Some Initial Assessments of the New Tax Law
The new tax law took effect on January 1st. Having been finalized only in the waning days of 2017, the last days of 2017 were filled with a wave of taxpayers trying to take deductions that a) they will lose in 2018 or, b) were worth more in 2017 than they will be in 2018. I hope those caught up in this rush - both taxpayers and professionals called on to give last-minute advice - managed to take time to enjoy the holiday. From personal experience, I can tell you that Congress waiting as they did made it an unnecessarily stressful event.
Along with the Congress, the IRS played its part too. Ever faithful to its mission of throwing a wet blanket on what appear to be opportunities to save money on taxes, they waited for almost a week before informing Americans who had rushed to pay their property taxes in order to obtain a possibly lost deduction if paid in 2018 that they would only grant the deduction under certain conditions - which conditions they could easily have announced when the bill was finalized to save everyone a lot of time and effort. But, of course, what's the fun in that?
After spending part of my holiday, as well as these first days of the New Year, researching - best I could - the changes in store for us, it's clear that even those who claim expertise in the area of tax law are still grappling with what turned out to be the farthest thing from "simplification" one could imagine. Whoever brought up the idea early on that we'd wind up with a simple post-card sized tax return was, at best, dreaming, at worst, on some hallucinogenic drug. While some of us will simply file as we have in the past, others - especially those who like to impose order on their financial lives via some form of planning - will be wrestling with a temperamental beast. The simple fact that most of the changes will "sunset" by 2026 adds more than a wrinkle to financial, retirement, and estate planning. (Sunset means, basically, that the changes go away and the former tax laws return.)
Of course, the sunset provision isn't unique to this tax bill. It is, however, comprehensive in nature. Just about everything goes back to the way it was in 2017. (I'm hedging here because I'm not certain about this, although it does seem that most of the major income and estate tax provisions - except, of course, those that apply to big corporations - will indeed sunset.) Then again, we don't even know whether that will hold, since there will be a general election before 2026. And if the other party gets in, it's on record as having very different ideas about tax "reform," which - don't be shocked - may throw everything in this bill to the wind. So our first initial assessment has to be: Nothing's changed. We remain in an era of tax regs that are seemingly blowin' in the wind. If you're one of those who sees the value in planning, you have to be, as always, alert and on guard for the whims of politicians seeking to gain advantage over their rivals in order to be re-elected.
Our second assessment comes from hedge fund manager and financial lord of the universe Ray Dalio. Even before it was finalized, Dalio could see the potential impact that eliminating or reducing itemized deductions on personal returns would have on individuals. And based on his assessment of that impact, he has warned of a population shift of wealthy individuals from high-tax to lower-tax states. Now, before you roll your eyes at the image of rich folks whining about taxes, remember that they do typically pay an out-sized portion of the income and property tax in their states. The potential loss of tax revenue due to rich people heading for greener pastures will impact all of us. Depending on where we live, basic services like garbage collection, snow removal, state and local police, among other services, rely on tax revenue. In addition, public education from pre-school to college, all sorts of social services for the poor, homeless shelters, drug rehab, etc., etc. may all be impacted. Even if you personally don't rely on such services, some of your fellow citizens do, for better or worse. Dalio provided an interesting chart estimating the impact on high-tax states. Here's how Dalio sums up the impact:
So, our big picture perspective is that, on the margin, the tax law changes are going to be significant and bad for high SALT locations and good for low SALT locations, and are going to be good for businesses and business owners (and hopefully those who the money trickles down to), so those businesses in low SALT states will get a double whammy benefit.
(You'll find the details HERE.)
Finally, a third assessment concerns businesses. While it's not all that clear how all smaller businesses will be impacted, some will certainly benefit. Given that fact, business owners and their advisers will (or should) scrutinize the bill to see if there's any reason to change the way they organize their businesses: sole proprietorship, partnership, LLC, corporation. The one area that seems clearly at a disadvantage is family businesses held in trust. The trust arrangement helps the older generation's pass the business to those children interested in taking the reins from their elders at some appropriate time. It allows for a smoother, more efficient transition. Apparently, no provision was made for this in the new tax law. The result will be a higher income tax rate for these family-owned businesses, relative to their big corporate competitors who are getting the lion share of the tax breaks. In addition, even those small businesses not held in trusts will see their tax break sunset, as opposed to tax break for the big guys. But wait! What about the idea that smaller businesses provide the greatest number of new jobs in our economy? Shouldn't such businesses have been given at least the same break as their big corporate competitors? And wouldn't competitive smaller businesses, being by nature more nimble than their monster adversaries, provide an advantage to consumers - which includes all of us? Well, woulda ain't worth dwelling on here, because politicians simply didn't do what they shoulda done. And those smaller family-owned businesses will now suffer the consequences. We should all at least wish them well and hope their government imposed disadvantage doesn't result in some of them simply giving up and closing their doors, or curtailing their efforts to provide cheaper and/or more customized products and services to their customers.
Buy, hey, big corporations winding up winners with this tax bill didn't surprise any of you, did it? Let's just hope their windfall causes enough "trickle down" to make this tax bill something good for all. We'll just have to wait and see.
Meanwhile, we've got a three-day weekend coming up, compliments of Monday's MLK national holiday. Coming on the heals of the Christmas-New Year's holiday most of us observed, it might seem excessive getting time off (for many if not most of us) so soon. I don't know about you, but I welcome it. Winter (at least in cold parts of the country) has a tendency to suck out more energy than spring, summer and fall. And jumping into the New Year with both feet as I did this year has left me eyeing MLK more longingly than in past years. Whatever your frame of mind and body, I hope you enjoy your weekend, be it of the 2 or 3-day variety.
Along with the Congress, the IRS played its part too. Ever faithful to its mission of throwing a wet blanket on what appear to be opportunities to save money on taxes, they waited for almost a week before informing Americans who had rushed to pay their property taxes in order to obtain a possibly lost deduction if paid in 2018 that they would only grant the deduction under certain conditions - which conditions they could easily have announced when the bill was finalized to save everyone a lot of time and effort. But, of course, what's the fun in that?
After spending part of my holiday, as well as these first days of the New Year, researching - best I could - the changes in store for us, it's clear that even those who claim expertise in the area of tax law are still grappling with what turned out to be the farthest thing from "simplification" one could imagine. Whoever brought up the idea early on that we'd wind up with a simple post-card sized tax return was, at best, dreaming, at worst, on some hallucinogenic drug. While some of us will simply file as we have in the past, others - especially those who like to impose order on their financial lives via some form of planning - will be wrestling with a temperamental beast. The simple fact that most of the changes will "sunset" by 2026 adds more than a wrinkle to financial, retirement, and estate planning. (Sunset means, basically, that the changes go away and the former tax laws return.)
Of course, the sunset provision isn't unique to this tax bill. It is, however, comprehensive in nature. Just about everything goes back to the way it was in 2017. (I'm hedging here because I'm not certain about this, although it does seem that most of the major income and estate tax provisions - except, of course, those that apply to big corporations - will indeed sunset.) Then again, we don't even know whether that will hold, since there will be a general election before 2026. And if the other party gets in, it's on record as having very different ideas about tax "reform," which - don't be shocked - may throw everything in this bill to the wind. So our first initial assessment has to be: Nothing's changed. We remain in an era of tax regs that are seemingly blowin' in the wind. If you're one of those who sees the value in planning, you have to be, as always, alert and on guard for the whims of politicians seeking to gain advantage over their rivals in order to be re-elected.
Our second assessment comes from hedge fund manager and financial lord of the universe Ray Dalio. Even before it was finalized, Dalio could see the potential impact that eliminating or reducing itemized deductions on personal returns would have on individuals. And based on his assessment of that impact, he has warned of a population shift of wealthy individuals from high-tax to lower-tax states. Now, before you roll your eyes at the image of rich folks whining about taxes, remember that they do typically pay an out-sized portion of the income and property tax in their states. The potential loss of tax revenue due to rich people heading for greener pastures will impact all of us. Depending on where we live, basic services like garbage collection, snow removal, state and local police, among other services, rely on tax revenue. In addition, public education from pre-school to college, all sorts of social services for the poor, homeless shelters, drug rehab, etc., etc. may all be impacted. Even if you personally don't rely on such services, some of your fellow citizens do, for better or worse. Dalio provided an interesting chart estimating the impact on high-tax states. Here's how Dalio sums up the impact:
So, our big picture perspective is that, on the margin, the tax law changes are going to be significant and bad for high SALT locations and good for low SALT locations, and are going to be good for businesses and business owners (and hopefully those who the money trickles down to), so those businesses in low SALT states will get a double whammy benefit.
(You'll find the details HERE.)
Finally, a third assessment concerns businesses. While it's not all that clear how all smaller businesses will be impacted, some will certainly benefit. Given that fact, business owners and their advisers will (or should) scrutinize the bill to see if there's any reason to change the way they organize their businesses: sole proprietorship, partnership, LLC, corporation. The one area that seems clearly at a disadvantage is family businesses held in trust. The trust arrangement helps the older generation's pass the business to those children interested in taking the reins from their elders at some appropriate time. It allows for a smoother, more efficient transition. Apparently, no provision was made for this in the new tax law. The result will be a higher income tax rate for these family-owned businesses, relative to their big corporate competitors who are getting the lion share of the tax breaks. In addition, even those small businesses not held in trusts will see their tax break sunset, as opposed to tax break for the big guys. But wait! What about the idea that smaller businesses provide the greatest number of new jobs in our economy? Shouldn't such businesses have been given at least the same break as their big corporate competitors? And wouldn't competitive smaller businesses, being by nature more nimble than their monster adversaries, provide an advantage to consumers - which includes all of us? Well, woulda ain't worth dwelling on here, because politicians simply didn't do what they shoulda done. And those smaller family-owned businesses will now suffer the consequences. We should all at least wish them well and hope their government imposed disadvantage doesn't result in some of them simply giving up and closing their doors, or curtailing their efforts to provide cheaper and/or more customized products and services to their customers.
Buy, hey, big corporations winding up winners with this tax bill didn't surprise any of you, did it? Let's just hope their windfall causes enough "trickle down" to make this tax bill something good for all. We'll just have to wait and see.
Meanwhile, we've got a three-day weekend coming up, compliments of Monday's MLK national holiday. Coming on the heals of the Christmas-New Year's holiday most of us observed, it might seem excessive getting time off (for many if not most of us) so soon. I don't know about you, but I welcome it. Winter (at least in cold parts of the country) has a tendency to suck out more energy than spring, summer and fall. And jumping into the New Year with both feet as I did this year has left me eyeing MLK more longingly than in past years. Whatever your frame of mind and body, I hope you enjoy your weekend, be it of the 2 or 3-day variety.
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