2017 Tax Cuts and Jobs Act

Congress has approved the 2017 Tax Cuts and Jobs Act.  Although this measure has been taking shape for several years, the ongoing political circus and rush to get this bill done have distracted both citizens and leaders from fully understanding this important legislation.

It started with good intentions:

  • Lowering the corporate tax rate would hopefully spur US businesses to “invest, grow and hire” at home instead of abroad, and discourage moving corporate headquarters away from the US (a bipartisan goal not long ago).
  • Simplifying and lowering the tax rates for individuals, with fewer brackets and loopholes, would lead to a more equitable system (a Republican marketing pitch for many years).

Nothing offers politicians the chance to be, well, politicians like fiddling with the tax code. A quick take on how the tax reform effort stacks up:

  • Lowering the “high” (relative to other developed countries) corporate rate should encourage multinationals to stop shifting profits to lower-tax locales, and to bring back the associated cash that has built up in overseas accounts. We view this as a positive step, but don’t think it will lead to one of the stated goals, a resurgence in US manufacturing, which has declined largely due to abundant and cheap overseas labor combined with advancing technology in design, communications and production.
  • The rejiggered individual code seems to miss the mark, especially judged against those good intentions. Whatever simplicity may be delivered by increasing the standard deduction will likely be offset by the time and money that will be spent gaming the new equally-complicated tax code. And don’t even think about trying to file your return on a postcard (an oft-stated goal of tax reform proponents).

Coming out of the 2008 financial crisis, many economists and politicians discussed the importance of counter-cyclical policymaking – regulations and government programs structured to cushion the pain of economic downturns. Considering we are nine years into a slow but steady economic expansion with a jobless rate of 4.1%, this tax reform effort fails that test. The Republicans, sensing their chance to seize the moment, brushed away thoughts of a delayed and/or phased-in implementation. Instead, we are about to stimulate a healthy economy – akin to pouring gasoline on an open fire.

Without a major growth surprise (that would likely be tempered by the Fed accelerating their monetary tightening), this tax reform will likely increase the deficit meaningfully. That’s not a crisis in the short term, but it influences our thinking about where tax rates and entitlements are likely to go in the future (up and down, respectively). For those of you still working, now is a good time to consider contributing to Roth retirement accounts, if you haven’t done so already (many employers now offer Roth 401(k) accounts). It also suggests that those who aren’t in or near retirement should plan on less generous government support in their golden years – disciplined saving and investing are as important as ever.

Finally, a couple of questions that you may want to discuss with your accountant before year end:

  • Is there an opportunity to pull forward my charitable giving for the next several years, either by giving directly or through a donor advised fund (most relevant to those taxpayers that currently itemize, but won’t under the new rules)?
  • Have I fully paid current year state income and property taxes, and can I pay more now (and less in 2018)?
  • As a business owner, in light of the new pass-through provisions, would deferring income and/or accelerating expenses improve my tax situation?

With tax season not far away, many of us will learn more about the new regime soon enough. It’s ironic that the debate seems to be just heating up now. For those of you who will benefit – congratulations! For those disappointed or disadvantaged by the changes – take heart – most individual provisions will “sunset” in 2025 (the rules are scheduled to revert to what’s in place now – and may well be adjusted before then).

We’re not tax experts, but we do enjoy hearing from you. Please pass along any thoughts or questions you have.