Financial advisors may stand to see significant tax savings after the House Ways and Means Committee released a tax reform draft on Thursday that would reduce the pass-through rate advisory firms pay to 25 percent.
The change would allow advisors to escape individual tax rates that approach 40 percent.
“[The Financial Services Institute] 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,” FSI President and CEO Dale Brown, whose organization represents the independent broker-dealer industry, said in a statement.
“We look forward to working with members of Congress and the administration throughout this process to ensure the final tax reform bill achieves these purposes,” Brown added.
The proposal includes a 25 percent tax rate for pass-through businesses. Instead of getting taxed at an individual rate for business profits—currently the case—advisors and others who own their own business or work as independent contractors would pay at the lower proposed pass-through rate.
A 25 percent tax rate would provide significant savings for advisors from the top two individual tax rates in the proposal (35 percent and 39.6 percent). There will be some guardrails, however, on what kinds of businesses can claim this rate, to avoid individuals abusing the lower tax.
As expected, the House Ways and Means draft would chop the corporate tax to 20 percent from the current 35 percent. The change is designed to be immediate and permanent.
Other parts of the plan would limit or eliminate some tax breaks corporations currently employ. It limits the deductibility of interest for most companies, for example, with an exception for smaller firms (a boon for advisors). It would, however, take away businesses’ ability to deduct some types of executive compensation above $1 million a year—including performance-based pay.
At the same time, the alternative minimum tax would be repealed for corporations. “The planned repeal of AMT would go a long way towards simplification. But like estate taxes for instance, the AMT is viewed as a tax on the highest income earners—which isn’t really true by the way—so it will be hard to see it surviving to the final bill, said Tim Steffen, director of advanced planning for Baird Private Wealth Management.
Not surprisingly, opposition to the bill, the "Tax Cuts and Jobs Act," is already forming, despite House Ways and Means Chairman Kevin Brady’s promise to pass the bill by Thanksgiving.