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Tax Reform & It's Implications For You

Tax Reform & It's Implications For You

| December 22, 2017
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“This is too difficult for a mathematician. It takes a philosopher.”– Albert Einstein, on filing tax returns.

The most comprehensive tax reform since 1986 is on the precipice of becoming the law of the land. For the overall economy, the effects of these changes will not be quantifiable for some time. For individuals, the effect is more dependent upon your particular circumstances. For those with straight-forward tax circumstances, we have attached a hyperlink to a basic tax-planning calculator that will show how the changes will affect your particular tax liabilities (Tax Plan Calculator).


In an attempt to move beyond the traditional disclaimer of “we do not hold ourselves out as tax experts so please discuss with your personal tax professional” we have included a short audio link to a conversation we just had with a trusted, non-affiliated, and well-respected leader of the tax community. Please click HERE to listen to this 5-minute conversation with Julie Welch. Julie is a managing partner at Welch, Meara, Browne and is a Certified Public Accountant, Certified Financial Planner and is the Director of the firm’s tax department. We have worked together for clients with very complicated tax situations and I can personally say that Julie’s highly-regarded reputation within the tax community is well-deserved.

It is important to make sure you are optimizing your particular tax situation in accordance with the upcoming changes in tax law so please try to have a conversation with your tax professional before year-end. Attached are some key considerations Julie Welch and her team at Meara, Welch, Browne put together to consider doing BEFORE December 31, 2017.


  • Consider maximum retirement plan and IRA contributions for 2017 to take advantage of the deduction at higher current rates.

  • Due to the proposed elimination of many itemized deductions, if one will no longer itemize deductions in 2018, consider paying as many itemized deductions in 2017 as possible – such as state and local taxes and charitable contributions. (You cannot prepay amounts due for tax years 2018 and later, but you can pay anything due for 2017 that you might otherwise pay in 2018.)

  • Pay any property taxes in 2017 – especially places that allow you to split the payment between December and April – consider paying the April 2018 amount before December 31, 2017. This must be a payment – not just a deposit.

  • Even if one will continue to itemize deductions, consider paying those items that are slated for elimination (such as state and local taxes) in 2017 to avoid a total loss of the deduction.

  • Consider accelerating deductions and deferring income to take advantage of the deduction at higher current rates applying to 2017. Watch 2017 AMT because if that applies, you may want to accelerate income if it will only be taxed at 28%.

  • Reconsider 2017 Roth IRA conversions before December 31, 2017, based on the proposal to eliminate the ability to “undo” Roth IRA conversions.

  • Consider contributions to donor-advised funds or private foundations allowing an immediate tax deduction while the payment to the ultimate charity can be spread over a number of years.

  • Bunching expenses such as property tax and charitable contributions will become even more important, itemizing deductions and taking the standard deduction in alternating years.

  • Hold off on gifts that would be subject to gift tax in 2017 since exemption would increase to $11,200,000 per person.

  • After tax reform is enacted, be sure to update your tax and estate planning.


  • Defer income and accelerate deductions.

  • Pass through entities with lower effective rates in 2018 may want to accelerate deductions and equipment purchases eligible for either immediate expensing or bonus depreciation before year end.

  • Bonuses to certain business owners must be paid by December 31, 2017 to get the deduction in 2017. Accrual-basis businesses can generally accrue non-owner bonuses and still deduct them in 2017 as long as they are actually paid by March 15, 2018. Cash-basis businesses generally must pay all bonuses in 2017 to get the deduction in 2017.

  • 100% Bonus depreciation for both new and used property would be retroactive to items purchased and placed after in service after September 27, 2017.

  • Cash basis entities - Pay any business meals for employees and entertainment expenses in 2017 rather than waiting until 2018

  • Reconsider entity choice – S corp vs C corp – this will require analysis.

Beyond these immediate concerns, we have included the key provisions of the tax reform as highlighted by Charles Schwab

Changes to Individual Tax Rates & Brackets

  • No changes to capital gains and dividends: Capital gains and qualified dividends would continue to be taxed at the current 0%, 15% and 20% rates, depending on income. Wealthier filers would continue to pay an additional 3.8% tax on investment income, known as the Net Investment Income Tax.

  • Increased standard deduction: The standard deduction would nearly double, to $12,000 for single filers and $24,000 for joint filers.

  • Increased child tax credit: The per-child tax credit would double from $1,000 to $2,000.

  • Increased exemption for Alternative Minimum Tax (AMT): The AMT would be retained for individuals, but the exemption and phase-out amounts have sharply increased. Consult a tax advisor for more details on how this provision could apply to your situation

  • Mortgage interest deduction: Individuals would be allowed to deduct interest paid on new mortgages (issued after Jan. 1, 2018) of up to $750,000. That’s down from the current cap of $1 million. The deduction would also apply to second homes, but not for home equity lines of credit.

  • State and local tax deduction: Taxpayers would be allowed to deduct up to $10,000 in a combination of property tax and income tax (or sales tax).

  • Estate tax exemption doubled: Estates of up to $11 million (or $22 million for couples) would be exempt from taxation.

  • Numerous other deductions and tax credits repealed: The bill repeals deductions for tax preparation, moving expenses and alimony payments, among others.

  • Expiration of most individual tax provisions: Virtually all of the provisions that apply to individuals are set to expire at the end of 2025. A future Congress would have to vote to extend them, otherwise, they would revert to 2017 levels.

  • Repeal of the individual mandate: The bill repeals, beginning in 2019, the requirement set by the Affordable Care Act that individuals purchase health insurance or pay a penalty.

  • Preserves deduction for medical expenses: Medical expenses above 7.5% of adjusted gross income would be deductible in 2017 and 2018. Beginning in 2019, that would rise to 10%.

  • Reduction in the corporate tax rate: Corporations would be taxed at 21% beginning in 2018, down from today’s top corporate rate of 35%.

  • Reduction in taxes for “pass-through” businesses: Most so-called “pass-through” businesses, such as S corporations, limited liability corporations, partnerships and sole proprietorships, including those owned by trusts, would be allowed to deduct 20% of their income. There are special rules for certain types of services businesses. This provision is extremely complicated. Investors should contact their tax advisor for details.

Other issues of particular interest to investors:
  • No changes to cost-basis rules: The Senate version of the legislation would have required investors to use the “first in, first out” (FIFO) method when calculating their cost-basis for stock sales. That provision was dropped from the final agreement. Investors will continue to have the ability to choose which lots of stock they are selling.

  • Expansion of 529 college savings accounts: Up to $10,000 per year of money in a 529 college savings plan can be used to pay for K-12 school tuition.

  • No major changes to retirement savings accounts: Contribution limits to IRAs, Roth IRAs, 401(k)s and other retirement plans were not changed.

The above list and video are not all-encompassing and more importantly, needs to be discussed with your tax professional.  We do not hold ourselves out as tax professionals, and we recommend consulting with your tax expert based on your particular circumstances. In our opinion, tax advice and investment advice should come from separate sources. The only thing worse than Bernie Madoff managing your money would have been Bernie Madoff managing your taxes as well.  However, our job as your dedicated investment team is to manage your investments well and optimize efficiencies.  These are important discussions to have and we would not be doing our job if we failed to encourage you to put the puzzle pieces of your financial life into the correct tax positions.
Best wishes for a peaceful, happy, and prosperous 2018!

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