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Where Does Tax Reform Stand?

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RANDY FREDERICK: Just when it seemed like there was no chance we would see tax reform in 2017, Congress has come back with renewed vigor to try to get a bill passed before year-end. Mike Townsend joins me for the October 24th Schwab Market Snapshot to give us his take from inside the Beltway.

So, Mike, it seems like once again, everyone in Washington is talking about tax reform. Now, I realize we’ve recently overcome some very significant hurdles, but can you give us an idea on where things stand at the moment?

MIKE TOWNSEND: Well, Randy, I think the important thing for investors to understand is that we don’t have a bill yet. We have a set of principles that were put out by Republican leaders at the end of September, and I think most people are familiar with the key elements.

Reduce the number of individual tax brackets down to three, at 12%, 25%, and 35%. Eliminate the estate tax and the Alternative Minimum Tax. Double the standard deduction, and get rid of most other itemized deductions, with the exception of those for charitable contributions and home mortgage interest. And reduce the corporate tax rate down to 20%.

But, already, within the Republican Party, we’re having some infighting about whether there should be a fourth bracket for the highest taxpayers, about whether we really need to eliminate the estate tax. So, a lot of questions still to be answered.

RANDY: Well, since you talked about how much uncertainty there was about what might actually be in the tax bill, what are some of the important elements that investors need to be keeping an eye on?

MIKE: Well, as I said, Randy, there are hundreds of unanswered questions, but there are three that I think investors should be focused on. Number one is: How is investment income treated? There’s nothing in the framework about what the tax rate will be for capital gains or dividend income. And nothing about that net investment income tax. That’s the 3.8% surtax on investment income for wealthier filers that was part of the Affordable Care Act. It was supposed to be repealed when the Affordable Care Act was repealed, but, of course, it wasn’t repealed, so I think that tax is here to stay. Second, how are retirement savings incentives handled? There’s been a lot of talk recently about requiring 401(k) contributions to be taxed upfront, rather than when withdrawn. That would be a big change, but President Trump earlier this week, tweeted out that there would be no changes to 401(k)s. So a lot of uncertainty there.

And then, finally, how are all those tax deductions and credits treated? There are hundreds in the code. Everyone has a constituency. Everyone has a champion ready to defend it. That’s where the real controversy is going to come and the disagreements are going to come when that bill is introduced.

RANDY: Well, it kind of sounds to me like the Republican leaders have laid out a pretty aggressive timeline. So can you tell us what the next steps are from here and what is the probability that this tax reform bill could become a tax reform law before year-end?

MIKE: Well, even a couple of weeks ago, I would have said there was virtually no chance for it to become law by the end of the year, but the odds are going up a little bit. In the House of Representatives, they have a very aggressive timeline—introduce the bill the week of October 30th, put it through the committee process the week of November 6th, and put it on the House floor for a vote sometime late the week of November 13th.

Now, in the Senate, it’s a notoriously slower process, and I expect it’s going to take after Thanksgiving into December for the Senate to get done. But there’s a big complicating factor looming in early December, and that’s the fact that on December 8th, the agreement to keep the government open and operating expires. And we could have a government shutdown on December 9th if Congress does not come together and extend funding for government operations.

So that’s a big, complicating problem. Bottom line here is I think there’s a shot that they could get something done, but it’s a small shot, and I think it’s going to be difficult for something to be passed by the end of the year. We’re probably talking early 2018 more realistically.

RANDY: Yeah, I think that makes a lot of sense, Mike. Thanks so much for that great information.

Listen, if you want to read more from Mike you can do that in the Insights & Ideas section of Schwab.com. And don’t forget, you could follow me on Twitter @RandyAFrederick. We’ll be back again. Until next time, invest wisely. Own your tomorrow.

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