Tax Reform Accomplished

As 2017 drew to a close, Congress passed the Tax Cuts and Jobs Act (the “Act”), tax reform legislation that made sweeping changes to the Internal Revenue Code. When Congress last reformed the tax code in 1986, the legislative process took over two years. This time Congress accomplished the same feat in two months.

This white paper discusses the portions of the Tax Cuts and Jobs Act that are of particular importance to business owners, investors, and financial advisors. We point out situations that are likely to fare better and those likely to fare worse under the legislation. At the end, we present a chart of “winners and losers ” that takes into account these individual situations. The chart also shows business and economic sectors particularly likely to be affected by these tax changes, thereby potentially altering their equity valuations.

The Act’s provisions contain nuances that present a number of potential opportunities and pitfalls. Investors should consult with their financial and other professional advisors to determine what responsive actions, if any, make sense in their cases.

Congressional Procedure for Passage

The Republicans passed the Tax Cut and Jobs Act without Democratic support. That was not a problem in the House, where the Republicans have a strong majority. But the procedural rules of the Senate made passage there without Democratic votes more challenging.

Normally, under the rules of the Senate, sixty votes (and thus some Democrats’ support) are needed to overcome a filibuster and pass legislation. However, the Senate has adopted a procedure, called “reconciliation”, which if followed permits the chamber to pass tax legislation with a simple majority. To comply with the arcane rules of reconciliation, the Tax Cut and Jobs Act could lose no more than $1.5 trillion of government revenue during the next ten years, and could not lose any revenue after that ten-year period.

Congress crafted the Act to meet the second prong of these requirements by having many of the tax cuts expire. But the first prong was more problematic. The reduction in corporate tax rates alone is estimated to lose close to $1.5 trillion in revenue. Thus, virtually every dollar of additional tax cuts (say, for individuals and families) had to be offset with an additional dollar of new tax revenue.

As a result of this process, and the broad spectrum of individual tax situations, the Tax Cut and Jobs Act is not an unalloyed benefit for everyone. There are winners and losers, as changes to deductions and exemptions fall unevenly across economic sectors, businesses, and individual taxpayers.

Following is a summary of the portions of the Act most likely to affect investors. Unless otherwise noted, these changes are effective January 1, 2018.

Tax Changes for Individuals

Among others, the Act makes the following changes affecting individuals and families:

Tax rates: The Act lowers the top individual tax rate from 39.6% to 37%, and applies the top tax rate to joint incomes over $600,000 (up from $470,700 under prior law). For single filers, the top tax rate applies to incomes over $500,000 (up from $418,400 under prior law). To comply with the reconciliation rules, the lower tax rates expire after 2025.

The Act changes the inflation index used to increase the income levels at which progressively higher tax rates take effect. The Act substitutes the “chained” CPI for the standard CPI used under prior law. “Chained” CPI acknowledges that consumers might switch to less expensive alternative goods when the prices of some goods get too high. (For instance, if the price of beef is too high, consumers may switch to less expensive chicken.) Chained CPI increases less quickly than unchained CPI. As a result, under the Act the income levels will not increase as quickly, potentially forcing taxpayers into higher tax brackets as their incomes increase due to inflation (a process called “bracket creep”).

  • Investment taxes: The Act does not change the 20% top tax rate on dividends and capital gains, or the 3.8% surtax on investment income imposed by the Affordable Care Act (Obamacare).

The final legislation does not include the Senate bill provision that would have required investors to compute taxable gain on a sale of securities with reference to their oldest shares (FIFO). Thus, investors remain free to minimize taxable gain by choosing to sell first those lots with the highest basis.

  • Personal exemption and child credit: The Act eliminates the personal exemption. Instead, the Act increases the child credit to $2000, of which up to $1400 is refundable, and adds a $500 credit for other dependents. These credits are available only through 2025. Also, the credits phase out (become unavailable) for joint incomes over $400,000 (up from $110,000).
  • Standard deduction: The Act roughly doubles the standard deduction to $24,000 for joint filers ($12,000 for single filers), a simplification measure that allows more people to avoid itemizing. The House Ways & Means Committee estimates that the increase in the standard deduction will reduce the number of taxpayers who itemize from roughlyone-third to fewer than 10 percent. Committee on Ways and Means, Tax Cuts and Jobs Act Section by Section Summary (November 2017).

This change in the standard deduction, along with the curtailment of deductions for interest expense and property taxes described below, has raised concerns that the Act will adversely affect real estate values. Additional taxpayers claiming the higher standard deduction have no tax incentive to pay mortgage interest or higher property taxes, and those who do continue to itemize will get reduced federal tax benefits from incurring those expenses. See New Tax Law Expected to Slow Rise of Home Values, Washington Post (December 29, 2017).

  • State and local taxes: Under the Act, individuals may no longer deduct state and local taxes in excess of $10,000 annually. Businesses may continue to deduct state and local taxes. Investors should scrutinize their state and local tax payments to determine if any might be regarded as business-related.
  • Mortgage interest: The Act reduces the mortgage amount on which interest paid may be deducted from $1 million to $750,000. The deduction is retained for second home mortgages, but not for home equity lines of credit. Existing home mortgages are grandfathered (up to the prior loan eligibility amount of $1,000,000). The disallowance for interest paid on home equity lines of credit applies to interest paid beginning in 2018, including interest paid on existing line of credit borrowings.

Investors who hold large cash positions and are considering the purchase of a home should discuss with their financial professionals the advisability of keeping their mortgage balance under $750,000, or even of making an all-cash purchase and claiming the newly increased standard deduction.

  • Charitable contributions: The Act does not change the general deduction for charitable contributions. The Act increases the percentage of current year income from which charitable contributions may be deducted from 50% to 60%.

The reduction in tax rates, doubling of the standard deduction (prompting fewer taxpayers to itemize), and increase in the estate tax exclusion all reduce the tax incentives to make charitable contributions. For that reason, charitable organizations are concerned that the legislation will adversely affect the amount of donations they receive.

  • Medical expenses: The Act retains the deduction for medical expenses. Moreover, medical expenses incurred in 2018 and 2019 are deductible to the extent they exceed 7.5% of adjusted gross income, rather than the 10% AGI limit in place in prior years (and which is scheduled to be in place again in 2020).
  • Casualty losses: The Act disallows deductions for casualty losses, except for losses arising from causalities that are declared disasters by the president.
  • Miscellaneous itemized deductions: The Act repeals the miscellaneous itemized deductions subject to the 2% floor. This repeal includes the deduction for investment fees and expenses available under prior law.

Mutual fund investors effectively may continue to deduct management fees as such fees are netted against the fund’s distributable taxable income. On the other hand, the ability to harvest losses and manage taxes remains a significant advantage of separately managed accounts. Investors should review with their advisors the form of investment that provides the greatest after-tax benefit in their situation.

  • Limit on itemized deductions: As a simplification measure, the Act repeals the limitation on itemized deductions imposed on high-income taxpayers under prior law (known as the “Pease limit”).
  • AMT: The Act does not repeal the individual alternative minimum tax (AMT), but it increases the exemption amount from $84,500 to $109,400 (joint returns) so fewer taxpayers are subject. The Act also significantly increases the beginning of the exemption phase-out from $160,000 to $1,000,000 (joint returns). These changes are in effect only through 2025 (to comply with reconciliation rules).
  • Estate tax: The Act doubles the estate tax and generation skipping tax exclusion to $11.2 million per person ($22.4 million for a married couple) through 2025. (The Act does not adopt the House bill’s repeal of the estate tax beginning in 2024.)The Act retains the current “stepped up basis” rules that allow an heir to sell inherited assets without paying capital gains tax on appreciation that occurred during the deceased’s lifetime.
  • 529 plans: The Act allows tax-favored 529 distributions to defray the cost of elementary and secondary school expenses up to $10,000 per student annually.
  • Retirement plans: Although initial proposals would have made significant changes to the treatment of retirement plan contributions, the final legislation includes none of these adverse changes. The Act makes one small change, repealing the ability of an individual to recharacterize a Roth IRA contribution as a traditional IRA contribution. Under prior law, an individual making a contribution to an IRA (traditional or Roth) could, before the due date of the income tax return for that year, recharacterize the contribution as made to the other type of IRA (Roth or traditional). The Act repeals the ability to recharacterize a Roth contribution as a traditional IRA contribution, but continues to allow the recharacterization of a traditional IRA contribution as a Roth IRA contribution. This recharacterization could be useful where, for instance, IRA asset values have droppedafter the conversion date. In such a situation, it could make sense to reverse the prior conversion and consider converting at a later time (after an IRS-mandated waiting period) when tax on the conversion would be imposed at a lower asset value.
  • Alimony payments: The Act eliminates the deduction for alimony payments. Alimony payments also are no longer includable in the recipient’s taxable income. The Act delays the effective date of this provision for one year, so it applies only to alimony paid pursuant to a divorce or separation agreement executed after December 31, 2018.
  • Home sales: The Act does not include the provision in the House and Senate bills that would have tightened the income exclusion on home sales by requiring a taxpayer to own and use a home as a principal residence for five out of the previous eight years to qualify for the exclusion and permitting the exclusion only once every five years.
  • Affordable Care Act (Obamacare): The Act eliminates the penalty imposed on people who do not purchase health insurance (the “individual mandate”). This provision is controversial. The non-partisan Congressional Budget Office has concluded that this action will save the federal government over $300 billion in the next decade, but will result in premiums increasing by an additional 10% and 13 million people not continuing their insurance coverage. Congressional Budget Office Cost Estimate, Better Care Reconciliation Act of 2017 (June 26, 2017); CBO Letter to Representative Mike Enzi (July 20, 2017).

 Tax Changes for Businesses

Among others, the Act makes the following changes affecting businesses:

  • Corporate tax rate: The centerpiece of the Act is a permanent reduction in the tax rate imposed on C corporations from 35% to 21%, beginning January 1, 2018. The Act also repeals the corporate alternative minimum tax (AMT). U.S. corporations currently pay tax at an average effective rate of 18.6%, lower than the new 21% rate. Washington Post, GOP Tax Plan Delivers Mixed Results for Corporate America (November 2, 2017). Thus, some sectors and companies will benefit from the new rate, while others may receive no benefit or even be hurt. The lower tax rate is particularly helpful to retailers, which claim few deductions and thus pay tax close to the full U.S. rate.
  • Business income of pass-through entities: Business income earned by pass-through entities (e.g., partnerships, limited liability companies, and S corporations) flows through to the owners’ tax returns, where under prior law it was taxed at ordinary income rates. The Trump Administration, along with the Republican Congressional leadership, sought to reduce that tax to allow smaller businesses to retain more of their profits and grow. The tax writers realized, however, that individuals could abuse this benefit to save taxes on income that is in fact compensation for their services, which should be taxed at full ordinary income rates. For instance, consider a project manager employed by a large company who earns $150,000 per year, which is taxed as ordinary income. If the tax on pass-through income is reduced, the worker could save taxes by forming a consulting LLC and having his former employer contract with the new LLC for his services — even though he is providing exactly the same services for exactly the same company. To prevent this result, the Act curtails the use of the flow-through benefit by owners who also provide services to the business entity. The Act provides a deduction equal to 20% of business income received by owners of a non-service business. Combined with the new 37% top individual tax rate, the deduction results in a top tax rate for eligible pass-through business income of 29.6%. The deduction is available only through 2025. The deduction cannot exceed the greater of (i) 50% of the owner’s pro rata share of wages paid by the entity (including wages paid to both employees and owners), or (ii) the sum of 25% of the owner’s pro rata share of wages paid by the entity (including wages paid to both employees and owners) plus 2.5% of the initial basis of all depreciable tangible property used by the business. Owners of a personal service business may claim the deduction if the owner’s joint income is less than $315,000. (Such owners also are exempt from the 50% wage limitation.) The ability to claim the deduction is phased out for incomes between $315,000 and $415,000, so that owners of a personal service business who have taxable income over 415,000 may not claim the deduction at all. The Act defines personal service businesses to include entities providing financial, brokerage, health, law, accounting, actuarial, or consulting services, but excludes engineering and architecture businesses.

Other considerations of the change to pass-through income include:

  • Small 401k plans: Small business owners who are eligible to claim the 20% deduction should re-evaluate with their financial professionals the ongoing tax benefits provided by existing 401(k) plans. Contributions into the plans will produce tax savings at a 29.6% rate, but distributions from the plans are likely to be taxed at higher individual rates. Of course this analysis ignores the significant benefits of tax deferral. If owners conclude that the 401(k) plan produces insufficient ongoing tax benefits, they should consider offering a Roth 401(k) option, which will allow business income to be taxed at the lower rate and participants to withdraw earnings tax-free.
  • MLPs: Energy and investment master limited partnerships that qualify for pass through treatment are eligible to claim the 20% deduction, to the extent that the MLP reports taxable income and subject to the limitations on the availability of the – 7 – deduction described above. Some profitable MLPs might consider operating as C corporations to take advantage of the drop in the corporate tax rate, although there are a number of countervailing factors that go into determining whether such a change in structure is advisable.
  • Capital expenditures: The Act permits businesses to deduct immediately capital expenditures they make through 2022, rather than, as under prior law, to claim depreciation deductions over the prescribed life of the asset purchased. The write-off expiration date is phased out, reduced by 20% each year through 2026 (entirely phased out in 2027).
  • Small businesses: The Act increases the amount small businesses may expense to $1 million, with the expense deduction phasing out beginning at $2.5 million.
  • Interest: Under the Act, a business may no longer deduct net interest expense to the extent it exceeds 30% of the business’s income (defined as EBITDA through 2022 and EBIT thereafter). Real estate businesses, and other businesses with gross receipts less than $25 million, are exempt from this disallowance.
  • Like kind exchanges: The Act limits tax-deferred “like kind exchange” treatment to exchanges of real property.
  • Entertainment expenses: The Act eliminates deductions for business entertainment expenses.
  • NOL carryforwards: The Act eliminates net operating loss carrybacks and makes changes to the treatment of loss carryforwards. The Act provides that loss carryforwards may offset only up to 80% of taxable income in any given year. Unused losses may be carried forward indefinitely. Individuals (not corporations) may claim net losses up to $500,000 (joint returns) annually; losses over that amount are subject to the new carryforward rules. The new rules apply to losses arising in 2018 and later years.
  • Insurance companies: The Act curtails special tax provisions used by insurance companies to reduce their taxable income.
  • Foreign earnings of U.S. multinational companies: Under prior law, a foreign subsidiary’s earnings were subject to a 35% U.S. tax when the subsidiary repatriated the earnings to its U.S. parent. To avoid this tax, many U.S. companies left their earnings overseas with their subsidiaries. The Act provides that future earnings of foreign subsidiaries will no longer be subject to tax on repatriation. Earnings that U.S. companies are currently holding offshore are deemed to be repatriated and subject to U.S. tax at a rate of 15.5% for liquid assets and 8% for illiquid assets, payable over eight years. Existing offshore earnings are taxed regardless of whether foreign subsidiaries actually repatriate those earnings. As a practical matter, once the earnings have been so taxed, the U.S. parent is likely to repatriate them as doing so will incur no additional tax.
  • Base erosion: The Act includes provisions aimed at multinational companies that hold valuable intellectual and other intangible property offshore to avoid U.S. tax, an arrangement common in the technology and pharmaceutical sectors. These firms often locate their intangible property in tax haven jurisdictions that impose no or little tax. They then require their U.S. company to pay a royalty or other amount to the foreign affiliate for the domestic use of the intangible property. The group obtained a tax deduction in the U.S. for the payment without owing a corresponding tax on the receipt of that payment in the haven jurisdiction. The Act seeks to thwart this scheme in various ways, such as by imposing a minimum tax on foreign earnings of U.S. multinational companies and by effectively disallowing a full tax deduction for payments made by a U.S. company to a foreign affiliate for the use of intangible and other designated property.

Winners and Losers

Following is a chart showing (in billions of dollars) how much each of the major provisions of the Tax Cut and Jobs Act increases or decreases federal revenue.

Source: Joint Committee on Taxation, Estimated Budget Effects of the Conference Agreement for H.R. 1, The “Tax Cuts and Jobs Act”(December 2017).

Recall that, under the Senate reconciliation rules, the Act may lose no more than $1.5 trillion over the next ten years. The bill comes in just under that amount at $1.456 trillion. Note also that the corporate tax rate reduction 35% to 21% and elimination of the corporate alternative minimum tax costs $1.389trillion, indicating that the corporate tax cut uses over 95% of the entire revenue loss allotment. Accordingly, all of the other provisions in the bill essentially must be revenue neutral in the aggregate: every dollar of revenue lost must be offset by a dollar of revenue gained. A taxpayer thus might end up paying less tax, more tax, or the same tax depending on how the gainers and losers apply to his or her situation.

A glance at the chart suggests that investors may pay significantly less tax if they (i) currently pay alternative minimum tax, (ii) have large estates and are actuarially likely to die in the next few years, or (iii) own a pass-through business other than a service business. Other investors may not fare so well; they should examine their situation carefully to see if the benefit of the reduction in tax rates exceeds the cost of eliminated deductions.

The following chart summarizes these findings. In addition to considering tax changes to individuals, the chart shows economic sectors that are likely to incur significant tax changes that could alter their stock valuations.

A final note on state taxes

Most states use federal adjusted gross or taxable income as the starting point for imposing state tax. States then reduce or increase the federal amount for particular state items. In those states, the expansion of the federal tax base arising from the elimination of deductions is likely to increase the state tax base as well –but without a corresponding reduction in the state tax rate. Thus, many investors may find that, although their federal tax is lower, their state tax has increased.

Conclusion

The Tax Cuts and Jobs Act makes sweeping changes that are likely to impact businesses and investor decisions significantly now and in the coming years. The nuances of the Act present a number of potential opportunities and pitfalls. Investors should consult with their professional advisors to determine how the legislation will alter the tax due in their particular situation, both now and in the future when many of the provisions are slated to expire. They also should discuss with their advisors what actions, if any, they might consider to take advantage (or blunt the adverse effects) of the Act’s provisions in their cases.


Note: This information does not reflect the political views of WealthPoint, LLC or any of its employees or affiliates. WealthPoint, LLC does not provide any tax or legal advice. The discussion herein is general in nature and is provided for informational purposes only.  There is no guarantee as to its accuracy or completeness.  It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities).  Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Andrew H. Friedman is the founder and principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products. They may be reached at www.TheWashingtonUpdate.com.

 Copyright Andrew H. Friedman 2018. Reprinted by permission. All rights reserved.

 File #0017-2018

A New Administration in Washington: What Tax Changes are in Store This Year?

For the first time in thirty years, enactment of comprehensive tax reform legislation is a realistic possibility. President Trump has made tax reform a central goal of his new administration, designating simplification and lower tax rates as key drivers of economic growth. In this effort Trump enjoys the vigorous support of the Republican leadership in Congress.

This white paper discusses the proposals for tax reform, the barriers that must be overcome to permit its enactment, and the likely tax changes investors will encounter when all is said and done in 2017.

Why is tax reform so hard?

“Tax reform” typically has two primary goals: simplifying the tax code and reducing tax rates. On their face, these goals are not terribly controversial. Virtually everyone agrees the tax code is far too complex, and most people approve of lower tax rates, at least for middle-income taxpayers.

Yet it is said in Washington, “tax simplification is complicated stuff.” (The quote is from Pamela Olson, former assistant Treasury secretary for tax policy.) The last time Congress reformed the tax code was 1986 under the Reagan administration.

The challenge in tax reform is not so much reaching consensus on the need for simplification as it is assuring that the reform changes do not reduce significantly the revenue the government derives from the tax system. The House leadership in particular is concerned about the burgeoning federal budget deficit and has made clear that reform legislation should strive to be “revenue neutral”.

Standing alone, a reduction in tax rates reduces the revenue generated by the tax system. Thus, most observers agree that reform can be revenue neutral only if the lower rates are joined with a broadened tax base, accomplished by eliminating or curtailing existing deductions and exemptions. All deductions and exemptions – including the most entrenched and most popular – are put on the table for possible change. But each deduction and exemption benefits a particular group or economic sector that does not want to see it taken away. Objections from these affected groups make the passage of comprehensive reform a political challenge.

Achieving Revenue Neutrality

The White House and Republican leadership have focused on two ways to alleviate, at least somewhat, the need to include unpopular revenue raising provisions in the tax reform proposal.

  • Dynamic Scoring. “Scoring” refers to the revenue lost or gained by a piece of legislation, typically as determined by the non-partisan Joint Committee on Taxation (JCT). The JCT typically scores legislation on a “static” basis, that is, without considering many of the longer term economic consequences of the proposal. Republicans assert that the JCT instead should use “dynamic scoring”, which takes into account the enhanced economic growth (and the accompanying additional tax revenue) resulting from lower tax rates.

Trump has set out forcefully the case for dynamic scoring. He posits that allowing individuals and businesses to keep more of their earnings stimulates the economy, as businesses use the retained funds to hire and grow and individuals use the additional wages they receive to purchase more consumer goods. This economic growth in turn raises taxable income and thus tax revenue, recouping at least some of the revenue lost from the reduction in tax rates. Treasury Secretary Mnuchin has even asserted that “the [tax reform] plan will pay for itself with growth.” Washington Post (April 20, 2017).

Although most economists agree that lowering tax rates engenders some economic expansion, there is wide disagreement over how much revenue the expansion generates relative to the revenue lost from lowering tax rates. See University of Chicago Initiative on Global Markets (May 2017) (no economists surveyed believe resulting economic growth will pay for proposed tax cuts). Federal deficits grew in the wake of the major tax cuts enacted under Ronald Reagan and George W. Bush, suggesting that the revenue generated through expansion was insufficient to achieve revenue neutrality. Of course, attributing a growing deficit to a single cause (tax rate reduction) in a complex multi-factor world where spending is not static is an uncertain enterprise.

There is no question that the use of dynamic scoring is a large part of the Republican legislative strategy. Our guess though is that the JCT, even if it uses dynamic scoring, will conclude that economic expansion alone will not make tax reform revenue neutral. Thus, we expect Congress will have to consider curtailing deductions and exemptions to offset at least some of the revenue lost by the reduction in tax rates.

  • Reforming the Affordable Care Act. In addition to tax reform, the Republicans have made reforming or repealing the Affordable Care Act (“Obamacare”) a top priority. The House leadership has stated that passing health care reform legislation first may be a necessary step to completing comprehensive tax reform.

Why does the order in which Congress takes up these apparently unrelated pieces of legislation matter? The answer is that the ACA reform legislation would eliminate the additional taxes imposed by the ACA, such as the 3.8% surtax on investment income earned by affluent families. Repealing those taxes before the tax reform debate lowers the existing revenue baseline that tax reform must match. Conversely, if Congress does not pass ACA reform, then the ACA taxes must be eliminated in the tax reform legislation itself, generating an additional revenue loss that must be recouped through controversial curtailment of more deductions and exemptions. Addressing health care reform first thus reduces the need for some revenue-raising changes and bolsters the feasibility of completing tax reform.

The Tax Reform Proposals

Last July, the House leadership issued a “blueprint” for comprehensive tax reform. More recently, the Trump administration released its own outline. Although there are differences, the two proposals have much in common.

Trump’s plan calls for the following changes to individual taxes:

  • 35% top individual rate (down from the current 39.6% rate).
  • 20% top capital gain and dividend rate (unchanged from the existing rate).
  • Repeal the Obamacare 3.8% surtax (if not already accomplished through ACA reform legislation).
  • Eliminate the alternative minimum tax.
  • Repeal the estate tax and generation skipping tax. An open question is whether the legislation will retain stepped-up basis in assets at death. Under current law, stepped-up basis eliminates a double tax at death by relieving heirs of the obligation to pay capital gains tax on appreciation that accrued during the lifetime of the deceased. Without an estate tax, the need to prevent double tax is eliminated. Repealing both the estate tax and stepped-up basis would essentially substitute an income tax on heirs for an estate tax on the deceased.

During the presidential campaign, Trump, along with eliminating the estate tax, proposed eliminating stepped-up basis for joint estates exceeding $10 million. The new administration proposal and the House blueprint are silent on this issue.

  • Eliminate the deduction for state and local taxes.

For businesses, Trump’s plan calls for:

  • 15% top tax rate on business income. This provision is the heart of Trump’s reform proposal. The current U.S. corporate tax rate of 35% is the highest among developed countries. This high rate has prompted U.S. businesses to move operations (and jobs) overseas. Trump believes that a lower rate will encourage companies to keep their operations in the U.S.

Trump would not limit the business rate reduction to C corporations. His proposal would similarly tax at 15% business income flowing through pass-through entities such as S corporations, partnerships, and LLCs. Currently, flow-through business income is taxed on the owner’s personal return at the highest individual rate. The proposal thus would reduce the tax rate on flow-through business income by almost two-thirds.

Many observers believe a 15% rate will be difficult to achieve on a revenue neutral basis. The House plan calls for a 20% corporate tax rate and a 25% tax rate on business flow-through income.

  • Full expensing of capital expenditures. Instead of deducting the cost of purchasing a capital asset over the asset’s life, the House blueprint would permit businesses to claim a deduction for the full expenditure in the year of purchase.
  • The House blueprint would eliminate the deduction for interest paid by businesses.\
  • Tax the sale of carried interests as ordinary income.
  • Institute a “repatriation holiday”, permitting multinational companies to repatriate offshore earnings at a reduced tax rate. Under current law, income earned by a foreign subsidiary of a domestic company is not taxed in the U.S. as long as the earnings remain offshore. But if the subsidiary repatriates the earnings to the U.S. parent, the U.S. imposes a 35% corporate tax. The U.S. is the only developed country that taxes repatriated earnings.

To avoid this tax, U.S. multinational companies are leaving trillions of dollars in earnings offshore, where they cannot be invested in the U.S. economy. Trump is proposing permitting (or perhaps requiring) offshore subsidiaries to repatriate existing offshore earnings at a reduced tax rate. Although his proposal does not specify a rate, most observers think it would be in the 5-10% range. This “repatriation holiday” accomplishes two goals: providing more funds for investment in the U.S. economy and raising additional tax revenue (because as a practical matter the U.S. will never recoup the nominal 35% tax on offshore earnings).

  • Allow future offshore earnings to be repatriated without tax. Trump’s proposal would eliminate the tax entirely on repatriation of future offshore subsidiary earnings, thereby implementing the “territorial” taxation system adopted by other countries. Thus, foreign subsidiaries could repatriate future earnings to their U.S. parent free of tax.

The House tax reform blueprint also includes a controversial “border adjustment” provision to promote U.S. competitiveness and raise revenue. Under this proposal, U.S. businesses that sell products directly from the U.S. company to an overseas purchaser (that is, without use of an offshore subsidiary) could exclude the resulting sales income entirely from U.S. tax. Conversely, U.S. companies would not be permitted to deduct amounts paid to foreign suppliers. Because U.S. imports greatly exceed exports, the border adjustment proposal raises significant revenue.

Border adjustments would be a boon to U.S. exporters. But the proposal would cause a substantial increase in taxes paid by companies that rely on imports. For instance, many retailers import products manufactured in other countries for sale in the U.S. Under this proposal, a retailer would get no deduction for payments made to purchase products wholesale from a foreign manufacturer, and thus would pay U.S. tax on the full retail sales price. Trump’s proposal is silent on border adjustments; the White House says it is under consideration with possible changes.

In addition to the above, the final tax reform proposal likely will include a series of “loophole closers”, less controversial tax changes to curtail what many members believe are unduly generous tax benefits that may be eliminated in the name of revenue and simplification. Examples of loophole closers could include:

  • Curtail “stretching” of inherited IRAs and 401(k)s.\
  • Apply required minimum distribution rules to Roth IRA accounts beginning at age 70-1/2.
  • Limit Roth IRA conversions to pre-tax dollars.
  • Treat all distributions from S corps and partnerships to owner-employees as subject to employment taxes.

Prognosis for Tax Legislation in 2017

With their sweeping election victory, Republicans can pass tax legislation this year without Democratic support. Normally sixty votes (and thus some Democratic support) are needed in the Senate to overcome a filibuster and pass legislation. However, Congress has adopted a procedure, called “reconciliation”, which if followed permits the Senate to pass most spending and tax legislation with a simple majority. House Speaker Paul Ryan already has said he plans to use this procedure to pass much of Trump’s fiscal agenda, including tax legislation.

Even with only one party involved, however, passing comprehensive tax reform is a prodigious task for the reasons discussed above. Although passage is far from assured, we believe there is a reasonable prospect that Congress will pass tax reform legislation this year.

Investors must keep in mind that tax reform is not an unalloyed benefit for everyone. There will be winners and losers, as changes to deductions and exemptions fall unevenly across economic sectors, businesses, and individual taxpayers. For instance, companies doing business abroad could be helped or hurt, depending on whether they import or export product. Investors must keep a close eye as reform legislation progresses to determine which sectors could lose tax benefits in the name of lower overall rates.

If the Republicans are unable to agree on full-scale tax reform, we believe that Congress will abandon the sweeping goal of simplification to pass streamlined legislation that simply reduces tax rates. It would be too embarrassing for the Republicans, having assumed control of Congress and the White House with the promise of lowering taxes, to pass no tax relief legislation at all this year. This tax rate reduction could be offset somewhat with uncontroversial loophole closers but would be supported largely by an appeal to dynamic scoring. There is even a reasonable chance that lower tax rates could apply in part retroactively to the beginning of 2017. If dynamic scoring overstates the rate of future economic growth, however, tax cut legislation standing alone could further increase future deficits, retarding economic growth farther down the road.


Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products. They may be reached at www.TheWashingtonUpdate.com.

The authors of this paper are not providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2016. Reprinted by permission. All rights reserved.

The opinions expressed in this article are the author’s own and may not reflect the view of M Holding Securities or WealthPoint, LLC.

File Number: 0782-2017

 

Initial Thoughts on the Presidential Election

Last week, America witnessed the conclusion of one of the most talked about elections in recent memory, as Donald Trump defeated Hillary Clinton and was elected to become the 45th President of the United States. Not only did Trump win the toss-up states he needed to in order to capture 270 electoral college votes, he even turned some states red that had historically been blue. While we await to see which promises made during Trump’s campaign become true, we wanted to share our initial thoughts on the election and the potential impact of those promises on America’s tax code and fiscal policy.

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First, we must acknowledge that Trump is becoming President at an opportune time, with the economy and unemployment rates being in significantly better positions than when President Obama took office in 2008. In addition, Republicans have gained control of both the House of Representatives and the Senate, providing a seemingly unobstructed pathway for his legislative initiatives to be passed into action. However, Trump does face some pushback within his own party and must deal with the Republicans not having 60 votes in the Senate. Although the “reconciliation” process (whereby most spending and tax legislation can be passed with a simple majority) can be utilized to pass some of his tax reform, he will have more difficulty passing non-budgetary items, which include the Affordable Care Act’s individual mandate or altering the Dodd-Frank legislation.

Unfortunately, there is still tremendous uncertainty about the specifics of all of Trump’s proposals for tax reform. Some of these proposals are in alignment with the House Republicans’ plan while others are in misalignment. Trump’s Tax Plan website lists the following proposals:

  • “Low-income Americans would have an effective income tax rate of 0%”
  • Income tax brackets would be simplified and tax rates would be reduced
    • Less than $75,000: 12%
    • More than $75,000 but less than $225,000: 25%
    • More than $225,000: 33%
  • Carried interest would be taxed as ordinary income
  • The Affordable Care Act would be repealed, including the 3.8% tax on net investment income
  • The corporate and personal Alternative Minimum Tax (AMT) would be repealed
  • The standard deduction would be increased and personal exemptions would be eliminated
  • The estate tax would be repealed, but capital gains on property held until death and valued over $10 million would be subject to tax
  • Corporate tax rate would decrease from 35% to 15%
  • Deemed repatriation of corporate profits held offshore at a one-time tax rate of 10%
  • “Most corporate tax expenditures” would be eliminated (except for research and development)

In all likelihood, there is going to be some form of substantial tax reform during Trump’s presidency. The questions are how significant will the reform be and in what method will the reform take place. For example, the repeal of the estate tax has occurred a few times in the history of the United States, with it being reinstated in times of war or as part of a budget or tax reform. The last time there was a repeal of the estate tax was in 2010 as part of the Economic Growth and Tax Reconciliation Act of 2001. This Act called for a phase-out of the estate tax over a 10-year period. However, additional legislation in 2010 and 2012 led us to our current estate tax policy. Therefore, will Trump be able to repeal the estate tax or possibly reform it over a period of time? The answer will come down to a careful negotiation between Trump and Congress and the balancing act of tax reform, entitlement reform (which Trump has said he will not change), and managing the federal deficit.

For our insurance practice, the potential repeal or even reform of the estate tax may change why and how insurance policies are purchased in the future. However, even if the estate tax is repealed, Trump has proposed there would be capital gains taxes on assets held until death (with capital gains not applying to the first $10 million of assets). Even if the reason to own insurance to provide liquidity for estate taxes is minimized, there is still a need for liquidity. The death benefit could offset the capital gains tax incurred on the sale of the inherited property.

The other reasons for having life insurance remain valid, such as providing spousal security, income tax diversification, supplementing your retirement income, succession planning for a business, estate equalization, creating a family legacy or funding philanthropic objectives. Given Trump’s proposal to reduce income tax rates in the near future, we will likely see a surge of individuals purchasing insurance policies to serve as a cash accumulation vehicle to supplement their retirement planning. Generally, most qualified retirement plans only make economic sense when you defer paying taxes at a higher tax bracket and withdraw the funds at a lower tax bracket. However, if income tax rates are decreased, it may make more sense from a tax planning perspective to participate in more after-tax planning as opposed to continuing to promote and invest in qualified retirement plans. It really comes down to two questions; would you rather pay taxes at a higher or lower tax rate and would you rather pay taxes on a higher or lower amount? Utilizing insurance would result in investing after-tax dollars to purchase a policy, allowing those funds to grow tax-deferred and withdrawing those funds income tax-free.1

The concern of many, including Paul Ryan and other members of the Republican Party, is how much will these potential tax cuts add to the federal deficit. Trump has also discussed increasing military spending, which would further exacerbate the federal deficit problem. Some argue that his tax reform lowers tax rates but increases the tax base so there shouldn’t be any change in overall tax revenue. There were also discussions during the campaign of imposing tariffs to generate additional revenue for the government. Although monetarily this may work, trade agreements would have to be negotiated which could have severe political ramifications and strain our relationships with Allies across the globe. While it’s still unclear what impact these changes will have, most Americans agree there needs to be a defined path for how we are going to navigate our ever-increasing debt burden. Potentially decreasing tax revenue and increasing spending does not appear to be in alignment with reducing our country’s debt. In fact, while increasing our revenues or decreasing spending on their own would be a start, it will most likely take both actions to change our fiscal policy, make an impact on our national debt and put the U.S. on a path towards financial stability. It seems that any other path will compound the debt burden and lead us toward an unsustainable and uncertain financial future.

Perhaps more than we have seen in recent memory, there is a tremendous amount of uncertainty surrounding what the future will hold. The capital markets reflected this on election night, as we saw the futures market predict the market would be down 5% the day after the election. Anytime there is uncertainty and especially after a Presidential election, the markets usually act negatively. Throughout history, we have seen this occur, such as when the markets dropped by 5.27%, 4.61% and 4.42% the day after President Obama, President Truman and President Roosevelt were elected. However, maybe there is reason for optimism as the markets actually gained by 1.40% the day after Trump was elected and continued that upward trend the rest of the week.

Trump will also be the first President to have never served in a government position. However, Trump’s supporters showed they are less concerned about his lack of political qualifications and more concerned about challenging and changing the status quo. They were dissatisfied with Washington and felt alienated amongst all of the change that has been occurring around them. As Andy Friedman pointed out on his Washington Update blog, Trump supporters “see a political system that at best has ignored them and at worst is stacked against them.”

Whether you voted for Trump, Clinton or anyone else, we need to be reminded that our government was designed on a system of checks and balances to serve in the best interests for all Americans. It was structured this way to prevent one man or woman from making unilateral decisions. Trump must work closely with our elected representatives in the House of Representatives and Senate in order to pass legislation. Furthermore, he must work collaboratively with his Cabinet members to navigate the multitude of domestic and foreign issues he will face while in office. Regardless whether Trump or Clinton was elected the 45th President of the United States, we should look optimistically toward the future and remember that we live in a country where our opinions are heard and our votes can inspire change.

Should you have any questions about how President-elect Trump’s proposals may affect your individual, estate or corporate tax situation, please feel free to give us a call.


This information does not reflect the political views of WealthPoint, LLC or any of its employees or affiliates. WealthPoint, LLC does not provide any tax or legal advice. The discussion herein is general in nature and is provided for informational purposes only.  There is no guarantee as to its accuracy or completeness.  It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities).  Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

1 Subject to policy performance and product specifications.

 File #: 1861-2016

 

The Candidates and the Markets: How Would Clinton or Trump Govern?

As the personality-fueled presidential campaign rages on, little time has been spent on how a Clinton or Trump presidency might affect the economy and the markets. Yet the candidates’ respective policy objectives are likely to have profound effects on investors. This paper discusses the fiscal policies a Trump or Clinton administration would likely pursue, whether those policies are likely to be implemented, and how those policies could affect businesses, borrowing, taxes, and the markets.

Our Election Predictions A Review

Here are the predictions from our July white paper, Sizing Up the General Election:

  • The Republicans will keep control of the House of Representatives.
  • The party that wins the White House also will control a majority of the Senate.
  • Neither party will hold the 67 Senate seats needed to override a presidential veto or the 60 seats required to break a filibuster and allow legislation to proceed. The metrics underlying the presidential election (evolving demographics and the Democrats’ natural advantage in the Electoral College), combined with the manner in which the candidates have operated their respective campaigns to date, make Clinton the heavy favorite. But it is too early to declare the race over. Trump’s uncanny ability to control and bend the rules of engagement give him a “puncher’s chance” of prevailing. Facing a heavily favored opponent, he still could pull off an unlikely win by landing a rhetorical punch that gets through Clinton’s defenses and severely rattles her. Until we see how — and whether — Clinton handles the Trump onslaught in their debates, it is premature to declare her the clear winner.

A Clinton Presidency

Hillary Clinton’s fiscal and tax policies hue to the Democratic Party line. She believes that capitalism has hard edges, and government programs are needed to help those in lower socioeconomic classes move up to the shrinking middle class. Clinton advocates for new or expanded government education and jobs initiatives and a higher minimum age. She would not reduce entitlements, instead leaving in place (or increasing) current Social Security and Medicare benefits even for young workers.

Clinton would pay for her initiatives with new taxes that would fall almost exclusively on affluent families. Higher income families, she asserts, have done far better financially in the economic recovery than have working Americans, and can afford to help those left behind.

Based on our predictions, Clinton will face a Republican-controlled House. In our view, Clinton’s unpopularity (over 50% of voters view her unfavorably), coupled with extant Republican antagonism, will significantly compromise the honeymoon period that typically follows a presidential inauguration. We look for a contentious relationship between the House and the White House from the beginning.

House Republicans are exceedingly unlikely to agree to Clinton’s call for higher tax rates and higher domestic spending. Thus, we see a Clinton presidency as a continuation of the Washington gridlock of the last six years (since the Republicans assumed control of the House in 2010). Few initiatives will be enacted and sweeping legislation will be scarce to non-existent. Instead, Washington will address fiscal deadlines with eleventh hour short term extensions, kicking the can down an abbreviated road.

Although such gridlock is frustrating to many American voters, it might not be detrimental to the markets. Markets react negatively to uncertainty. When one party controls the White House and Congress, the possibility of sweeping legislation antithetical to businesses remains a possibility. During the first two years of his presidency Obama enjoyed a filibuster-proof Congressional majority. Those years saw the passage of the Affordable Care Act, Dodd-Frank bank reform, and other sweeping legislation viewed by many as harmful to business. Gridlock virtually eliminates the risk of major legislative changes, freeing the markets to focus less on Washington policy and more on economic developments.

A Trump Presidency

Donald Trump is anything but predictable. That attribute alone has the potential to roil the markets. A number of months ago, Donald Trump, drawing on his bankruptcy experience, ruminated that it might make sense for the U.S. to negotiate a “haircut” on its loan repayments, giving Treasury debt holders less than the face amount to which they are entitled. Trump walked back that comment shortly after making it, but a similarly explosive comment from a sitting president likely would cause significant market turmoil.

Consistent with his “America First” policy, Trump wants to impose hefty tariffs (reportedly as high as 40%) on foreign goods entering the United States. Our trading partners presumably would retaliate with their own tariffs on goods from the United States. Most economists believe the resulting drop in U.S. exports could have a devastating effect on domestic businesses.

In contrast to Trump, most of the House Republican leadership supports broad free trade principles, and thus is unlikely to enact Trump’s radical trade policies. But failure to derail those initiatives quickly could precipitate nervousness in the markets.

On the fiscal side, like Clinton (and unlike the other Republican presidential candidates), Trump would not reduce Social Security or Medicare benefits even for young workers. Also like Clinton, Trump would initiate a large scale infrastructure repair program. And he would spend significantly more to shore up the military. But while Clinton calls for increased taxes on the wealthy, Trump would reduce taxes significantly across the board. Trump’s tax plan is in line with that of the House Republicans, and thus would have a good likelihood of passage.

Although markets initially might cheer lower taxes, the negative consequences to the federal deficit of more spending and reduced taxes could cause overleveraging problems down the road. Thus, a Trump presidency could follow the arc of the George W. Bush presidency, with exploding debt leading to an economic (and market) downturn.

The Fiscal Situation and Taxes

Over the past several years, the deficit has declined steadily from its all-time high in 2009. But, according to the nonpartisan Congressional Budget Office, the deficit is now rising again: the 2015 deficit will grow by a third in 2016. Congressional Budget Office, Long Term Budget Outlook (August 2016). Even in the absence of additional spending, this deficit increase will accelerate in coming years as major entitlement expenditures (Social Security and Medicare payments) grow with the aging population.

Neither presidential candidate seeks to reduce the federal deficit. With spending up, entitlement reform off the table, and the deficit growing, we believe the deficit hawks in the House leadership will be forced to undertake a constant search for revenue. Of course, Republicans will not seek to enact broad tax increases – such as higher tax rates or the elimination of popular deductions or exemptions. Instead, the House leadership is likely to look at less controversial tax changes — smaller items that curtail tax treatment that many in Washington believe is inappropriately generous.

Indeed, this process has already begun. The last government funding compromise (in December 2015) sought partially to recoup increased spending by eliminating a popular (and, in the eyes of many politicians, overly generous) Social Security planning strategy called “file and suspend”.

We believe eliminating the “file and suspend loophole” is a harbinger of things to come. Future funding bills could close other perceived loopholes, resulting in a whittling away of techniques investors use to reduce taxes. Examples of other loophole closures that have been under discussion include:

  • Tax the sale of “carried interests” as ordinary income.
  • Curtail “stretching” of inherited IRAs and 401k’s.
  • Apply required minimum distribution rules to Roth accounts beginning at age 70-1/2.
  • Limit Roth IRA conversions to pre-tax dollars.
  • Treat all distributions from S corps and partnerships to owner-employees as subject to employment taxes.
  • Curtail sophisticated wealth transfer techniques.

Most investors note that taxes already are high. In 2013, tax increases to avoid the “fiscal cliff” and to fund the Affordable Care Act caused the top tax rates on investment income to jump by ten percentage points. As a result, the top 10% of tax returns by income now pay 82% of all federal individual income taxes, the highest number ever recorded. Fairness and Tax Policy, Joint Committee on Taxation (February 2015). Tax rates imposed on upper income taxpayers are now the highest they have been in the past 35 years. The Distribution of Household Income and Federal Taxes (CBO November 2014). And the effort to raise revenue through loophole closers could eliminate many current tax reduction techniques, effectively raising taxes further.

High and increasing taxes make effective tax planning for investments paramount. We review a number of tax planning suggestions – and discuss possible loophole closers in more detail — in our white paper, Investing in a Rising Tax Environment 2016, published earlier this year.

After the election and before the new administration takes office, we will prepare a white paper that discusses in more detail the new president’s policies and their likelihood of enactment, including how the policies could affect individual economic sectors.


Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products. They may be reached at www.TheWashingtonUpdate.com.

The authors of this paper are not providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2016. Reprinted by permission. All rights reserved.

The opinions expressed in this article are the author’s own and may not reflect the view of M Holding Securities or WealthPoint, LLC.

File #1658-2016

Government funding and tax extenders legislation affects investors

After weeks of negotiations, Congress reached agreement on a bipartisan bill to fund the government through September 2016.  Following are provisions of particular interest to investors.

The legislation makes permanent (including retroactively for 2015) some provisions that previously had expired every few years:

  • IRA / charitable contribution provision for account holders over age 70-1/2
  • Tax credit for research and development expenditures
  • Enhanced write-off of small business capital expenses under section 179

The legislation extends (including retroactively for 2015) other provisions:

  • Extension and phase out of bonus depreciation through 2019

The legislation includes a number of new provisions:

  • Repeals the forty-year-old prohibition on exports of domestically produced crude oil
  • Expands 529 plan qualifying distributions to include student computers and technology

The legislation delays sources of funding and government reimbursements under the Affordable Care Act:

  • “Cadillac tax”(40%)  imposed on high cost employer health plans delayed until 2020; thereafter tax becomes deductible
  • Medical device tax delayed until 2018
  • Annual fee on health insurance provider premiums written (“belly button tax”) delayed until 2018
  • Government reimbursements for insurance company losses limited to amounts collected from profitable insurers (reimbursement fund must be revenue neutral)

Of interest to financial advisors, the legislation:

  • Does not prevent the Department of Labor from finalizing and implementing the proposed IRA account fiduciary rules
  • Does not make significant changes to Dodd-Frank

 


Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm.  He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products.  They may be reached at www.TheWashingtonUpdate.com.

The authors of this paper are not providing legal or tax advice as to the matters discussed herein.  The discussion herein is general in nature and is provided for informational purposes only.  There is no guarantee as to its accuracy or completeness.  It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities).  Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2015.  Reprinted by permission.  All rights reserved.

Obamacare upheld again: Consequences for Business Owners and Investors

Presidential Seal

 

 

 

 

Last week the Supreme Court ruled that all qualifying Americans are entitled to receive subsidies to purchase health insurance under the Affordable Care Act, regardless of where in the country they live.  The decision leaves the status quo in place but nonetheless raises considerations for investors and business owners:

  • As interpreted by the Administration, the ACA requires small business owners with more than fifty employees to provide health coverage to their employees beginning in 2016.
  • There remains a concern about inadequate ACA enrollment, particularly by middle- and higher-income Americans.  If enrollment continues to lag, it could lead to significant premium increases, as the insurance pool will not have sufficient “good” risks to balance out the less favorable ones.
  • Speaker Boehner’s legal action against President Obama remains outstanding.  Boehner’s suit objects to the Administration’s unilateral decisions to delay the employer mandate and to reimburse insurance carriers for losses incurred from insuring high-risk people.  A Boehner victory (which most legal experts consider a long shot) could end the carrier subsidies, which likely would prompt carriers to increase premiums or cut coverage to recoup the lost revenue.
  • The decision avoids a decline in health care stock values.  Many companies – particularly for-profit hospitals – benefit from the greater insurance coverage provided by the ACA.  However, premium increases discussed above could cause the feared “death spiral”, in which higher premiums leads to fewer healthy enrollees, which leads to higher premiums, etc.  That consequence could hurt health care stock values down the road.
  • The decision eliminates any realistic possibility of repeal of the 3.8% surtax on investment income for higher-income taxpayers.  Revenue from that tax is used to pay for the bulk of the insurance subsidies that the Court upheld.  There is no realistic prospect of a reduction in tax rates in sight.

 


Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm.  He speaks regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products.  He may be reached at www.TheWashingtonUpdate.com.

Neither the author of this paper, nor any law firm with which the author may be associated, is providing legal or tax advice as to the matters discussed herein.  The discussion herein is general in nature and is provided for informational purposes only.  There is no guarantee as to its accuracy or completeness.  It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities).  Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

Copyright Andrew H. Friedman 2015.  Reprinted by permission.  All rights reserved.

What is the Generation Skipping Transfer Tax?

Recently, M Financial posted a brief blog on the generation skipping transfer tax.  Please copy and paste the link below into your internet browser to read.Transfer Tax

http://mfin.com/m-intelligence-details/Understanding the Generation Skipping Transfer Tax

 

Life Insurance in a Rising Tax Environment

In March, we posted an article about investing in a rising tax environment.  We at WealthPoint thought the article in the link below would be a good follow up to that article.  Please take a moment to read through it.

Rising Tax Environment

Please click the link below.

WP_Marketing Intelligence Report – Life Insurance in a Rising Tax Environment

Life Insurance Basics

M Financial put together a piece on life insurance basics that we thought our readers would find educational.  Please take a moment to read through it and use it as a reference.

To view the file, select the link below:

WP_Life Insurance Basics

Life Insurance Policy

 

U.S. HOUSE PASSES ESTATE TAX REPEAL DESPITE VETO THREAT

US House of Rep

By Richard Cowan and David Lawder

WASHINGTON (Reuters) – The U.S. House of Representatives on Thursday ignored a White House veto threat and passed legislation to repeal the estate tax that hits inherited assets worth $5.4 million or more.

By a mostly partisan 240-179 vote, the Republican-backed bill will be sent to the Senate, where Democrats are expected to use procedural hurdles to try to block it. Even if it passes the Senate, it would likely fail to achieve a two-thirds majority needed to override a veto.

House passage was timed for the week when most Americans file their tax returns. Conservatives, who refer to the estate tax as the “death tax,” have long railed against it, arguing it hurts the families of small business owners and farmers.

“It’s past time to repeal this unacceptable tax. Every American deserves the ability to pass their life’s savings to their kids,” said Representative Tom Graves, a conservative Republican from Georgia.

Repealing the tax would boost the federal deficit by about $269 billion over 10 years, according to Congress’ Joint Committee on Taxation.

Few Americans pay the 40 percent tax on assets above the $5.4 million exclusion amount. About 5,400 estates, equal to 0.2 percent of taxpayers, will owe such taxes in 2015, according to the JCT.

(Reporting By Richard Cowan and David Lawder; Editing by Dan Grebler)