GOP Tax Plan Spares 401(k)s, Targets IRAs

The wrangling will continue, as the Senate plan should be out in a few days, which is "expected to be quite a bit different," Steffen said.

Here's a breakdown of the major changes in the GOP bill:

It consolidates the individual tax brackets to 12%, 25%, 35% and 39.6%.

• Roughly doubles the standard deduction to $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples.

• Establishes a new Family Credit – which includes expanding the Child Tax Credit from $1,000 to $1,600 and provides a credit of $300 for each parent and non-child dependent 
• Preserves the Earned Income Tax Credit
• Consolidates three similar higher education benefits into one expanded American Opportunity Tax Credit.
• Ends the Coverdell savings program, which helps families cover primary and secondary education expenses. Instead, elementary and secondary school expenses would be qualified under 529 college savings plans, which would also be expanded to allow unborn children as beneficiaries.
• Continues the deduction for charitable contributions 
• Preserves the home mortgage interest deduction for existing mortgages; for newly purchased homes, maintains the deduction for mortgages up to to $500,000. (The current limit is $1 million.)
• Continues to allow write-offs the cost of state and local property taxes up to $10,000.
• Repeals the deduction for state and local income taxes and sales taxes.
• Repeals the deduction for medical expenses and tax preparation expenses
• Repeals the overall limitation on itemized deductions.

The plan lowers the corporate tax rate to 20% from 35% and establishes a controversial 25% rate for "pass-through" business income.

Hunter Blair, an analyst at the Economic Policy Institute, said in a Thursday statement that the use of pass-through entities "has exploded in recent decades, but most of this increase is not attributable to mom-and-pop stores but to hedge funds, law firms, and private equity partners."

In fact, 49% of all pass-through income goes to just the top 1% of households, he said, "thus the new pass-through rate would disproportionately help the wealthiest Americans, including President Trump, who owns more than 500 pass-through businesses." (The Trump Organization is one of them.)

For his part, Brown says that "FSI has long supported tax reform that safeguards the important role of independent contractors in our economy, and provides equitable treatment of pass-through entities operated by financial advisors." He added that FSI would work with members of Congress and the administration "throughout this process" to make sure the final bill includes this provision and preserves the retirement tax incentives.

While the deduction for property taxes would be capped at $10,000 under the GOP plan, "the state income tax deduction would go away. This is another one that will be strongly debated, and I'd expect this to change," Baird's Steffen added.

Also, the bill includes "good incentives for businesses – the lower corporate tax rate, a new immediate deduction for the cost of new equipment, and the deduction for interest remains in place," however, "the application of the new corporate rate will be complicated," Steffen said. 

The new rate is 25%, "but only on income not attributed to 'labor,'" Steffen continued. "The default assumption is 70% of the income would be exempt from the lower rate. For service firms, like lawyers and accountants, the assumption is 100%. They may be able to fight that, but it appears by default those business won't benefit from the lower rate."

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