Tax Reform and your Financial Plan

Tax Reform leads to Tax Timing Financial Strategies

Tax reform impact on personal finances


As a business owner or investor what happens to the tax law matters to you.

On April 26, 2017, Trump released his tax plan, or maybe I should call it a tax memorandum. The most recent list released provided fewer details than the copy provided in September during the presidential race.

In other words, this tax proposal appears to be more of a “let’s start talking about taxes” than “here is our new tax law.” With that said there are important parts worth understanding when it comes to your financial plan because it’s never too early to set yourself up to take advantage of good financial strategies.

Let’s Make Taxes Simple Again

In my shared office space at Johnson Block and Company, we have a copy of the first tax return. It’s three pages with one page of instructions. If you don’t believe me, here is an image:

IRS Copy:

It’s no secret that Trump and Republican’s want to simplify the tax code. A postcard-sized tax return is an image being thrown around. The likelihood of that seems like a long shot because it’s not the first two pages of Form 1040 that makes tax returns difficult. It’s the 5,500 pages in the Internal Revenue Code that tells us how to get those numbers to the first two pages of Form 1040 that’s difficult.

That said, a few of the recent proposals would simplify tax filing for the majority of Americans:

  • Increased standard deduction from $6,350 to $12,000 for single filers, and from $12,700 to $24,000 for married filers.
  • Eliminates all itemized deductions, except for the charitable deduction and the mortgage interest deduction.
  • Eliminates the Alternative Minimum Tax.
  • Eliminates the 3.8 percent Net Investment Income Tax.

Ah yes, the elimination of AMT. We can all rejoice.

By changing those few areas, tax filing will be simplified for the majority of households. Combining this law change with the changes in technology such as IBM’s Watson joining forces with H&R Block brings hope for a less onerous filing season for the majority of Americans.

These two changes aren’t great for some CPA tax preparers or even H&R Block (the early adopter) in the long-term, but technology that improves tax compliance as well as reduces the burden on taxpayers to file taxes is tremendous.

Even though tax filing could become “simple” for the majority of people the opportunity for tax timing planning is still highly relevant. In fact, after Trump was elected I had the majority of my clients pre-pay their itemized deductions in 2016 to plan for this possible change headed into 2017.

Some predictions indicate that tax reform won’t go into effect until 2018, so that gives us another round of tax timing opportunities meaning similar tax timing advice will hold true.

Tax planning after Tax Reform

As stated earlier there aren’t a lot of details on the new tax law. However, there are a few opportunities worth considering as part of your wealth plan, assuming some of these proposals stick:

  • Lower tax brackets create a tax timing event. If the law goes into effect in 2018 then manage your tax brackets to see if you can push income into 2018 rather than pay the potentially higher tax in 2017.
    • Specifically, if you’re a higher income earner and you can avoid paying the 3.8% Medicare surcharge tax.


  • Change to the capital gains tax rate. Tax loss harvesting is always appealing, but there is potential for higher income earners to take advantage of a tax timing opportunity to save up to 8.8%.


  • If itemized deductions go away it may be wise to pre-pay your real estate taxes and state income taxes. Although if AMT is still in effect in 2017 then that could ruin the fun.


  • Corporations are expected to have lower tax rates. The general idea is that these rates will be lower, so will your entity structure need to be revisited?


  • Wait to buy fixed assets until the plan takes effect…? Trump’s original plan had language that all assets would be eligible for immediate deduction rather than Section 179 or Bonus Depreciation which are subject to certain limits.


  • Don’t ignore estate tax planning. The estate tax is scheduled to go away. However, you know that estate planning is not all about the estate tax. Furthermore, keep in mind that political powers swing back and forth. If you’re going to live longer than the next 4 years (at least) then you might not be protected from the estate tax.


  • Do you have old Incentive Stock Options (ISO) shares exercised between 2013-2015? When you sell these options you will likely get an AMT credit which offsets the AMT and regular tax. If AMT is repealed along with the AMT Credit Carryover you could be taxed twice on the shares. Once when exercised and then sold the shares.

It appears we’re far from these laws taking effect, but that doesn’t mean you should stand by and wait until the tax law is put into effect. Have your financial strategies on standby so you can make a smart financial decision that takes advantage of your tax timing opportunities.

Once the calendar flips to 2018 your planning opportunities go with 2017. Gain an understanding of these changes or talk with your trusted advisor and establish your strategy before it’s too late.


Addendum #1

On Wednesday, September 27th, Congress unveiled a tax reform outline titled, “Unified Framework for Fixing Our Broken Tax Code.”

Similar to the April tax proposal, this proposal promises major tax cuts and simplification.

The main features of the plan remain the same as the April release:

  • Standard deduction will double
  • Elimination of AMT (Woo hoo!)
  • Elimination of estate tax
  • Fewer tax brackets
  • Lower pass-through and corporation tax rates

Business owners will want to keep an eye on the pass-through tax decision. The current proposal indicates that LLCs and S Corporation income will be taxed at a maximum of 25% versus the current 39.6% rate. This would yield substantial tax savings to certain business owners.

State income tax and real estate tax deduction might be eliminated to balance the increase in the standard deduction. If you’re in a high tax state like Wisconsin, you may benefit from timing your payments to get the deduction into 2017. Assuming the current system of AMT doesn’t already eliminate this tax benefit…

Regarding simplification, it is my opinion that this proposal still meets this promise for low-income earners. If you’re a middle to high earner then you could experience some simplification, but not enough to guarantee you can do it yourself. If you’re a business owner… forget it. Your tax return is still complicated.

Another area to watch is related to households with children. Because the higher standard deduction will eliminate the exemption for your children, the idea is that there will be an increase to the Child Tax Credit. An adjustment like this is to balance the reduction in the loss of the tax benefit created by exemptions.

I will continue to monitor the on-going reports on the tax code and pass along any important updates.


Addendum #2

On November 2, 2017 the GOP released full details of the Tax Cuts and Jobs Act. This release gives us a great view what is in store for tax reform.

The two biggest highlights –> Tax reform is scheduled for AFTER 2017 and AMT is gone! This gives you time to plan before the end of the year to make your tax timing decisions. It also gives some excitement… AMT was the worst!

This proposal fails to meet the “postcard-sized” tax return that was mentioned. Although, for low-income taxpayers tax filing will be significantly simplified. Business owners, real estate investors, and high-net-worth individuals will not experience any real simplicity.

Tax brackets will be reduced from 7 down to 4 (earlier ideas are that it would be 3), the brackets are 12%, 25%, 35%, and 39.6%.

The 12% bracket is at $45,000 for single and $90,000 for married couples. The early financial independence crowd should be excited about this. For those on route to early financial independence, the use of tax-deferred accounts will continue to be powerful. Especially since the 401(k) threshold is remaining at our current levels.

A very interesting component of the proposal is that the capital gains tax bracket will remain the same as the old system. It is currently a 3-bracket structure of 0%, 15%, and 20% with a 3.8% Medicare surcharge. It is also designed to follow the old system’s tax bracket thresholds (i.e. 15%, 25%, 28%, etc.). I suspect this will change before it’s over, but that’s only a guess.

Here is a chart prepared by Michael Kitces for the new brackets:

Current Long-Term Capital Gains Tax Rates Versus Republican Proposal

Families will have increased tax credits for dependents to offset the elimination of personal exemptions. The Child Tax Credit will remain but is increased from $1,000 to $1,600. Note, the Dependent Care Assistance Program is repealed. Included in the proposal is a new $300 credit for non-child dependents (e.g., college-aged children, or even elderly parents), and the taxpayer themselves (and his/her spouse) will each receive their own $300 “Family Flexibility Credit.” These credits will phase out in 2023. Considering a credit is a dollar for dollar reduction in tax, this is a favorable increase in savings for some middle-class families.

If you own multiple homes then you will only be able to deduct interest on your primary residence. You also need to live in your primary residence 5 of the last 8 years to keep the $250,000 single ($500,000 married) exemption.

Pass-through entities will receive a preferential treatment of 25% rather than the individual’s tax rate. This is a clear incentive for business ownership! Any passive investor will be eligible for the 25% capped rate. Any active business owner will need to split income derived from their labor versus their capital contributions. Similar to the current reasonable salary rules for S Corporations. Interesting planning will commence in this area. To avoid abuse there are specified service activities (i.e. lawyers, accountants, consultants, engineers, performers, financial services industry) that will not have any income eligible for the 25% capped business rate. This avoids the temptation to convert from being an employee to an independent contractor and utilizing the lower business tax rate.

My favorite Roth conversion strategy will come to end. The ability to convert today and recharacterize by October 15th of the following year is being repealed.

There are a lot more details and I plan on digging deeper to get more ideas. A lot of taxpayers will be taxed at lower rates in 2018 and beyond. This makes the use of a Donor Advised Fund one of the top planning strategies of 2017.


Do you want to understand how to make your money work for you and keep more of what you have earned? 

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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Nate Byers a Madison, WI CPA Financial Advisor,  and all rights are reserved. Read the full Disclaimer in the footer below.