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Tax Cuts, Not Tax Reform

I figured before the proposed tax bill changed too much I should send out some commentary a day early.  Below are some quick nuggets from my reading on the proposed tax bill.

  • This is NOT true tax reform. It is mostly a bunch of tax cuts.
  • 401ks are not changed. It is interesting as one columnist advocated for them to be pulled back to encourage people to contribute to Roth IRAs as the latter tool helps more people in retirement.  Stay tuned as I will write more on this in another article.
  • CPAs – I know you were terribly worried your jobs would be replaced with a “postcard return.” One analyst pointed out while income tax brackets are consolidated the current brackets for capital gains would remain the same. Oh, and the new income brackets are 4, but sometimes 5, but then back to 4 again.  Clear as mud and job security for all CPAs.
  • The Corporate rate would be a permanent 20% one that goes into effect in 2018. Odds are this will bump up some as the proposal makes its way through Congress.
  • Mortgage interest deduction would be capped at $500,000. This may not impact many homes in the Akron area, however, in higher cost of living communities it will be a bigger deal.  Just like the Corporate tax rate, plan on some changes here.  Go ahead and throw State and Local Tax (SALT) deductions in this pot as well.
  • The Estate Tax elimination – Please stop calling this a death tax as nearly 100% of deaths do not create a taxable event.
  • The AMT would finally be going away. No real complaints here.
  • Deductions will be thinned out and simplified through changes to standard deductions, personal exemptions, Child Tax Credit and a Family Flexibility Credit.
  • Some deductions will be a harder sell. Not only the SALT ones mentioned above, but also Medical Expenses. Kind of like the Estate Tax, Medical Expenses are not often used, however, when they are they are significant.
  • Charities are nervous not only because of the consolidation/elimination of the above deductions, but also proposals that would eliminate any deduction related to buying seating rights for college athletics and that any charitable contribution, and not just donations above $250, would require receipts.
  • House flippers are targeted in the proposals by changing the rules from “owned and used for 2 out of the past 5 years” to “5 out of the past 8 years.” There are also changes to the income limit with this.  I wonder what will happen to all the house flipping shows on HGTV?
  • Lots of changes to employee benefits as well. They range from dependent care to qualified moving expenses to adoption assistance to meals and more.
  • Also changes related to educational-related items, but one that stands out is the elimination of the Coverdell accounts. I think this is mostly due to lack of use since most people use 529 plans.
  • Roth conversion strategies are being modified by eliminating the recharacterization rule. It was only a matter of time before this came up as I have always considered it a “too good to be true” strategy.
  • One final thought – I read a comment that this proposal is great for rich people, unless they actually work for a living. Not a good plan for high income earners like physicians.

 

Someone tweeted the President will sign any tax bill he gets in front of him because he just wants a victory.  The jury is still out on whether any approved tax bill will make it to his desk, but I would agree with the comment.  In the meantime, plan on lots of reports in the days and weeks ahead on what is happening with the proposed tax cuts.  The longer this takes to pass the greater the odds it will look dramatically different or simply not get approved.  Also, don’t be surprised if there is another tax bill next year regardless of what happens with this version.  This is what happens when you just do a bunch of cuts instead of real reform.

About Dan Johnson, CFP

I am the President and CCO of Forward Thinking Wealth Management, LLC, which is the flat-fee financial planning firm located in Akron, OH, and set up to work virtually with clients across the country. I charge clients a flat fee of $4,800 regardless of asset size. My firm is a solution to what I feel is a broken system where clients pay advisors based on something out of their control - the performance of the market.
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