In our white paper, Tax Reform Near the Finish Line: What’s in the Bill, we summarize the portions of the Tax Cuts & Jobs bill of particular interest to investors, as well as the likely winners and losers under that legislation.

The Senate subsequently agreed to the following changes to its bill during floor consideration and voting:

  • Full expensing of business capital investments no longer ends abruptly after 2022, but now phases out, reduced by 20% each year through 2026 (entirely phased out in 2027).
  • The deduction for income earned by business pass-through entities is increased from 17.4% to 23%.
  • Permit property tax deduction up to $10,000 annually (same as House bill).
  • Reduce AGI threshold for medical expense deduction from 10% to 7.5% for next two years. (The House bill would eliminate the medical expense deduction entirely.)
  • The individual alternative minimum tax is not repealed, but the exemption amount is increased so fewer taxpayers are subject. (No changes to corporate AMT.)
  • Raise tax rate on deemed repatriation of existing foreign earnings from 10% (liquid assets) and 5% (illiquid assets) to 14.5% and 7.5%, respectively.
  • Permit 529 funds to be used for elementary and secondary education (same as House bill).

After the House and Senate versions are distilled into a single bill, we will update our white paper to incorporate the final provisions.

In the meantime, financial advisors have asked about other parts of the pending legislation that might impact their clients. Following are some of the questions we have received, along with our responses.

  • Do the bills in their current forms have any negative impact on deferred compensation? Is any negative impact expected?

The initial drafts of the bills would have taxed deferred compensation at such earlier time as the compensation payment was no longer contingent on future services to be provided by the recipient, even if actual payment is deferred beyond that date. Further, the bills would have applied these deferred compensation rules to grants of stock options. However, these changes were dropped from both bills during committee review. The changes could be added back during the process of distilling the House and Senate versions into as single bill, but given the prior rejection of the changes, that addition back seems unlikely.

  • May businesses continue to claim deductions for items such as meals with clients, business travel, advertising, and marketing materials?