2017 Tax Bill Review, Part 1

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I have some good news and some bad news. The good news is a certain unnamed accountant will do rather well over the next several years with the new tax code. The bad news is you will not.

The current tax bill on the verge of becoming law will make an experienced tax professional more important than ever. Worse, you’ll have no choice. You’ll either pay an increasingly overworked experienced tax professional or overpay your taxes. Either way you pay.

As for me, I was busy enough. I didn’t need more busy work. The tax bill is 500 pages with handwritten notes in the margins because it is being pushed so quickly toward passage. You know what they say? Fast is better than good.

The ink hasn’t dried and new ink is still being added as I write, but the tax bill is almost certain to become law now. There are plenty of surprises to discuss. A few issues are still up in the air; I’ll cover those in a future post.

For now I want to provide a guide as we head into the last month of the year. Some issues in this tax bill are effective (if passed and signed by the President) on varying dates in 2017. Since planning is not possible I will skip those items for now.




The Craziest Tax Bill Ever

Over three decades of experience and I had to live long enough to see this. We can debate the merits of the economic benefits of this bill, but the truth is brutally painful.

Pass-through businesses (partnerships and S-corporations) will see tax relief. More than ever small business owners will need to organize as a pass-through. Even taxpayers will smaller amounts of side gig income will need to have a serious conversation with their tax professional to determine if an entity is right for them.

I’ve seen (and heard) a few different versions of the pass-though deduction. Since the hand written notes were not available to me before publishing I refrain from giving exact numbers. Last week Tuesday and Wednesday I was in training and plenty of time was used to discuss the potential tax changes. As crazy as it sounds, one short week later and part of my training (and two days of my life) are obsolete.

The wealthy will benefit the most from this bill. Tax brackets are coming down for individuals at the upper end of the scale while the lowest tax bracket goes up from 10% to 12%.

The standard deduction is going up and exemptions are going away. When you’re done playing the end result is nil. Families with children will see a higher Child Tax Credit. I ran several illustrations on the Senate proposals late last week and many typical situations will result in a tax increase!




Bad for Business and Bad for the Economy

Small business owners might be jumping for joy at their tax reduction. However, it might be wise to delay the celebration.

Yes, pass-through entities will see a tax reduction, but if customers pay higher taxes who will drive sales? That is the catch-22 of this tax bill. High income/net worth individuals will keep more of their income while the middle class and poor are gutted.

The argument goes back to the old “trickle-down” theory of thirty years ago. It didn’t work then and it’s doubtful it’ll work now.

Wealthy people don’t spend more just because they get a tax cut! They’re rich. They wouldn’t be rich if they spent every penny they made.

The middle class and poor spend a larger percentage of their income just to meet necessities. A tax increase for the middle class and poor means an immediate decline in spending!

Your favorite accountant will enjoy more income and lower taxes from this bill. However, I will NOT pay higher wages based on my tax rate! (Sorry to any employee reading this.) I pay higher wages for higher profits! Wages are deductible so profits, not tax rates, drive wages! Congress is wrong, lower tax rates will not increase wages. It’ll just add to the deficit and probably cause higher interest rates.

Most small businesses will have it worse since they are not in the tax services business. In fact, I predict the only two groups of small businesses who will win with this tax bill are tax professionals and businesses who cater to the very wealthy. How can it be any other way?

Don’t be fooled by the news reports. The economy might have a minor upward blip, but it will be short-lived as spending from a serious percentage of the population is pressured by higher taxes. As for me, don’t expect me to spend more based on a tax cut. I don’t spend all I earn already and encourage you to undertake the same habit.

More than ever, a frugal mindset will be needed to navigate the course of the next many years.

Stock Market

The last I saw the corporate tax rate will be reduced to 20%. I also heard there could be an upward adjustment to this.

Investors will benefit from a lower tax rate for corporations in some industries. Tech will not do as well as first thought. My largest investment, Altria, will probably do very well. Pharma will also have mixed results.

The reason the lower corporate tax rate will not lift all large corporate boats equally is because of the lie the American people have been sold for years. We have been told time and again that the U.S. has the highest corporate tax rate in the world.

There is a kernel of truth to the statement. What the lie involves is the “real” tax rate after all deductions and credits. Then the U.S. is decidedly in the middle to slightly below the centerline.

The lower tax rate and bonus depreciation brings back the Alternative Minimum Tax for corporations last I saw, but it looks like an accidental effect and could be resolved in committee before the law is passed.

Some companies, like cigarette company, Altria, will do well under the new tax scheme. Altria pays at the top 35% tax bracket under the old law. If the 20% top corporate bracket holds Altria and other major corporations paying a larger portion of their profits in taxes will see benefits. However, many large corporations already pay a lower rate.

Note: I do NOT buy a stock based on tax rates! This is not a recommendation to buy stocks of companies paying near the highest tax rate under the old law. Any tax benefit will be short-lived. Once the reduced tax cost is digested profits from continuing operations and cash flow will determine a corporation’s value.

The bill also requires first in, first out accounting on sales of stocks and mutual funds. This will make tax-loss harvesting more difficult.




Republicans Hate Jesus!

Never mind the provision allowing 529 plan funds up to $10,000 for private and religious schools. Tapping into a 529 sooner means there is less tax-free gain to accumulate! Since 529 plans are only deductible on state tax returns in a limited way, the only real benefit on a federal return is the tax-free growth. Unfortunately, if you allow withdrawals earlier for primary and secondary education, there is less benefit. It might not even be worth the effort. And the money earmarked for higher education will be diminished.

What surprises me the most in all the proposed bills is the damage non-profit organizations will face. When the standard deduction is increased to offset the elimination of exemptions there will be consequences. Limits will be (likely) placed on the amount of mortgage interest deductible. The same for state and local taxes.

This means Schedule A will be used a lot less in the future and contributions to charity are claimed on Schedule A. Though charitable giving shouldn’t be predicated on tax implications, it frequently is.

Small businesses can promote their favorite charity through sponsorships, but individuals will see less, or no, benefit from their charitable contributions. I expect churches will feel the squeeze as more people discover their tithing translates into a tax increase!

Donor advised funds may allow for a larger charitable gift deduction in a particular year, but the higher standard deduction will always diminish its true value. The same applies to charitable remainder trusts (CRT). There could still be estate tax reasons to use CRTs. But, the estate tax is virtually eliminated.

It will be interesting to see how this plays out when politicians meet angry parishioners at church on Sunday. I don’t think many people have a clue how non-profits will be affected by the tax law changes.




More Good and Bad News

The Child Tax Credit is expanded to age 17. Buuuut. . . it expires in 2024. That is a recurrent theme in this bill. Corporate tax cuts are permanent while individual cuts are temporary.

Kind employers (like me) can’t even be nice to our employees anymore. Employers in the past could have incentive rewards. Small gift card rewards were tax-free. Not after the end of 2017. Corporations with billions in profits see their taxes decline nearly half while employees can’t avoid tax on a $25 or $50 gift card! If you had a warm and fuzzy feeling I bet by now it’s gone.

A Family Leave Credit was added at the last minute. Buuuut, it only counts for certain states. Talk about insane! It seems the family leave provision is only allowed on the federal return if the state doesn’t have a similar provision. My guess is states will adjust so the federal credit applies in their state, too.

This brings up another interesting topic. It seems the Republicans have built a tax code to punish blue states. California, New York, New Jersey and Massachusetts will suffer greatly under the new tax proposals. The problem is these states contain the largest percent of our national economy! California is ~13.7% of the U.S economy alone.

And these states have the highest populations. The tax bill is designed to hurt a large portion of the national economy. What could go wrong? I predict the next recession starts and spreads from these economic growth centers.

SMH

I wish I could offer better news. This tax bill is the biggest mess I’ve seen in my career.

There are plenty of solutions. I’ll wait until the ink dries from the President’s pen before giving advice so I know it’ll stick.

I’m an optimist. I think this tax bill is so riddled with holes I’ll be able to drive a Mack truck through it. My guess is the law will not last long as the deficit balloons out of control and the economy stutters. In the mean time I’ll do everything in my power to help you maximize your results.

Stay tuned.

When you’re born you get a ticket to the freak show; when you’re born in America you get a front row seat. —George Carlin



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Keith Schroeder

54 Comments

  1. JOHN MARINO on December 4, 2017 at 7:46 am

    Mr. CPA – this tax bill help drive our GDP over 3% vs the under 2% we’ve had the last 8 years. Think ‘bigger picture’ on this tax bill!

  2. Chris on December 4, 2017 at 7:54 am

    Living in Pennsylvania, we have medium sized income taxes, and medium plus property taxes.
    The state has been fake debating about getting rid of property taxes. I say fake because everyone says they want but the reality is property is more reliable (we have to live somewhere after all) than income (if someone loses their job, and eventually there house someone else will buy it).

    I like the idea of companies repatriating their money back home. When money comes home, it can only help IMO.
    I have an S-Corp so I figure I can’t be worse off. The amount of money I pay in taxes while struggling to pay for 12 years of college in a row (thanks honey) makes me physically ill.

    Some people believe save for retirement first, but if you are aiming to retire early someday, I find it difficult to let my children pay (loan) for college, except for some small skin in the game.

    I really enjoy your site, look forward to a review of what if anything actually becomes law.

    • Keith Schroeder on December 4, 2017 at 8:49 am

      Chris, the reduction in tax on repatriation is a first step to a territorial tax system, something I approve of.

      • Josh Lester on December 5, 2017 at 1:13 pm

        Keith, can you go into this more at some later date?

  3. WCRN on December 4, 2017 at 8:01 am

    Maybe I am a simpleton, but as a non-itemizing, average wage earner living in NY with one child this seems to put money into my pocket.

    • Keith Schroeder on December 4, 2017 at 8:54 am

      WCRN, some people will see a tax reduction, others will not. Facts and circumstances always apply. There will be winners, but the large number of losers will have a larger effect on economic performance. Most losers will come from the middle class and poor where they spend all their income. Reduce their income and they have no choice but to spend less. I’m in the 1% and will do very well. Unfortunately some of my clients will not.

  4. Dan Wick on December 4, 2017 at 8:19 am

    Seems like a little overkill on bashing this tax bill. “This tax bill is the biggest mess I’ve seen in my career.”

    Did you forget healthcare?

    • Keith Schroeder on December 4, 2017 at 8:55 am

      This is a tax bill, not a healthcare bill. We shouldn’t confuse the two.

      If there is a worse tax bill in the last 30 years I’d like to know. Congress didn’t take the time to produce a good bill. They wanted fast to get “something” done. There are plenty of good ideas, but this bill has too many holes. One analyst I saw this weekend feels China and Germany will do better with this bill than Americans. I think he is wrong, but he brings up a good point. The rushed tax bill has problems that will need to be addressed as the problems will start faster than most understand. Even Reagan’s 1981 tax overhaul needed one more go in 1987. Those were good tax bills with time and thought applied before application.

      • Chris on December 4, 2017 at 1:21 pm

        Actually, it’s also a health care bill. Removing the individual mandate will have a big impact. There is also talk of changing Medicare, Medicaid, and social security to balance the spending.

      • Jim on December 4, 2017 at 2:11 pm

        Actually the Aca was the largest tax bill in my life. It expanded the Medicaid system substantially. Just last week I was informed that in Alaska we will begin seeing 3 percent increases in premiums every year for the next ten years. Also Medicaid premiums will expand at the same rate but will not be paid by the Medicaid recipients but rather the taxpayers. The estimates are 7k for a family of 4 additional in premiums at the ten year period end. Add in another 7k the average family will pay in taxes for the Medicaid recipients and you have 14k of extra payments coming out of my pocket in 10 years. That combined with my already increased premiums thanks to Obamacare have been the largest tax increase in my working career. Currrntly my wife and I are trying everything in our power to eliminate our debt and live off the system as the Medicaid system here is far superior to our benefits. Add that into the fact that 42 percent of bankruptcies in the United States are due to medical bills, we would be morons to continue to work when Medicaid will pay for all healthcare bills including airline transportation. One major injury or illness would bankrupt us, causing us to lose our home and everything we have. So again why work ? We can’t go bankrupt over medical bills if Medicaid pays for everything. It makes no sense for us to continue to work and pay into the system when the system we pay into benefits those who wont work more than the working class. Any legislation via the government (Obamacare) that takes money out of my pocket is inherently a tax regardless if you call it a tax.

      • Dan Wick on December 4, 2017 at 5:27 pm

        I am thinking the Supreme Court confirmed that the ACA was a tax levied instead of a mandate.

  5. Scott on December 4, 2017 at 8:41 am

    2 kids single income here and my federal liability will be 60% lower in 2018.

    • Keith Schroeder on December 4, 2017 at 8:57 am

      There is more to your story, Scott. Nobody, including major corporations, are expecting 60% tax cuts. Either your circumstances have changed or you are reading the bill wrong. I read that 500 page mind number. I also have enough experience to see its effects. Unless the facts change for an individual, the tax reductions will be very small in the few cases it happens unless your tax bracket is over 25%.

      • Scott on December 4, 2017 at 9:18 am

        My circumstances have not changed. I’ve created a forecast for my liability under current law, the house bill and the senate bill. I could show you my calculations if you’re interested. I was itemizing before but now I’ll be taking the increased standard deduction. Most of the reduction of my tax liability comes from the Child Tax credit (which the house version of the bill calls the Family Tax credit now).

        Btw, the Senate plan keeps the 10% bracket. You mentioned above that they are removing it…the new 12% bracket was previously 15%.

        • Keith Schroeder on December 4, 2017 at 9:34 am

          I don’t have time to work everyone’s numbers. Scott, so I’ll pass on he review. I hope you read the actual bills (over 1200 pages if you read all the bills with amendments) so you didn’t miss the cause and effect issues. The higher standard deduction is offset by the elimination of exemptions. This is a zero sum game right out of the gate. The CTC has been all over the place. If they go to $2,000 AND make it refundable a few more people will benefit by around $8 per week per child. If is stays at $1,600, not so much. Another slight change depending on the tax bracket of the taxpayer.

          You misread the lower tax bracket issue. The House bill combined the 10% and 15% bracket into a 12% bracket. Last I heard that was staying at 12%. I could be wrong on that count as committee may adjust this or it might have been penciled in. The changes hand written into the margin of the bill are unavailable to me at this time. I can only go off what I get second hand, always a bad policy.

          I think the confusion will decline once we get the final bill. At least my work will be exciting for a few years. (And they say accountants don’t know how to party. Like 1999, baby! 1999!)

          • Scott on December 4, 2017 at 9:59 am

            Hey, I’m a CPA as well…but I’m in a corporate job..so I don’t follow the tax code too closely (unless it impacts me, of course). And yes, we sure know how to party hahaha… this is exemplified perfectly in the low cost of term-life insurance we can buy from the AICPA (which I believe means they think accountants are less risky…less fun?)

            Yeah, it’ll be interesting to see how they reconcile the 2 bills. The CTC in the house plan also allows you to take a $300 credit per spouse…while the senate plan says $500 credit per non-child dependent. I’m just curious which version you were using when you wrote the article. Because you’re right if they remove the 10% bracket like the house plan did, then my tax liability will only go down negligibly.



          • Keith Schroeder on December 4, 2017 at 10:08 am

            Scott, I did what any respectable tax professional would do, I combined the two bills and picked what I felt was most likely to pass committee. I could have used the Senate bill, but I felt a hybrid would be wiser. Or, maybe I should have waited until the bell tolled before I opened my mouth. I’m getting plenty of backlash. Oh well, so much for my plans today.

            Readers, review the last paragraph in Scott’s comment. This is important if you are estimating your potential tax changes. I did NOT cover this issue in the post.



          • Scott on December 4, 2017 at 10:19 am

            I enjoyed the review! Thanks for writing! This is why it’s only part 1, right??



          • Keith Schroeder on December 4, 2017 at 10:26 am

            Part 2, 3, 4 . . . will be actual law and will be narrowly focused topics. Ie. I want to discuss the new rules for S corps and the deduction amount. This will be an ongoing series as any significant tax law change will do to this blog. It was quiet for several years. Now we get fireworks. It’s the only way for someone like me to remain gainfully employed.



  6. CY on December 4, 2017 at 9:18 am

    Hi Keith,
    You sound pretty grim. I agree about the longer term implications since all of the benefits for individuals have expiration dates after a few years. I’m in the beginning stages of negotiating the purchase of an event planning business (expos/conventions), but considering that the large majority of the attendee base is middle class, I’m a lot less excited now that the implications are a significant reduction in discretionary spending for the target audience. Is this a terrible time to be considering a business venture?

    • Keith Schroeder on December 4, 2017 at 9:24 am

      I’m not as grim as you might think, CY. I think the tax bill is rushed and it shows. I don’t see how churches survive unscathed. The promise of higher wages by reducing C corp taxes is overstated. At least 10% of taxpayers will see a tax increase and they all reside in the middle class or poor.

      The final proof of how bad this bill is in the implied economist support. Several of the names touted as supporting this bill don’t exist! The universities they are supposed to work for have no record of them working there. A Google search shows no background on some of these people. I might be wrong (it’s happened before), but my 3 1/2 decades of experience tells me to fasten my seat belt. I recommend you do the same.

  7. Todd on December 4, 2017 at 9:24 am

    Great article! Who will benefit from a reduction in corporate taxes is a question of competitive advantage. Companies with a larger moat will be able to capture the benefit. Companies with no moat will see the benefit competed away and lower prices passed on to its customers. Buffett did a great job of explaining this in one of his older letters.

    • Keith Schroeder on December 4, 2017 at 9:42 am

      Todd, that is why I added the note in the post about not buying a stock based on tax rates. Buffett was right.

      The winners from the tax cute for corporations are the largest shareholders. I would expect the windfall to increase share buybacks and maybe a slight dividend increase. This has been the policy of public companies for a while now so expecting different is wishful thinking. I think the love-fest is short-lived due to higher deficits.

      The stock market rally could suffer if interest rates and/or inflation increase because a hot economy was stimulated. I have to crystal ball looking into the future. I agree with Buffett that America will do fine. But there could be some pain along the way.

      I know I offered a modest economic outlook with a tax bill. (Shame on me.) But I feel my job is to inform. I always wanted this blog to be a view from my side of the desk. This is what I see. If you wait a bit my opinion will change as this thing unfolds. It’s how the game works.

      Thanks for the insight, Todd. I like the moat analogy.

  8. Jeff on December 4, 2017 at 9:41 am

    Would you agree that our marginal tax rates are ridiculous? When every 100K extra starting at 400K is taxed at 40%, it’s not fair. What is the incentive to grow? Paying $40,000 to keep $60,000? And I really despise the term “rich tax cuts” when it’s 40% going to %35 or even the pass-through being taxed at 20%. If I were only paying %15 at the upper end, no, I wouldn’t need a cut.

    Are you in favor of a flat tax at all? (I’m OK with first 30-50K being tax free)

    • Keith Schroeder on December 4, 2017 at 9:51 am

      I agree 100%, Jeff. That is why this bill is so insane! Those tax cuts for individuals are temporary!!!!!! while corps get permanent relief. Under this plan you better save your tax savings. They’ll be needed later to pay off the federal deficit, plus interest.

      Interesting you ask about a flat tax, Jeff. We almost had a flat tax in the 1980s. There were two brackets back then: 15% and 28%. How did it feel? Me too. I’m not hung up on a flat tax, but like your tax-free statement. If I were an oligarch I would increase the standard deduction to $50k for individuals, $75k for HOH and $100K for married couples. Most deductions would be gone and capital gains (and qualified dividends) would not have special tax rates. I think Reagan was on to something with two brackets. I like it and would go back to it. Corporations would be taxed on territorial income (instead of world income) at a flat 25% from dollar one with most tax credits/incentives gone. It would be simple so it’ll never be tried.

  9. MB on December 4, 2017 at 9:51 am

    Thank you for the analysis. Yeah the current tax bills are horrible. Why on earth they would want to upend the live-in fix and flip is beyond me. The current bill promises me a 5 figure tax bill this next year from this change alone. It is like they are intentionally trying to kill the great bull market we have been having.

    • Keith Schroeder on December 4, 2017 at 9:55 am

      I didn’t mention that little groin kick, MB! For those who don’t know, the primary residence exclusion (Section 121) is probably changing. The 2 of 5 year rule to avoid tax on gains of $250k or less per person is changing to 5 of 7 and if memory serves (it doesn’t) the exclusion amount is adjusted. I’ll write more about this when the ink dries and hopefully have some solutions.

    • KDC on December 4, 2017 at 12:10 pm

      Correct me if I’m wrong, but by “live-in fix and flip” do you mean buying a fixer-upper, living it a couple years while you fix it up and then re-selling it while basically being untaxed on the increase in value from the work you put into it because it’s your primary residence? Actually, closing that loophole feels like it makes the tax code more fair to me. The extra time you put into fixing up the property is basically side-hustle income, so the fact that it’s totally untaxed right now feels like a problem.

      • Jover on December 4, 2017 at 4:49 pm

        KDC, what you’re missing is that eliminating this advantageous opportunity helps no one. Leaving it in place helps remove blighted properties and making them desirable again.

        • Josh Lester on December 5, 2017 at 1:43 pm

          Agree. Also, you get the same benefit if you pay someone else to work on your home and it goes up in value. Are you actually excited about paying taxes next time you have to move, even if you did nothing but watch prices rise? Remember that not only did you make money when you sold, but you now have to pay more the next place you go. Why should I be penalized because and can and enjoy working on my own home? Its not a side hustle, I just refuse to pay someone for something I am better at.

      • KLG on December 15, 2017 at 1:04 pm

        One of the larger issues we face with ageing suburbs and urban neighborhoods is properties that are in decay. This kind of a credit creates an incentive for individuals who are doing a huge service to the neighborhoods they live and work in by keeping property values up, thus keeping property taxes more stable. I think this has a value to the community in a way that couldn’t be offset by them paying the taxes and it having to go through the bureaucracy to give any benefit.

        Now this is just my not quite well informed opinion but there is a lot more to the “fairness” of it that isn’t reflected in taxed earnings.

  10. Mr. FWP on December 4, 2017 at 11:06 am

    Thanks for this, Keith. Interesting to see your perspective. I suppose we’ll see what makes it into the ultimate bill.

  11. JS on December 4, 2017 at 11:39 am

    Thank you for your analysis on this topic. Do you have any thoughts on this tax bill changing a household’s decision to put retirement money away pre-tax vs. post-tax? My household has tried to maximize pre-tax retirement accounts with the belief our tax bracket will be less in (early) retirement. With these tax cuts happening now and adding to the federal deficit, I am increasingly concerned that the bill will come due later in the form of much higher taxes for households. Tax cuts, deferred infrastructure maintenance and investment, underfunded public sector pension and retiree health care benefits…the bill for all of these items is coming due with seemingly less and less money to pay for them.

    • Keith Schroeder on December 4, 2017 at 11:52 am

      That is a tough question, JS. Each situation is different. Does increasing 401(k) contributions at work affect other credits? This and other considerations need to be reviewed before a plan is put in place. If Congress cuts spending many of the proposed tax cuts could stick around. However, there are only three things big enough to make a difference: defense, Social Security and Medicare. All tough calls and with significant fallout.

      • Gene on December 4, 2017 at 1:45 pm

        Could a future article be written on the topic of pre-tax vs post-tax? While each situation may be different, a article on what to factor in, might be of use to some. It is one of the two areas I struggle with in my personal finances. pre/post tax, and to pay off the house or not.

    • Mike @ Balanced Dividends on December 5, 2017 at 7:07 am

      This is a great question, JS. As Keith mentioned, each situation will be different for each respective individual. Sometimes leveraging multiple account types (pre-tax, post-tax, and/or taxable) enables one to utilize savings / investments in different ways.

      Overall, no one knows what taxes will be in 5, 10, 15, or +20 years – not even next year yet.

  12. Lynn on December 4, 2017 at 11:56 am

    Thank you for this. I’ll be looking to the definitive versions, on the edge of my seat, like many are right now. Close to retirement, deciding when and wear to purchase a retirement residence, reallocating positions in my portfolio out of concerns for the danger zone years of early retirement and as a full time teleworker living in a HCOL area, curious to see if unreimbursed employee expenses are a thing of the past. Lots to consider…at least I am in company.

    Again, thank you.

  13. OOP Finance on December 4, 2017 at 1:04 pm

    Thanks for the summary. I do want to raise a point regarding the change for incentive awards. I’m not sure if you’re arguing that the $25 gift card isn’t taxable because it is an employee achievement award as opposed to a fringe benefit under 132. In the case of the latter, it’s my understanding that cash or cash equivalents like gift cards are always taxable. I know there’s a rough rule of thumb that de minimis fringes up to $75 may be excluded for tax purposes, but it doesn’t apply to cash or cash equivalents.

  14. John on December 4, 2017 at 3:57 pm

    Thanks for the quick summary. As you said, this tax bill was not very well thought through. If you have a small business, you definitely need a CPA now.

  15. Ryan on December 4, 2017 at 5:22 pm

    Keith,

    Did you or anyone else see a mention of limiting the aggregate contributions of 401k, 403b, etc to include 457 plans? I hope they left that part out!

    Ryan

    • Keith Schroeder on December 5, 2017 at 7:38 am

      I believe the Senate version left retirement accounts alone and the House bill removed it at the last second. In my training class last week they said it was removed from both bills so we are probably safe.

  16. Fiby on December 4, 2017 at 7:12 pm

    And that’s not to mention the house version of the bill, which repeals the provision exempting tuition waivers from tax.

    As a PhD student receiving a tuition waiver, my tax bill stands to skyrocket under the House version. Thankfully, for now, the Senate bill does not repeal the tuition waiver exemption

  17. Yaacov on December 4, 2017 at 11:41 pm

    Hey Keith,

    thanks for the review.
    You mentioned a FIFO accounting method for stocks unde the new bill. Do you remember if this was in the house or senate versions?

    If this does come to actual law, the best course of action would be to buy different ETFs that mimic the same index, thus creating a synthetic-LIFO. Basically every 5 years or so you would change up the ETF youbare buying, and then come liquidation time, pull the ones that were bought last. Suprisingly this has comparable results to max-loss.

    • Yaacov on December 4, 2017 at 11:44 pm

      Writing this because I forgot to tick the “Notify of upcoming comments” box. Feel free to delete.

    • Keith Schroeder on December 5, 2017 at 7:43 am

      Yaacov, I think the biggest hit from FIFO is to the tax-loss harvesting industry.Betterment and Wealthfront will have a reduced value.

  18. Mimoza on December 6, 2017 at 7:50 am

    Finally I was able to ready an article with ‘meat’ (not the fluff and air) even though it’s not final. Sorry, Keith, you don’t mince words and I’m a straightforward person myself, so I wanted to praise this article because it was ‘more to the point’ (for my taste buds LOL)…

    Since I’m not a tax professional, these few things caught my attention in your article. I hope you can explain more.

    Why will tobacco companies will benefit much more than technology companies? Could you give a ‘broad brush’ explanation so I grasp the distinction between the two business models?

    A lot of ER folks become bloggers, how will the tax bill affect them that they’d need to reorganize the legal form of their business? Or did you mean different kind of small businesses? Could you elaborate a little bit more? I remember media writing long time ago that Mr. T’s whole business is a galore of pass-through entities, so I’m sure this will work just fine for everybody else ;-). I agree that people were duped big time believing that he’s a pro-business. Yes, he is, but we’re talking Wall Street size businesses, not mom-and-pop shops. And yes, it will be good for some short term but that’s “common sense” in the USA to kick the can further and blame somebody else later… The conservative right colleagues at my work place also will not understand the tax math affecting other families because this tax bill will benefit their families. They’re all in the 50’s with grown up kids, perhaps not much mortgage interest to claim anymore. So they’ll get a tax refund just because of the new standard deduction. It will be definitely different for working couples with 2 kids (maybe one of them in college). Their taxes will increase most likely and will not receive any benefits for helping their children with college education.

    Thanks in advance.

    • Keith Schroeder on December 6, 2017 at 7:58 am

      If tech companies are paying an effective tax rate of 12% (made up number) and tobacco companies pay 35% (not so made up), a tax decrease will benefit tobacco more. Under new law (potentially) tech will still pay close to their old rate while tobacco see a 15% decline is tax expense. The repatriation rate of money overseas still generates a tax if repatriated so the new bill only reduces the tax compared to the old rule few were using. If tech utilizes the lower repatriation tax rate they still pay more taxes than before. Make sense?

      Small businesses, including bloggers turning a profit, will need to organize as an LLC electing S corp tax treatment to benefit from several proposed changes. I’ll dig deeper with solid facts once the facts are reality. My guess is we see a final tax bill as law in the next 7-10 days.

      • Mimoza on December 6, 2017 at 8:56 am

        But, Keith, you stated you made up the effective tax rate of 12% for technology co. but not for tobacco. Maybe your rate sticks I don’t know, but if technology companies pay the effective tax rate close to tobacco’s both businesses would benefit the same everything else being equal, no? Of course, the real world cases vary from one co. to the next. OTOH, as Apple moved its domicile from Ireland to some no-tax island, its combined domestic and global tax rate is most likely low single digits. I’d love to do the same (live on paper on the same island) but earn wages in more fertile land… business as usual.

        Looking forward to your next articles, cheers.

  19. Freedom 40 Plan on December 6, 2017 at 11:00 am

    Thanks for the thorough review of the bill. Very interesting read and so much more substantial than all the BS coming through other media sources. It’ll certainly be interesting to see what comes through in the final legislation.

  20. Blastmaster on December 6, 2017 at 6:58 pm

    “The argument goes back to the old “trickle-down” theory of thirty years ago. It didn’t work then and it’s doubtful it’ll work now”

    Keith, I believe that Federal tax revenues increased substantially after the substantial rate reductions of the Reagan era. Congress critters of both parties ramped up spending and entitlements thereby increasing the “deficit”. Increased economic activity can and does produce more revenue. Sorry, but when I hear “trickle down”, I usually suspect a leftwing agitator or outright Marxist central planner is speaking. Its a pejorative used by the enemies of free markets and statists in general. The very people who’s goal is outright wealth confiscation (from readers of your blog) and redistribution (to non readers of your blog). A non biased blogger may have used the term “Supply side” economics. Time will tell what the results of the tax bill will be. As a middle income wage earner with a side hustle, I suspect little if any change to my lifestyle as a consequence. My income and savings/investment rate are largely dependent upon me and my own efforts. If the result of the tax bill is strong sustainable economic growth then a rising tide lifts all boats. Regarding congress and DC in general, a benevolent dictatorship is looking better and better

    • Keith Schroeder on December 7, 2017 at 8:25 am

      You bring up some good points, Blastmaster. I use contemporary words to describe certain facets of my thesis. “Supply-side” and “trickle-down” are two different concepts President Reagan used. Trickle-down hasn’t worked as I mention in the post; supply-side has. Remember what Reagan was trying to do. Inflation was high and so was unemployment. A double recession was killing the economy in 1982. Supply-side economics offered to increase supply causing inflation to decline while jobs were created as supply was produced. Reagan accomplished this by increasing Section 179 expensing from $10,000 to $25,000. It was sheer genius for the economic environment of the time. Ever since supply side economics has been doubled down on. It worked! Too well! Now inflation doesn’t budge regardless the money printing the Fed does as Section 179 expensing is almost unlimited for small businesses. That might change, but supply side economics worked for 1982. Today we need a different model. Interest rates and inflation are near zero, not 14% like in the early 80s. I say trickle down doesn’t work because we’ve doubled down on that as well and all we get is a bigger and bigger national debt. I could flesh this out in a full post, but I know where the discussion heads, to politics. It’s not political except to the politicized, it’s economics! Maybe I’ll dress in thick armor and give the economics lessons. I’m sure the left and right will equally want to lynch me. Nothing new there.

  21. Mick on December 8, 2017 at 7:44 pm

    From a napkin calculation while reading wsj analysis, it seems I might save due to shifting enough income into lower brackets. But I’ll wait and see the final version.

    What I don’t understand is the talk of doubling the standard deduction as helping when the loss of exemptions will lost about 2/3 of that increase for me (based on two evening). Seems like it’ll be worse for families, but maybe the should tax credit will offer that?

    But, currently my itemized state and property tax are slightly greater than standard so any charitable giving is deductible. That will go away with the new standard deduction. I will still contribute, but it will cost me more.

    I think charities will see a one time uptick in contributions for 2017 as people like me might accelerate our 2018 giving into 2017, but may be negative impact going forward.

    • Keith Schroeder on December 9, 2017 at 8:06 am

      You mention the most important point, Mick. The tax bill is a problem if you make no changes. Those who plan will always do better. When writing I have to communicate the aggregate changes assuming nobody thinks or plans. Adding people’s response to the new tax situation is impossible to quantify in aggregate. The hazards of writing a tax blog.

  22. Mick on December 10, 2017 at 4:13 pm

    Yes, still in flux.
    The fact that people in my (high tax) state will likely lose SALT deductions is not really a federal problem: the real issue should be why are our state taxes so high to begin with? My fellow citizens should be questioning Trenton not Washington

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