Tax Reform - Tax Year End 2017 - Road Map

Tax reform is now a real possibility and if current proposals make their way into the final reform, the changes will be fairly consequential.  As of early November, there is a fair bit of sausage-making in front of us before we see the final product.  However, broad strokes of the likely changes are starting to emerge, and numerous changes are in play at this time.  KEEP IN MIND THAT THESE ARE NOW PROPOSALS, NOT LAW.  Of the more significant are:

Corporate Tax Reduction

While this has, for all practical purposes, no direct impact on any of our individual clients, we believe that the economic impact of this proposal could be really significant.  We think this is a good thing and that it will benefit almost every citizen if in a somewhat indirect way.  We expect that if a tax reform bill is passed this year, this will be a part of it in some form.

Personal Income Tax Changes -

Fewer and Lower tax brackets - The standard deduction looks to be made larger (double) and will absorb the existing personal exemptions. 
Reduced Itemized Deductions - Itemized deductions for Medical Expenses, State Income Taxes, Casualty Losses and certain Miscellaneous Itemized Deductions will be no more.  Mortgage interest deduction will be restricted on higher value homes.  The change in the mortgage interest deduction appears to apply only to mortgages entered into after 11/2/17. 
Simplified Education Funding - Many if not most of the credits and education savings accounts will be repealed after 2017.  Section 529 plans will be modified to allow broader use, including, for example, elementary and high school expenses.
Alimony and Gain Exclusion on Disposition of the Primary Residence - The House proposal includes a change in the tax treatment for alimony.    The exclusion of taxable gain on the disposition of a principal residence will be restricted under the House plan.  These restrictions will be applied prospectively, only to marital settlements dated after the effective date or home sales after the effective date.
Retirement Plans - Changes here are pretty modest.  One notable change is the repeal of the Roth Recharacterization option after 2017.
Alternative Minimum Tax (AMT) Repeal - This is welcome news in terms of plain simplification.  For taxpayers who have paid AMT in the past and have AMT Credit Carryovers, there are plans to allow for the utilization of these credits in future years.

We think that the broad strokes above are likely to find their way into any tax reform legislation passed this year.  The particulars will almost certainly change.  For example, we are aware of some significant pushback on the issue of elimination medical expense deductibility for taxpayers incurring very large medical expenses. 

Estate Tax Repeal -

While both the House and Senate versions have some form of Estate Tax Repeal and/or Reduction, it seems to us that is the most susceptible to being traded away in the politics of reconciliation.  For this reason, the particulars of Estate Tax repeal or reduction seem to be the least certain of all tax reform at this point.

Our approach now:

We see a few somewhat discrete components of the pending changes:

Estate Tax - Most of this is beneficial to anyone with taxable estate in excess of about $11.0 million.  Further, we see no year-end-deadline-driven opportunities or threats associated with the known Estate Tax Reform proposals.  Any estate planning actions made advisable by the changes can be done after year-end with full knowledge (rather than the guesses we now have available) of the particulars of the new law.  Our approach here so far is to wait for the new law and act after year end (2017).

Personal Income Tax changes ongoing effects -  After 2017, the tax landscape will likely be somewhat altered.  We have, in the past sought to help optimize our client's posture with respect to tax-drag on the portfolio, and general management of tax consequences.  We intend to continue this effort, and this aspect of tax planning can also be done after year end with full knowledge of the actual tax landscape in effect at the time.  No need to guess or surmise.

Personal Income Tax changes in the effects of the transition itself.  That is, there will be differentials between 2017 and 2018 that may be mitigated or exploited depending on each taxpayer's individual circumstances.  For the most part, these will be actions that can be taken in 2017 prior to year-end.  This is where we intend to focus our efforts now.  For example:

  • If you expect to itemize in 2017 and see that you may not itemize in 2018 and beyond, it would make sense to accelerate deductions into 2017.  Easy ones are to prepay your real property taxes on your home, and to make charitable contributions for 2018 purposes in 2017.   Keep in mind that state and local income taxes and real estate taxes and personal property taxes as well as some miscellaneous itemized deductions may impact your exposure to Alternative Minimum Tax.
  • If you are already charitably inclined and you will itemize in 2017, it may make sense to look into moving appreciated assets into a donor-advised fund which can be used for the next few to several years for making charitable gifts.  If this strategy is employed, it must be set up sooner rather than later. 
  • If you are contemplating disposition of a personal residence and the gain will be significant, it will be prudent to examine the proposed changes in detail to see how motivated you might be to close the sale prior to year-end.
  • If your tax rate will decline, and you have the ability to manage the timing of your income, it may be worthwhile to defer some income into 2018.
  • There may be circumstances, particularly with AMT payers, that call for acceleration of income into 2017.  One simple method for this would be a Roth conversion, albeit note that the proposals we now see call for the elimination of the "free look" of Roth Recharacterization after 2017. 

Disclaimers, Caveats and Ass Covering

The final particulars in whatever tax reform bill passes will not be known or knowable until the bill is signed.  It would not be surprising to see this signing, if any, happen in the last week of the year.  Any actions taken prior to year-end that are premised on anticipated changes in the law carry a substantial risk that either the anticipated changes do not come about, or that given the extremely short time interval between enactment and year-end preclude a full and prudent analysis of the new law.  We will do the best we can in collaboration with your tax professional, to help you assess that risk and to reach your own decision/conclusion regarding tax strategies.

If you wish to engage our help in this effort, we not only want to, but expect to collaborate with your tax-preparation professional.  They will be working on these issues and, most likely, will be more advanced than us in their understanding and thinking on these matters.

There will be no commercially available and pre-tested and validated software, anywhere, available to help with this one-time transition.  As much as we believe in the notion that you must "run the numbers" in this type of analysis, we are clearly in a "back of the envelope" circumstance here.  Even if we use our computers to do some calculations and presentations, the fact remains that we are in the world of "by guess and by golly".


As a part of our normal and routine year-end tax planning, we have estimates from Dimensional Funds as to the amounts of capital gains and income distributions they expect to make for year end.  If we are currently managing assets held in a taxable account, we will be contacting you with this information for you to pass on to your tax accountant.  Further, to the extent we have your income tax return information, we will be analyzing this data and looking for opportunities.  

Please feel free to call us to discuss.