By Michael T Townsend
December 14, 2017
The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party, nor should the analysis be considered tax advice.
Republican leaders on Capitol Hill have reached a deal on a massive tax package that would cut the corporate tax rate and make sweeping changes to individual taxes. A final vote on the bill—a product of negotiations between the House and Senate—is expected next week in both chambers. Once passed, the bill could be sent to the president for his signature before the Christmas holiday.
But it’s still not certain the bill will attract enough votes, particularly in the narrowly divided Senate. Several Republican Senators have said they were waiting for all the details of the agreement, which is expected to be published on Friday, before committing to vote for it. Republican leaders, however, are confident that they have enough votes.
Negotiators spent more than a week reconciling the differences between the House bill, which was approved on Nov. 16, and the Senate bill, which passed that chamber on Dec. 2.
The final agreement reportedly includes a significant win for individual investors: It scraps a provision from the Senate draft that would have required investors to use the “first in, first out” (FIFO) method when calculating their cost basis when selling stock. In effect, that would have been a tax hike on many investors, as any time they sold stock, they would have had to sell their longest-held shares first, potentially exposing them to larger capital gains.
Even if the tax bill passes, investors will retain the right to choose which shares they want to sell.
Here are other key elements of the agreement:
Corporate tax rate cut to 21%. This is a change from earlier drafts of the bill, which had sought to cut the rate to 20%. Raising the rate by a single percentage point frees up money that can be used elsewhere in the bill.
Lower rate for wealthiest filers. One major point of difference between the two bills was that the House version maintained the current top individual tax rate of 39.6%, while the Senate bill lowered the top rate to 38.5%. The final bill, however, sets a new top rate for individuals at 37%.
Mortgage interest deduction set at $750,000. The agreement splits the difference between the two bills by allowing a deduction for interest on the first $750,000 of a new mortgage. The House version had capped the deduction at mortgages of up to $500,000, while the Senate bill was set at $1 million.
Change to state and local tax deduction. Perhaps the most controversial provision in the two bills was the elimination of the deduction for state and local taxes. Both bills allowed a deduction for up to $10,000 in property taxes, but representatives of high-tax states like California, New Jersey and New York pushed hard for additional relief. The agreement reportedly allows taxpayers to deduct up to $10,000 in property, state income or state/local sales taxes. Taxpayers would be allowed to use a combination of property and income taxes or property and sales taxes.
Alternative Minimum Tax (AMT) stays, but with a higher income exemption. The House bill had repealed the AMT entirely. The Senate kept the much-reviled tax, opting instead to increase the amount of income exempt from it. The final agreement reportedly went with the Senate approach, though the level of income that will be exempt from the AMT was still being finalized.
Individual tax cuts will expire in a few years. While the House bill made virtually all the individual tax provisions permanent, Senate budgeting rules made that impossible. As a result, the Senate bill “sunset” the individual tax provisions after 2025. Lawmakers plan to keep that approach in the final compromise, but were still determining, based on the math, whether the tax cuts would need to expire at the end of 2024 or 2025. A future Congress could vote to extend the provisions.
The final version of the tax legislation is expected to be published on Friday afternoon. The Senate is expected to debate and then vote on the bill on Dec. 18, with the House expected to follow suit on Dec. 19, though it is possible that the debate in both chambers could slip by a day. It must be approved in exactly the same form by both chambers. Republican leaders are confident the bill will be on its way to President Donald Trump for his signature by the middle of that week.
Lawmakers will then turn their attention to another pressing crisis—the need to avert a government shutdown at the end of the week. The temporary agreement to fund government operations that was reached last week extended funding only through Dec. 22. The government will shut down on Dec. 23 if an extension of funding is not approved. Republican leaders are likely to push for another short-term extension, likely until mid-January, in order to avoid a shutdown over the holiday.
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