Feeling insecure in your ability to banter on about politics, taxes, and headline news the next time you sit down with family and friends? I know the feeling. I’m routinely asked about Apple stock and Bitcoin despite being a planner, not an investment manager. To help, I’ve tapped into fellow NAPFA advisor, Clare J. Fazackerley, to outline the recent tax proposal. She is both a CPA and CFP® so I’m delighted to pair her research with my insight to make sense of all this. Feel free to also check out my post on tax language if you need a refresher on terminology.

As you likely realize, this is not your typical year-end when it comes to planning for taxes or investments. Congressional leadership has surprised us by passing a tax bill with major adjustments, and we are only now getting enough detail to understand the implications that are only weeks off!

The stock market also looks to be turning in a strong performance for 2017. Many fear that it is now overvalued, with implications for both your investment portfolio performance and your 2017 tax returns. As with anything on the blog, this post is meant for educational purposes and should not be used in place of a professional CPA, tax service, or investment manager that evaluates your exact situation.

Tax and Investment Planning

As of today, it appears that the Congressional Republicans’ tax bill will pass and be signed into law this week. The way we calculate taxable income will change for the next 8 years! Your federal taxes may go up, down, or sideways.

Based on illustrations under a variety of return scenarios with the major changes as we understand them today, it appears that most middle income clients will have higher taxable incomes, but lower net income tax. Lower income folks should see lower taxes. Below are the factors taken into consideration:

RATES: The same number of tax brackets (7), but all over 10% are down about 2-3% (15% bracket is reduced to 12%); some bracket shifts may mean higher rates on part of your income.

EXEMPTIONS: They are eliminating the personal exemption in 2018. This could be bad news for anyone with multiple children or other dependents (older kids, parents, etc.). The increased standard deduction (which is just shy of doubling) does not cover this loss for anyone except singles. A small new credit will not either.

ITEMIZED DEDUCTIONS: They have substantially reduced allowable deductions and these changes are likely to come up at the dinner table:

  • State and local income and property tax deductions will be limited to a $10,000 aggregate total. (If your state income taxes are $6,000 and your property tax is $6,000, the deduction will be $10,000.)
  • Home equity loan interest will no longer be deductible.
  • Unreimbursed employee expense deductions will be repealed. Note that this does not affect business deductions, only those employees like salespeople who don’t get reimbursed for mileage, etc.
  • Other miscellaneous itemized deductions will all be repealed, including tax preparation fees, legal fees, investment fees, gambling losses, etc.
  • Given these changes some of you may no longer itemize. While this certainly makes tax prep easier, it’s been controversial as many expect it to impact people’s willingness to make charitable donations that can only be deducted if itemizing.

CHILD TAX CREDITS: There will be an increased child tax credit, but only for children under 17. Income phase outs will increase, so that’s good news with anyone with kids & income $110,000 – $400,000.

BUSINESS INCOME: It appears that some of you who are self-employed or freelancing may pay significantly less income tax but the details are complex. For most, 20% of business profit will be exempt from income tax but not self-employment tax.


ALTERNATIVE MINIMUM TAX: Changed, but not repealed.

GAINS: Many actively managed (not index) mutual funds will be reporting large capital gains, which will need to be reported as income even though the fund hasn’t been sold. (The gain should be more-or-less reflected in the current market value.) A large number of funds will be reporting income of 10% or more of market value and some even 20%+.

Those with incomes in the lower brackets may pay no tax on these, as the 0% capital gains rate applies. If your income puts you in or above the 25% bracket, you’ll pay 15% on the gains. If you plan to sell and take gains given recently market upswings, the above comments about long-term capital gain tax also apply.

DIVORCE: Alimony will not be taxable or deductible beginning with 2019 divorces. This is how it’s already handled for child support payments.

HIGH NET WORTH: Corporate rates and estate “death” tax reduction are also in the bill, which is why some people argue that this legislation is in favor of the rich.

Oh, and it’s all temporary (2025) except the corporate tax reductions, which are permanent.

How to be proactive in light of these changes:

  • Pay your 4th quarter 2017 state & city estimated taxes in December. Pre-paying 2018 is specifically not allowed.
  • Consider paying at least the first installment of 2018’s property taxes, or all of it. Please keep in mind though that while this isn’t specifically disallowed it could come into question during an audit if you had no real reason to accelerate payment other than that it was to your benefit.
  • Accelerating 2018 charitable contributions may pay off.
  • For longer-term planning, if you want to make all your 2018 contributions – and maybe 2019 & beyond, you should consider a charitable donor-advised fund. DAF’s are a type of low-cost trust arrangement that allows you to take the deduction now and actually send the money out later.
  • Get your non-cash charity donations out of the house before year-end!
  • As a freelancer it may be worth pushing invoicing off until January to the extent you still can. You can’t avoid reporting it by just not depositing a check.
  • Review W-4 withholdings to see if they need to be adjusted. This is especially true if you’ll be paying more in taxes given the outlined changed.
  • Please review the risk level in your portfolio. If the market “corrects” you don’t want to be taking more loss than you can stand!

Side note: In a discussion with James Kelleher, CPA of North Reading I learned that if you’re currently in AMT you may not benefit from some of the above suggestions. Namely, paying your income and property taxes early. These benefits are already phased out under AMT.

Lastly, I’d be remiss not to mention all the speculative hub-bub thoughout the year that didn’t make the cut.

  • Dependent Care Credits
  • Flexible Spending
  • Education credits
  • 401(k) contribution limits
  • Adoption Assistance (tax free employer reimbursement & credit)
  • Tuition waivers (for University employees, families & grad students)
  • Exclusion of gain from sale of home (still 2 of 5 years)
  • Student loan interest (for those within the income limits)
  • Teacher expense deduction

You’re now ready to sit at the dinner table and participate in topical conversation. Good luck and Happy Holidays!

Did you love this but want even more information? Here are a few links to readable, reliable blogs (even then, not gospel; nobody’s read all 1,097 pages yet):

  1. http://tonynovak.com/the-three-basic-principles-of-individual-tax-reform/
  2. https://www.forbes.com/sites/anthonynitti/2017/12/16/the-tax-bill-is-finalized-whos-happy-and-whos-not/#737d47c12288
  3. https://www.forbes.com/sites/kellyphillipserb/2017/12/17/what-the-2018-tax-brackets-standard-deduction-amounts-and-more-look-like-under-tax-reform/#2705ed614017
  4. https://taxfoundation.org/conference-report-tax-cuts-and-jobs-act/