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January Financial Insight: 10 Tax Law Highlights and a Peek at 2018

| January 05, 2018

Welcome to 2018! 

While 2017 was a lot of fun, I am glad to see it in the rear-view mirror.  Personally, it was a great year for me and Catherine.  I hope that you experienced a lot of positive things in your 2017 as well, but now it is time to move forward.  The start of the New Year is always exciting and filled with opportunity and this year is no exception.

“Don't tax you, don't tax me, tax that fellow behind the tree,” quipped Senator Russell Long, who chaired the powerful Senate Finance Committee from 1966 to 1981.

As you probably are aware, the end of the year saw the enactment of tax legislation that will change the way we think about taxes for the coming future.  This past year, Halloween was barely over when House Republicans introduced their version of tax reform. While few observers thought such a massive undertaking could be signed into law within seven short weeks, that is exactly what happened. In the hectic days that preceded Christmas, the president signed what is probably a law that changes tax code more than any other since 1986.

“The legislation will result in substantive tax reform for corporations, with the elimination of the corporate alternative minimum tax (AMT) and consolidation down to a single 21% tax rate (from 35%), all of which are permanent,” Michael Kitces, a respected authority on tax issues, wrote on  “However,” he added, “when it comes to individuals, the new legislation is more of a series of cuts and tweaks, which arguably introduce more tax planning complexity for many, and will be subject to another infamous sunset provision after the year 2025.”

I know the often-stated goal of tax reform was simplification. But simplification means that much lower tax brackets can only be achieved if cherished deductions and credits are done away with. It’s easier said than done.  Sure, simplification is a lofty ideal, but, “Don’t take my deductions or credits from me,” has always been the taxpayers' battle cry. And yes, Congress heard and listened to several of those pleas.  While some deductions will disappear, others remain or have been reduced.

Sharpen your pencils – the new tax code and tax planning

Over 80% of Americans will get a tax cut next year, while just 5% of taxpayers are expected to pay more (Tax Policy Center, Washington Post). In most cases, cuts are expected to be modest; however, much will depend on individual circumstances.  

Due to the complexities of the new law, I am always happy to talk with you, but I also encourage you to check with your tax advisor. Many experts are struggling with the details of the bill, and that’s to be expected this early in the game.  What I would like to do is touch on the high points. It’s not all-inclusive and not a deep dive, but given many of your questions lately, I believe an overview is in order.

So, let’s get started. (Sources for this review include and the Tax Policy Center.) Remember, almost all of the changes in the new legislation (with the exception perhaps of the lowering of the qualified medical expense deduction from a 10% threshold to a 7.5% threshold) do not apply to the tax returns you will prepare for 2017!  The new legislation applies to earnings, deductions, and expenses you will realize in 2018.

1.  The 10% bracket remains unchanged, while the 15% bracket declines to 12%, the 25% to 22%, the 28% to 24%, the 33% to 32%, the 35% holds steady, and the 39.6% slips to 37%. The thresholds are modestly adjusted above the new 22% bracket.

2.  The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filers, reducing the incentive to itemize and simplifying for some taxpayers.

3.  The $4,150 personal exemption is eliminated, and the $1,000 child tax credit doubles to $2,000. In general, rules for charitable contributions remain unchanged.  (Please note, that if you take new larger standard deduction you will not be able to also take charitable deductions.) By itself, the combination of points one, two, and three will provide modest tax relief for most families. But I must caution, it depends on your individual circumstances.

4,  Those in high-tax states could see the biggest hit, as there will be a $10,000 cap on state, local and property tax deductions.  This could be impactful for higher wage earners here in Virginia and especially if one owns property in NOVA.

5.  For investors, the preferential treatment for long-term capital gains and dividends remains intact, as is generally the case for retirement accounts.  One important change – the new law repeals rules that allow for recharacterizations of Roth conversions back into traditional IRAs. Once you convert into a Roth, there’s no going back.

6.  The 3.8% Medicare surtax on investment income for high-income taxpayers was retained.  Since the levy entered the tax code, we have crafted strategies that reduce its bite; however, the tax survived the current tax reform and is likely to remain a permanent feature of the tax code going forward.

7.  The AMT for individuals was not repealed, but exemptions have been widened.  Ideally, it would have been eliminated from the tax code. But Kitces points out, “While the AMT commonly impacted those around $150,000 to $600,000 of income, in the future, AMT exposure will be much smaller, and it will be extremely difficult to be impacted at all, especially given more limited deductions.”

8.  The estate tax survived, but the exemption will double from $5.6 million to $11.2 million, and $11.2 million to $22.4 million for couples.

9.  The new tax bill also repeals the Affordable Care Act mandate that requires all individuals to obtain health insurance. It becomes effective 2019.  No one is quite sure what this will look like, but it is something to remain aware of.

Finally, it’s important to point out that many of the more popular changes in the tax code for individuals will sunset in 2025. While many may eventually be made permanent, as we saw with the Bush tax cuts of 2001 and 2003, there’s no guarantee this will happen again.

10.  And now for businesses: Given that the 21% corporate tax rate applies only to C-corps, there will be a 20% deduction for pass-through entities, such as S-corps, partnerships, and LLCs. I believe this will be a welcome benefit for many business owners, but complex rules may limit the pass-through for some entities. If you own a small business and are using an LLC or and S-Corp election, I recommend that you meet with your tax advisor as early in the year as possible to make sure you have things properly in place to take advantage of any opportunities that may benefit your situation.

I fully expect that the rewrite of the tax code will produce unintended benefits and unexpected consequences.  But as in all things we will have to wait and see what happens.

From an economic standpoint, Congress and the president hope this new legislation will spur economic activity that has been slower than any of us would like to see since the 2008-2009 recession. They hope that changes, especially as they relate to business, will encourage firms to open new plants, expand in the U.S., and level the playing field with the global community.

The $64 million-dollar question – will it work? About 90% of economists surveyed by the Wall Street Journal expect a modest boost to growth in 2018 and 2019, but after that, opinions diverge.  If tax incentives boost productivity, it could lift long-run GDP potential, which would yield a significant benefit. If the economic benefits end after a two-year sugar high, it will likely be deemed a failure.

Early anecdotal data offer some encouragement, as several large firms announced year-end bonuses or wage hikes tied to the lower corporate tax rate.  At a minimum, the lower tax rate increases longer-run after-tax earnings, which played a big role in the late-year stock market rally. It could also boost corporate stock buybacks and dividends going forward, which would create an added tailwind for stocks.

That said, I’m cautiously optimistic it will encourage entrepreneurship and economic growth, which would benefit hard-working Americans.   Again, I understand that uncertainty breeds questions and concerns. If you would like to talk, I’m simply a phone call or an email away. I’d be happy to talk with you and answer any questions you may have.

Happy New Year and a peek at 2018

 I’ve been in the financial planning field for quite a while now and as you can imagine, I’ve been inundated with articles and soothsayers that offer up specific roadmaps for stocks. None have been consistently right.  That said, let’s use simple math to guide us as we enter 2018.

The S&P 500 Index advanced 21.83% in 2017. That figure includes reinvested dividends. No question about it, 2017 offered rich rewards to those who invested in a well-diversified stock portfolio. So, does a sharp upward advance in one year set the stage for a pullback in the following year? Not if we use the historical data as our guide.

 (Here is the link to the raw data )             

 Based purely on the historical data, last year’s impressive advance has little predictive value, with one exception. It simply tells us that stocks have an inherent upward bias over the longer term. I should also add that upward bias is a key component embedded in your financial plan.

What will impact shares next year?  Longer term, it’s always about the fundamentals, i.e., economic growth and profit growth. Low inflation and low interest rates only sweetened the pot last year.  The momentum generated by a growing U.S. and global economy is likely to carry over into the new year. While a 2018 recession can’t definitively be ruled out, leading indicators suggest the odds are low.

That said, unexpected events can create short-term emotional responses in the market that are best avoided by long-term investors.  Last year’s lack of volatility was simply remarkable. According data from LPL Research and the St. Louis Federal Reserve, the biggest drop in the S&P 500 amounted to just 2.8%. It was the smallest decline since 1995. The average intra-year pullback for the S&P 500: 13.6% (LPL Research).

It’s an excellent reminder that volatility is typically a part of the investment landscape. It can sometimes be unnerving, but it’s incorporated into the investment plan we’ve recommended for you.

Table 1: Key Index Returns




3-year* %

Dow Jones Industrial Average




NASDAQ Composite




S&P 500 Index




Russell 2000 Index




MSCI World ex-USA**




MSCI Emerging Markets**




Bloomberg Barclays US

Aggregate Bond TR




Source: Wall Street Journal,, MarketWatch, Morningstar

MTD returns: Nov. 30, 2017—Dec. 29, 2017

YTD returns: Dec. 30, 2016—Dec. 29, 2017


**In U.S. dollars

I hope you’ve found this review to be educational and helpful.   Let me emphasize again that it is my job to assist you! If you have any questions or would like to discuss any matters, please feel free to give me a call. Once again, before making any decisions that may impact your taxes, please consult with your tax advisor.  If you currently don't have a specific tax advisor, let me know and I can help you find one that I have worked with in the past who understands situations like yours.  As 2018 gets underway, I want to wish you and your loved ones a happy and prosperous new year!  Kind Regards, Rudy