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Tax Reform: Focus Turns to Senate in Final Push

As we all emerge from our turkey-induced food coma, all eyes will now be on the U.S. Senate, as Congress returns this week from its Thanksgiving break to make the final push to approve tax reform by the end of the year.

To pick up where we left off, both the House and the Senate Finance Committee approved separate pieces of legislation on Nov. 16 before leaving town for their Thanksgiving break.

Neither bill includes a provision to “Rothify” 401(k) plans, but each does contain a number of other retirement-related provisions, including changes that restrict IRA recharacterization and allow plan loan rollovers.

Senate Majority Leader Mitch McConnell (R-KY) previously stated that this week the Senate will begin considering the bill approved by the Finance Committee. In order for the Senate to approve the legislation by a simple majority, the budget framework specifies that the legislation cannot exceed a net $1.5 trillion tax cut over the 2018-2027 period. The framework also says that the legislation cannot add to the deficit after this period. Under the budget rules, debate is limited, but there are numerous procedural roadblocks that could delay the process.

The current breakdown in the Senate is 52 Republicans to 48 Democrats (including two independents who caucus with the Democrats). Assuming that no Democrats support the legislation, “no” votes by just three Senate Republicans would block the legislation.

There are several “wild card” Republican Senators to keep an eye on:

  • Wisconsin’s Ron Johnson, who believes pass-through entities should be provided more tax relief;

  • Maine’s Susan Collins, who is concerned about including a repeal of the health insurance individual mandate under the Affordable Care Act (ACA); and

  • Tennessee’s Bob Corker and Arizona’s Jeff Flake, who are concerned about the legislation’s overall effect on the budget deficit.

Another wild card is the Senate’s inclusion of the proposed repeal of the Affordable Care Act’s individual mandate. That provision offsets nearly $320 billion of the bill’s overall cost. If it is removed, either the Senate bill would have to undergo substantive changes in the tax relief provided, or lawmakers would have to find new revenue offsets in order to meet the budget requirements — or some combination of both.

Sen. Lisa Murkowski (R-AK), who had previously expressed concern about repealing the ACA’s individual mandate, indicated just before Thanksgiving that she now supports that step — but has not yet indicated whether she supports the bill.

And we haven’t heard yet from Sen. John McCain (R-AZ), who took pains to ensure that he was the senator who cast the decisive vote sinking repeal of the ACA, on where he stands on the tax reform measure.

FIFO Basis for Sales of Securities

Meanwhile, as we continue to comb through the fine details of the legislation, another provision has surfaced that will be of interest to financial advisors and brokers.

A provision included as part of Senate Finance Committee Chairman Orrin Hatch’s (R-UT) original mark would require that the cost of any specified security sold, exchanged or otherwise disposed of on or after Jan. 1, 2018, be determined on a first-in, first-out basis, except to the extent the average basis method is otherwise allowed (as in the case of stock of a RIC).

In general, taxpayers would no longer have the option to identify for tax purposes which set of stock was sold in situations where they have acquired stock in a corporation on different dates or at different prices. The shares sold would be deemed to be drawn from the earliest acquired shares.
The original provision included several conforming amendments, including a rule restricting a broker’s basis reporting method to the first-in, first-out method in the case of the sale of any stock for which the average basis method is not permitted.

A manager’s amendment offered at the end of the four-day markup provides that regulated investment companies are exempt from the first-in, first-out rule.

The House bill does not include this provision. It is estimated to increase tax revenues by $2.4 billion over 10 years.