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Quarterly Letter

Fourth Quarter 2017

What Happened to Tax Reform?

When I began my career as a tax consultant at PricewaterhouseCoopers more than 30 years ago, one of my first major assignments was to become the office expert on the Tax Reform Act of 1986. This law was the capstone of the so-called “Reagan tax cuts.” It greatly simplified our tax system and decreased our top marginal individual income tax rate (which had been 70% in 1980) to 28%. The tax act was a bipartisan effort – officially sponsored by Democrats in both the House and Senate. It was also revenue neutral (President Reagan promised to veto any bill that increased the deficit) with the tax cuts offset by closing loopholes and shifting some of the tax burden to corporations.

In the ensuing three decades, frequent tax law changes have wiped out the tax simplification benefits achieved in the 80s and left us with a tax code of staggering complexity with a mishmash of deductions, credits, phaseouts, limitations, and the dreaded Alternative Minimum Tax (AMT). Given the unanimous consensus that we desperately needed to reform our tax code, I was optimistic early last year when Congressional leaders promised Reagan-style, revenue neutral tax reform where we would all be doing our tax returns on a postcard.

Unfortunately, the Tax Cuts and Jobs Act that was signed into law in December by President Trump does not resemble tax reform; we will not be doing our tax returns on a postcard anytime soon. Any progress toward simplification and fairness (such as an increase in the standard deduction which will reduce the number of itemizers) is more than offset by complicated new deductions and loopholes. Even low hanging fruit for reform like the “carried interest” loophole, which Candidate Trump repeatedly promised to eliminate, came through the process intact. This means that a New York City police officer will continue to pay a higher tax rate on his income than a hedge fund or private equity manager. To make matters worse, the AMT lives on. This fiendishly complex shadow tax system, that was eliminated in both the House and Senate bills, somehow came back to life in the Conference Committee and found its way into the final bill.

Congress also abandoned the plan to make the tax bill revenue neutral. The Congressional Budget Office (CBO) estimates that the plan will decrease government revenue by nearly $1.5 trillion. Even under optimistic estimates of economic growth, the federal deficit is projected to increase by more than one trillion dollars.

The tax bill provides for a significant permanent tax cut for corporations (with the corporate tax rate dropping from 35% to 21%) and a temporary tax break for most individual taxpayers. The individual tax cuts expire at the end of 2025 (so as not to increase the deficit beyond $1.5 trillion).

The actual bill runs over 1,000 pages but here are a few highlights of the individual tax law changes:

  • Lowers individual tax rates with a maximum rate of 37% - down from the current 39.6%
  • Increases the standard deduction to $12,000 for individuals and $24,000 for married couples
  • Eliminates the personal exemption
  • Limits the write off for state and local income and property taxes to a combined $10,000
  • Limits the home mortgage interest deduction to debt of $750,000 - down from $1 million
  • Eliminates the deduction for miscellaneous itemized deductions
  • Adds a 20% deduction for certain pass-through entities
  • Doubles the estate tax exemption to more than $11 million per person

The new law presents some planning opportunities for 2018 and beyond. For example, given the new limitations on itemized deductions, it will make sense for some taxpayers to “bunch” as follows:

In this example, by bunching two years of contributions into 2018 (and utilizing the standard deduction in 2019), you would generate an additional deduction of $ 9,000 over two years. A donor advised fund can be an excellent vehicle for bunching charitable contributions.

We can also minimize the impact of the elimination of the deduction for miscellaneous itemized deductions (which includes investment expenses). Beginning in 2018, we will debit an IRA account for its portion of the      investment management fee. Given that this is tax-free, it essentially preserves the tax deductibility. As part of our rebalancing this week, we have freed up cash in IRA accounts for this purpose.   

All-in-all, there is a lot to digest in the new bill and given that it was passed very quickly with little public scrutiny, it will take weeks to fully grasp the full impact. As we continue to review the new law we will keep you posted on any additional planning thoughts for the new year.   


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Please contact us if you have any questions or comments or if there are any changes in your financial situation.  We appreciate your continued trust and confidence.


Stanley P. Dyl



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