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Republican tax blueprint leaves 401(k) accounts alone, but adds private university endowments tax

Utah Sen. Orrin Hatch
Sen. Orrin Hatch, R-Utah, hopes to finalize a proposal next week.

Contributions to 401(k) and IRA retirement accounts will remain unchanged but private university endowments will see a tax on their investment income, according to the tax reform proposal released Thursday by congressional Republicans.

A two-page description of the proposed Tax Cuts and Jobs Act released by the House Ways and Means Committee said it "makes no changes to the popular retirement savings options that Americans have today."

Private foundations would see their tax on net investment income drop to 1.4% from 2% under the Republican plan, which would also impose a 1.4% tax on net investment income on private colleges and universities with at least 500 students and assets of at least $100,000 per full-time student at the end of the preceding tax year. State colleges and universities would not be subject to the tax.

The tax reform package calls for reducing the corporate tax rate to 20% and preserving lower rates on capital gains, dividends and interest income. It eliminates many individual deductions and roughly doubles the standard deduction up to $24,000 per year.

Pass-through business income for partnerships such as private equity businesses would gain a lower cap of 25%, down from the current individual rates up to 39.6%. Businesses could immediately write off capital investment expenses and overseas profits would have a one-time tax to remove the tax incentive for keeping money offshore, the document said.

Carried interest was not changed as part of the proposal. Private equity and real estate investment firms welcomed the news that deduction of interest expense would remain, but not that it would be capped at 30%.

The commercial real estate finance industry group CRE Finance Council, also happy that the commercial property cost-recovery/depreciation regime stays, said that changes to those provisions during markup of the bill will have a "profound" effect.

"Uncertainty will be the order of the day until the bill either advances to the Senate (working on their own legislation) or gets stymied by member opposition," A CREFC bulletin said.

Senate Finance Committee Chairman Orrin Hatch, R-Utah, one of the key tax reform negotiators, said the Senate is finalizing a proposal that his committee will consider when the House Ways and Means Committee finishes, "hopefully toward the end of next week."

House Ways and Means Chairman Kevin Brady, R-Texas, said the committee is on schedule to work on the bill early next week.

American Benefits Council President James A. Klein said in a statement that his group will work with Congress "to ensure that retirement savings is protected as the tax reform process moves forward."

Investment Company Institute President and CEO Paul Schott Stevens said his members "strongly appreciate that Chairman Brady's bill recognizes the important role that current retirement savings tax incentives play in helping Americans prepare for retirement."