The Holiday Wrap Up

The Holiday season is upon us and I don't know about you, but it seems to have shown up rapidly this year. Where does all the time go? As in prior years, this will be my last post for the next two weeks. I'll still be hard at work through year-end, but I'm trying to carve out a little extra time with family.

If we don't talk beforehand, I wish you Happy Holidays and success in the New Year!

With gratitude,
Brandon

Congress is set to vote on its tax overhaul legislation this week, with the House today and the Senate soon after. Even though nothing is etched in stone yet, let's review several of the interesting and lesser-known provisions from the final draft released on Friday.

FIFO – Fortunately for individual investors, mandating first-in-first-out, or FIFO, treatment when realizing capital gains didn't make it into the final draft. As I noted last week, this would have disproportionately impacted "retail" investors for a puny amount of tax revenue relative to the total cost of the bill. By my fuzzy math, the gain to the Treasury from mandating FIFO would have been about 0.28% of the projected $1 trillion deficit addition created by the tax cuts. But to many investors it would have felt much larger.

Chained CPI – The use of this new inflation measure for indexing tax brackets will be made permanent beginning 2018. As I discussed a couple of weeks ago, this change should lead to so-called "bracket creep" as tax brackets rise slower than wage growth, pushing some taxpayers into higher brackets. This should lead to higher taxes for many over time which, consequently, helps pay (at least on paper) for the tax cuts now. Ironically, average tax rates could end up being higher for middle- and lower-income earners after 2025, due mostly to the individual portion of the tax bill "sunsetting" at that time, and the use of Chained CPI.

SALT – The deduction for state and local taxes, known as SALT, has garnered a lot of press attention, but there's an important detail. The plan is set to allow deduction of up to $10,000 in state local taxes, combined. Unfortunately, since this is combined, $10,000 doesn't go very far in higher tax states like ours.

One consideration before year-end is to pay 4th quarter state estimated taxes, and even state income taxes for 2017, before 12/31. This would pull the expenses into 2017 and perhaps allow for more of a deduction than waiting until 2018 to pay. Unfortunately, this wouldn't work for prepaying 2018 taxes.

HELOC - Interest will no longer be deductible for proceeds that are used for personal expenses, such as debt consolidation, buying cars, paying for college, etc. Proceeds used to do work on your primary residence or buying a primary residence, will still be deductible and would get added to the new $750K combined debt limit we've all heard so much about. One wonders how they'll know what you're spending the money on, but I digress... Fortunately, this only applies to new HELOCs.

Tier 2 itemized deductions – Unless they are directly related to a business, there's no more deducting CPA fees, home office expenses and other random non-employer reimbursed expenses, moving expenses, and... financial advisor fees. With the higher standard deduction this won't impact the average person anyway since they won't itemize, but it's something to remember. For advisory fees, if you've been lumping fees on IRAs into a taxable account, it may make more sense to have each account pay for itself starting in 2018.

Roth Recharacterizations – This tool will also be going away with the new plan. Going forward, investors will want to ensure any Roth conversions they do are warranted and done correctly, as they won't be able to have a do-over later via recharacterization.

529 Plan changes – In an exciting twist, 529 money will now be available for private, faith-based, and even homeschooling expenses for students at any grade level, up to $10K per year in distributions. This dramatically extends the range of 529 plan savings and is long overdue. Additionally, this change opens up the concept of 529 plans to parents and others who didn't necessarily want their savings to be restricted to future college expenses.

All told, the draft legislation is a weighty 1,097 pages and the "explanatory statement" that goes along with it is 570 pages. There's lots of information contained in the documents that will trickle out in the coming days and weeks (even months). As we get into the new year there will likely be technical tweaks as well. While some parts of the tax code were simplified, others seem way more complicated. Hoping to do your taxes on a postcard starting in 2018? No chance.

Have questions? Ask me. I can help.