Welcome to our financial education resource, covering key topics in financial services, including terminology, trends, and strategies shaping the investment and banking industries. We have developed this resource to empower you to make informed decisions about your finances and be better prepared when working with your advisor and/or banker. 

On Friday, December 15, the House and Senate Tax Cuts and Jobs Act Conference Committee released details of the tax reform bill. The proposed bill comes after several weeks of negotiations to resolve differences in the House and Senate versions.

If this legislation is voted through by Congress, it would then go to President Trump to sign it into law. We will continue to monitor the details and expect a more in-depth piece on the subject once the bill is finalized. 

But first, some insights from our Chairman and Chief Economist, Rick Keller, CFP®, as told to Tyler Resh, Director of Marketing and Strategy.

The Big Picture: What is the overall goal of the reform?

I think as we consider the big picture here, the overall goal is to simplify the tax code for individuals, implement a lower corporate tax rate for corporations, and have a mechanism to tax overseas profits so we can see some of those dollars repatriated here to the U.S.

The Benefits to Corporations: Who stands to gain most from the reform?

For the most part, I think that we're going to see the corporation tax changes as providing the largest impact from this tax code reform.

Impact on Individuals: What are the biggest changes for individuals?

From an investor standpoint the things that we're concerned with is the shortness of time between date of enactment and the end of the year that would allow us to move money around. 

The other aspect is if we lose the deductibility of California state taxes since most of our clients are in the 9.6% up to 13.3% California state income tax bracket, the use of tax-free, tax-deferred and other techniques that defer a tax liability are going to become more important than ever because you will no longer save anywhere between 39.6% currently and 28%. The alternative minimum tax kind of stops the deductibility of state income tax and your property tax at 28% rate. But still you lose that deduction; it'll take at least 3% off your tax savings on your federal returns. So that would be the biggest change for those of us in California.

We also could be in a situation where we are recommending that clients pay their 2017 property taxes before year end. Prepaying allowable property taxes, or other deductible expenses, by year-end might be a good strategy as some deductions might not be available for deduction in 2018.

Impact on Affordability and Housing: Should individuals consider moving to more tax friendly states?

The financial gain by moving out of state is going to be larger than ever. It is a combination of high state income tax rates, sales tax rates and our property taxes, though for some long-term owners Prop 13 has limited them to the cost basis of their house, but if you have a newer purchase it can still be quite high.  Not being able to deduct these things will be a high cost, particularly for our beautiful weather here in California.

Rush Job: What is the impact on hurrying this bill through to get it done before 2018?

By rushing the tax proposals through, there are a lot of unintended consequences. A couple of the ones that would be of concern to me would be in the area of education. So education tax credit, deductibility of student loan interest for lower income people, taxation of scholarships for those people that are in graduate school, those kind of things I think are counterproductive to what we would like to see.

Impact on the Economy: What are the potential effects of this tax plan on the economy?

The tax proposal has an ultimate goal of stimulating the economy. The problem is the economy's doing just fine on its own without the stimulus. I would think that the benefits to small business and big corporations, the ability to accumulate capital, have higher returns on capital, normally are going to create more jobs and bring some companies back that had gone overseas, because now it's going to be more attractive than ever to produce and make things here at home. So we will have a much more competitive global tax rate now, so I'm going to take that as a big positive, especially for small business.

The big worry has to be on the deficit because every estimate I've seen that over the next 10 years this would increase the deficit by about $1.5 trillion, and that's high given the current level that would add about 10% or more. Right now we have about $16 trillion in U.S. government debt in private hands. If you add Social Security, it adds another $5 trillion. If you add some of the other unfunded liabilities, you get up to about $22 trillion. So $1.5 trillion added, it is impactful but to me it's really too big now and they need to think about how we get it down, and there's only two ways: Cut expenses or increase taxes.

Meaningful Changes: How should we view the changes to businesses and individuals?

For both big and small businesses, I think it is a very meaningful tax change. For individuals, the changes are rather small. The high-income people, their taxes actually go up because of a loss of deductions. Low-income people, their taxes actually go down despite some of the things I've seen in the paper. But I think all-in-all the real impact is going to be simplification, because the increases in the personal exemptions are substantial. A lot of people that currently itemize will no longer have to itemize – not having to prepare the individual Schedule A itemized deduction worksheets, it's going to make life a whole lot simpler for a lot of people. So that will be a change but the impact on capital formation for businesses could be quite impressive.

Impact on Our Approach to Investing: What do we expect to be the impact on investments?

From an investing standpoint, I don't see a whole lot of change in that the tax bracket for ordinary rates and capital gains rates are still going to be very wide so you're still going to want to maximize long term capital gains over short-term capital gains, which means holding things over years opposed to less than a year. I think the desirability on a net after-tax basis of municipal bonds is going to be more attractive if you live in a high-tax state like California, so we're looking at those with renewed interest.

In Support of Tax Planning: What does this reform tell us about the importance of tax planning?

Tax planning for this year is as important as ever, but the savings will be similar no matter which year you were to take a loss and offset, this year or not. There are some meaningful changes in the estate tax area that we're going to want to spend some time on with individual clients.

Staying on Top of the Changes: How we are monitoring the news

We will definitely stay on top of things, and we will be on top of the changes for you and how they impact your portfolios; and what we can do to add value to your situation. Expect more from us as details become available. And expect a more in-depth piece on the totality of the reform once everything is finalized.