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  • Beirne Wealth Consulting

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BWC's Initial Interpretations of the new Tax Bill

On December 20th, the House gave final congressional approval for the new tax bill.

Key Takeaways:

  • Healthcare Individual mandate was repealed for 2019 but will remain for 2018. Likely more people will be uninsured.
  • 1031 exchanges will only be limited to real estate (no cars, airplanes, or art)
  •  There will be an increased depreciation for business cars. This may make buying a car for businesses a better option than leasing.
  • Moving expense deduction and exclusion repealed. Relocation firms might see reduced business.
  • Alimony will no longer be deductible to the pay nor reportable by the recipients. Likely to result in less gross judgements going forward.  This is effective for divorces granted after 12/31/2017.
  • Deferred Comp plan crackdown as deferred comp will be taxed as soon as there is no substantial risk of forfeiture. Still waiting on what "substantial risk" is but this may result in existing deferred comp plans paying out sooner (more taxes) and restructuring of new deferred comp plans. May be a win for the insurance companies.
  •  Sexual harassment settlements are non deductible if subject to a NDA (Non disclosure agreement).
  • Employer tax credit for Paid Family and Medical Leave Act. More companies will introduce this.
  • Flexibility to rollover 401(k) loans after termination within 60 days. This may spawn a whole new business for the custodians of the world.
  • Business Entertainment Expense bars any deduction for activity generally considered to be entertainment, amusement, or recreation. May be saying goodbye to sporting events and concerts for business purposes!

Other bullets for businesses:

  • Options will be taxable to companies in which a person earns more than a million dollars in salary and option grants.
  • Effective 2018, with calculation changes taking effect in 2021, interest expense that companies can deduct from their taxes will be limited to 30% of EBITA (For businesses with $25 million or more in revenues). This may make debt refinancing less attractive after 2021. You may see a rush to issue bonds before 2021 and less after.  

Non Profits:

  • New 21% excise tax on nonprofit employees with salaries over $1 million. Family Foundations that employ their grown children will see the brunt of this.

Individuals:

  • All individual tax rates will get a small reduction. Tax rates will go to 7 brackets. The marriage penalty is basically removed, if you earn less than $600,000. Over $600,000, you are being hit for being married!
  • All of these rates are going to be indexed to inflation but the key point is that it will be chain linked inflation. This takes a series of economic data from successive years which will result in a slower moving gauge. Winner here will most likely be the government, as this calculation benefits them the most.
  •  Individuals can deduct $10k in state and local taxes- combination of property, sales, and income tax. No indexing here. A couple with $15,000 of real estate property taxes, $1,000 of car taxes and $25,000 of state income taxes is really going to feel the hit going forward. Winner is most likely government, where losers will most likely be those in the coastal areas and high income tax states.
  • Standard deductions will move from $12k to $24k for married couples and $6,350 to $12,700 for singles. This may result in more people taking the standard deduction and not itemizing.
  • The Personal Exemption is consolidated into the expanded standard deduction. One has to realize that the higher standard deduction is worth less than the loss of the personal exemption. Winner, again, is most likely government.
  • Mortgage deduction limits to $750k on a new mortgage. New Regulations say that this is for the acquisition, building, or substantially improving a primary residence. So, if you refinance a primary residence to $700,000 and you take out $200,000 as a cash out, that $200,000 is not deductible. Existing mortgages up to $1 million are grandfathered.
  • No grandfathering for Home equity loans or lines. It is how the HELOC is used- so no deductibility for cash outs. Not sure how this will be monitored, but if one gets audited,  Beware!
  • Pass through businesses will be taxed at a lower rate. There are a lot of restrictions around this so that people do not "reclassify" themselves. This will be a hot topic going forward.
  • AMT has an expanded exemption amount, so less people will drop into the AMT zone.
  • Charitable contribution limited will be extended from 50% to 60%.
  • Property: Casualty losses not covered be insurance will be only deductible, if losses are attributable to a declared national disaster. While there has been some taxpayer abuse on this side, the government will be less likely to declare a national disaster.
  • Only for 2017 and 2018, Medical expenses will be deductible if they exceed 7.5% of AGI and then reverts to 10%. With the baby boomers aging, looks like the government wins on this one too.

For Families with Children:

  • Child Tax Credit will be expanded from $1,000 per child to $2,000. Phased out at $200k for individuals and $400k for married couples. Not indexed for inflation. This should help larger families and make up for lost personal exemptions.
  • Kiddie tax- children under 19 or students under 24 are currently taxed at their own individual brackets for earned income. Unearned income is stacked on their parents income. Now, unearned income will be subject to Trust tax brackets. That means 37% on any income over $12,500. A portfolio around $400,000 earning a 3% dividend and interest yield will be right there. Looks as if Government is trying to nudge people away from UTMA/UGMAs and to 529 plans.
  • 529 expansion - $10,000 tax free distribution per student per year for private elementary and secondary school. Home schooling is also included. This is a win for parents.

Investment provisions:

  • Investment Advisory fees are no longer deductible. Individuals currentyl having their IRA fees deducted from a personal account should rethink that strategy for 2018.
  • Tax prep expenses, unreimbursed employee business expenses (including home office deduction), and safety deposit boxes are no longer deductible. This was a huge reason to itemize and going forward may hurt the W-2 wage earner.
  • Roth Recharacterization - eliminates ability to re characterize Roth conversions. You can still recharacterize a contribution. So, you better get the timing right the first time because there are no more redo's.

This is the nuts and bolts of the tax plan.  There will be a lot of planning that will need to take place in the coming weeks and months.  At this time, no one knows how this plan will affect the economy, the markets and the nation.  Only time will tell.  We will leave you with the Benjamin Franklin quote " If you fail to plan, you are planning to fail."

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