personal exemption

Senate: Repeals personal exemption.

House: Same.

Corporations

Senate: Lowers rate to 20% beginning in 2019.

House: Same, but takes effect in 2018.

Child tax credit

Senate: Increases to $2,000.

House: Increases to $1,600.

The individual provisions in the House bill are permanent, while most in the Senate bill would expire in 2025 to allow the total cost of the Senate bill to come in under a level that qualifies for a majority vote instead of requiring 60 votes to overcome an expected filibuster.

The Senate bill was approved on a mostly party-line vote of 51-49, with Sen. Bob Corker of Tennessee as the only Republican in opposition.

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