As you are no doubt aware, tax reform is upon us. With the Senate’s version of the bill passing, it appears that most major roadblocks leading to tax reform have been cleared. However, as the bills currently passed by both the House and Senate vary in several ways, there are a few more steps required before tax reform lands on the President’s desk. The first step is for Congress to hold a conference committee intended to sort out the differences in their proposed bills.  Some, but not all, of these differences include:

  • The Senate bill sunsets tax breaks for individuals in 2025, something it did to save money so that the Senate bill would meet reconciliation rules. The House bill makes its individual tax cuts permanent. The corporate rate, meanwhile, would be permanent in both bills.
  • The Senate bill enacts its 20% corporate rate in 2019. The House bill enacts its 20% corporate rate immediately in 2018.
  • The Senate bill repeals the Affordable Care Acts individual mandate. The House bill does not.
  • The Senate bill doubles the exemption on the estate tax allowing an individual to pass up to $11 million tax free to their heirs, but the House bill entirely repeals the estate tax in 2024 so you can pass any amount of money tax free.
  • The Senate bill maintains the current mortgage interest deduction of $1 million. The House bill cuts it in half to $500,000
  • The Senate bill retains teacher deductions for school supplies, graduate student tuition wavers, and student loan interest deductions. The House bill repealed them all.
  • The Senate bill has seven tax brackets and lowers the top rate, with brackets expiring in 2025. The House has four and maintains the top rate, with brackets being permanent.
  • In the Senate version of the bill, sellers of financial securities will be required to dispose of shares in the order they were acquired (“first in, first out” or “FIFO”). Sellers could no longer designate which blocks of shares they wished to sell to minimize capital gains taxes. This rule could translate into dramatically higher tax bills for investors with highly-appreciated stock.
  • Additionally, it is unclear whether the final bill will maintain the rule allowing a beneficiary to receive a stepped-up cost basis when inheriting property or financial assets.

So while the Senate and the House hash out their differences, what are you to do? As Abraham Lincoln once said, “Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” In other words, preparation is key. We want you to be prepared by knowing how the proposed tax reform may impact you and what actions, if any, you need to take. Unfortunately, until the final bill is brought to the floor, there is not much clarity in what will change at this moment. While there are items that seem certain to change, for example, the estate tax and standard deduction, the information is not certain enough to recommend making year-end tax decisions.

So what do we recommend? Pay attention to the upcoming reconciliation process, and once the final version is released schedule a consultation with your tax advisor. While we do not give tax advice at Wealthview Capital, we are on stand-by to help you pro-actively enact strategies that may improve the tax efficiency of your financial plan. Some of the main areas of concern should be tailored around the need to defer or accelerate deductions or income this year. Again, though it is unknown exactly what is changing, it does appear that the changes will be meaningful, and it is best to be prepared in advance as you may only have one chance to get it right.  As always, if you have questions or concerns, please let us know.

Best regards and wishing you and your family a safe and happy holiday season,

the Team at Wealthview Capital