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.
Senate Republicans released an overview of their version of tax reform legislation on Nov. 9, and there are a number of key differences between their version and the bill under consideration in the House of Representatives.
Also on Nov. 9, the House Ways and Means Committee, after four days of debate over dozens of amendments, approved the bill on a party-line vote of 24-16. That action sends the bill to the House floor, where it is expected to be considered during the week of November 13th. A vote to pass the bill in the House is expected before lawmakers break for the Thanksgiving holiday on November 16th or 17th.
Many changes are expected to both versions of the legislation in the days and weeks ahead, but here is our initial take on some of the notable differences between the tax reform approaches of the Senate and the House:
- Seven individual tax brackets. While the House bill reduces the current seven tax brackets to four, the Senate bill would retain seven brackets, reportedly with rates of 10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5%. The Senate bill’s top rate is lower than the 39.6% rate for the highest earners under the House plan.
- Deduction for state and local taxes completely repealed. The House bill repeals the deduction for state and local income taxes, but preserves a deduction for state and local property taxes, up to $10,000. The Senate has no such provision.
- Estate tax exemption increased, but not repealed. The House bill doubles the current $5.49 million exemption amount for individuals and then eliminates the estate tax entirely in 2024. The Senate plan increases the exemption by the same amount, but does not repeal the tax in the future.
- Corporate tax cut delayed by a year. Both plans lower the corporate tax rate to 20%. The House does so in 2018, while the Senate version delays the tax cut until 2019.
- Home mortgage interest deduction maintained. The Senate proposal maintains the deduction for interest paid on newly purchased homes for mortgages up to $1 million, the same as current law. The House bill proposes to cap the deduction at mortgages of $500,000.
- Deduction for medical expenses would continue. The Senate plan preserves this deduction, which was eliminated in the House bill.
- No changes to taxation of investment income or retirement savings incentives. As with the House bill, tax rates for capital gains and dividend income will remain the same as current law. In addition, the bill does not make dramatic changes to retirement savings. Some reports in recent days indicated that the Senate may require some or all contributions to retirement plans to be made to Roth plans, which tax contributions up front. Pressure from the public and the White House to maintain the status quo for retirement savings plans forced the House to back off any changes, and the Senate has followed suit.
The two bills are likely to move on parallel tracks during the week of November 13th. The full House is expected to debate that version of the bill, with the hopes of passing the bill on the House floor on or before November 17th. At the same time, the Senate Finance Committee will consider amendments to the Senate bill. Consideration on the floor of the Senate is not expected until after the Thanksgiving break. If and when both chambers have passed their bills, a conference between the two chambers would take place to iron out differences and produce a single, consensus piece of legislation. That compromise would have to be approved by both the House and Senate before the bill could be sent to the president for his signature.
Bottom line for investors
We continue to suggest that investors take no action at this time. Investors need to understand that the bill can and will change dozens of times in the weeks ahead, making specific analysis of how the bill affects any particular taxpayer’s situation nearly impossible. Until we have more detail, investors should not overreact. And while the bills are beginning to move forward, passage of tax reform remains far from a certainty.
We do think the Senate bill is the one to watch as the process moves forward. With only a narrow 52-48 majority in the Senate, Republicans can lose no more than two votes and still be able to pass the bill. (Vice President Mike Pence would cast the deciding vote if there is a 50-50 tie.) The bill is drafted with that goal in mind, and Senate Republican leaders will make whatever changes are necessary to ensure they can count on at least 50 votes. Should both chambers pass their respective versions, expect the Senate to have the upper hand in any negotiations with their House colleagues as a result.
What you can do next
- If you’ve built a solid financial plan and a well-diversified portfolio, it’s best to ignore the political noise and focus on your long-term goals. Want to talk about your portfolio? Call our investment professionals at 800-355-2162.
- Watch Schwab experts discuss other market and economic topics in the Schwab Market Snapshot.