Our Assessment of the New Tax Bill

US Congress

With the sweeping US tax bill set to become law, we thought we would provide some brief observations and perspective on its broad implications, as well as a summary of the major changes the bill entails.

Politics aside, this is a milestone event. The bill represents the most comprehensive changes to the tax code in over 30 years. While it arguably doesn’t simplify the code as many originally hoped, it lowers tax rates and begins to address some distortions. That said, the code still remains complex, and the bill will take time to digest. It also puts a premium on economic growth to cover the $1.5 trillion in tax cuts.

One of the bill’s most significant changes is the reduction of corporate taxes from 35% to 21%, which becomes effective in 2018 and is permanent. The bill also temporarily permits (until 2025) immediate expensing of capital spending, rather than amortizing it over years. The intended consequence, of course, is better economic growth, which will be a key measure of success for the bill. We believe the hurdle rate will be a sustained 3% annual GDP growth, which has been elusive for a decade.

For individuals, the new bill offers incremental and less permanent changes. Most significant are:

  • lower tax rates by several percentage points
  • more limited impact of the Alternative Minimum Tax (AMT)
  • an increase in the Standard Deduction
  • meaningfully higher estate and gift tax exemptions
  • restriction/removal of many popular itemized deductions.

We briefly discuss these below. All-in, with these puts and takes, we believe most of our clients will see an improved tax picture over the next few years. These new provisions (with the exception of the AMT) expire in 2025.

Our ultimate message here is that the new bill puts a premium on revising and updating your tax strategies. You should speak proactively with your CPA about the bill’s implications for your circumstances. We can help you organize your thoughts and priorities. Happy to do that with you.

As a final point, from an investment perspective in the US, the new bill has implications for better corporate earnings (essentially a one-time boost to earnings growth) and, at least in our opinion, rising bond yields in the near term if the tax cut acts as an economic stimulus. We would not be surprised to see better GDP growth in the US (topping 3%) for 2018. Much of this, in our view, is largely “priced in” to US stocks on a broad basis. The “next leg up” in our opinion must be driven by sustained economic growth after 2018.


Individual Tax Bracket Reduction:  Seven brackets remain.  All but two Marginal Rates were reduced and Income Thresholds increased.

Personal Exemption Eliminated:  For the 2017 tax year, individuals (and their dependents) receive a $4,050 exemption per person. Starting in 2018, this exemption has been eliminated.

Standard Deduction Increased:  Standard Deduction will be increased to $12,000 for individual filers (from $6,350 in 2017) and $24,000 for joint filers (from $12,700). 

Pease Limitation Eliminated:  The Pease Limitation on Itemized Deductions has been eliminated.  Pease reduced Itemized Deductions by 3% as Adjusted Gross Income reached certain levels ($261,500 for individuals, $313,800 for joint filers).

Capital Gains/Qualified Dividends/Medicare Surtax:  Rates and Income thresholds remain the same, and the 3.8% Medicare Surtax stays in place.

Itemized Deductions:  Increased Standard Deduction is expected to significantly reduce the number of taxpayers itemizing deductions.  Those who continue to itemize will see changes:

  • Cap on State and Local Income Tax and Property Tax Deductions:  A combined cap of $10,000 for State/Local Income Tax and Property Tax…for both Individual and Joint Filers.
  • Mortgage Interest Deduction:  The new law places a cap on the deductibility of mortgage interest on the first $750,000 of principal debt on any Mortgage taken out after December 15, 2017.  Existing mortgage holders can continue deducting interest on the first $1,000,000
  • Home Equity Line of Credit Interest:  The new law eliminates the deductibility of HELOC interest, including HELOCs previously opened. 
  • Cash Donations:  Threshold for deductibility of Charitable Cash Donations increased from 50% of AGI to 60%.
  • Medical Expense:  Threshold for deductibility of Medical Expenses temporarily decreased to 7.5% of AGI in 2018 (and retroactive for the 2017 tax year).  Increases back to 10% after 2018. 
  • Investment Advisory Fees/Other Miscellaneous Deductions:  All miscellaneous deductions subject to the 2% AGI floor are eliminated.  Some notable expenses in this category include tax preparation fees, unreimbursed employee expenses and investment advisory fees.

Alternative Minimum Tax (AMT):  The new law creates significant increases to income thresholds for AMT, reducing the number of taxpayers impacted.  The two changes:

  • AMT Exemption Amount:  For those whose income is subject to AMT, the amount of income exempt from AMT increases from $55,400 (individuals) and $86,200 (joint) to $70,300 and $109,400, respectively.
  • AMT Exemption Phase-out Amount:  Currently, the AMT Exemption is phased out as AMT income exceeds $123,100 (individuals) and $160,900 (joint filers).  The new law increases those levels to $500,000 and $1 million, respectively. 

Pass-Through Income:  With the exception of “specified service” businesses, the new tax law allows for a 20% reduction in the amount of reported Pass-Through Income (which is then claimed as income on the individual’s tax return).  The exempt business sectors include health care, law, accounting and financial services (to name a few).  Additional restrictions may affect the application of the 20% reduction. 

529 Plans:  Distributions from 529 Plans can now be used tax-free for public, private and religious elementary and secondary school qualified expenses (up to $10,000 per student per year).  This also applies to home schooling expenses.

Trust and Estate Income Taxes:  Reduction in the number of brackets from 5 to 4 and lower Marginal Rates.  Brackets remain compressed with only $12,500 of income needed to reach the highest rate of 37%.

Estate and Gift Tax Exemptions:  The current Unified Estate and Gift Tax exemption amounts of $5.6 million ($10.2 million for married couples) will increase to $11.2 million ($22.4 million for married couples). 

Roth IRA Recharacterizations:  The new law disallows the Recharacterization (or “undoing”) of a regular IRA that was converted to a Roth IRA, starting with filings for the 2018 tax year. 

As we mentioned above, the new tax law is complex. While this summary strives to articulate the major changes, it is not a comprehensive assessment of the bill. There are clearly several moving parts to evaluating your own tax situation, so we recommend that you speak proactively with your CPA about how the bill affects you. We would be glad to help you organize your thoughts for that discussion.


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