Senate tax bill

The U.S. Senate Finance Committee revealed its own tax bill, and it differs from the House bill (which passed) in several respects. The following are the major differences.

1. The Senate bill has 7 tax brackets ranging from 10% to 38.5% versus the House bill's 4 brackets ranging from 12% to 39.6%.
2. The Senate bill preserves the estate tax while doubling the current $5.49 million exemption for individuals. The House bill ends the estate tax after 2024. Until then, the current $5.49 million exemption for individuals would be doubled.
3. The Senate bill preserves the existing mortgage-interest deduction for home purchases for up to $1 million of debt. The House bill would reduce the maximum to $500,000 of debt for new purchases and would limit the deduction to one principal home, ending the deduction for second homes.
4. The Senate bill preserves the deduction for medical expenses. The House bill ends it.
5. The House bill would not change taxation of capital gains. The initial Senate bill would, and investors protested. Currently, if an investor buys shares of stock in the same company at different times and then sells part of them, the investor can choose which ones are being sold. Selling the highest cost shares would minimize capital gains, and thus the tax. The Senate bill proposed first in, first out, or FIFO, which would in many cases be the lowest cost shares, resulting in the largest gain and tax. This would apply to individuals and mutual funds (including exchange-traded funds or ETFs) selling individual company shares. Individuals selling mutual fund shares would compute the capital gain using the average cost of the shares held.
     An tax annoyance for people who invest in mutual funds is capital gains distributions. This occurs on  "taxable" accounts (not IRAs, 401k's, etc.) when the mutual fund sells shares even if the holder of  the mutual fund shares doesn't sell. The holder gets a 1099 form from the fund or his/her broker reporting the amount of capital gains, which must be included on the holder's next federal income tax return. Such amounts in the future would generally be larger with the FIFO treatment for the mutual fund.
   After protests from some mutual fund companies, the Senate bill was modified to not apply FIFO to mutual funds.

Sources: CNBC, Bloomberg, Fox Business