House and Senate Republicans are getting closer to an agreement on a final version of the extraordinarily important tax bill and could reach such a deal this week. We could see final version of the bill at the end of the week with a possible vote in both the Senate and the House next week.

No matter when we see the final version, there will be very little time to figure out how it affects you, and to take advantage of year-end tax planning opportunities. For example, some experts predict 90% of taxpayers will not itemize after 2017 if the Bill becomes law. This means 2017 could be the last year 90% of taxpayers can deduct charitable contributions (those affected taxpayers should consider prepaying 2018 and 2019 charitable contributions before 12/31/17). We will not know for sure which of these strategies are right for you until we see the final version of the bill. So, we will stay alert.

The Weekly Commentary will continue to report on this time critical topic as it is finalized.

The income tax Bill made progress through the Senate this week to make substantial changes in the formula to calculate your federal income taxes. Many of these changes will have a negative impact on your income taxes. The Bill is not guaranteed to pass, but, the probability is high that it will become law.

The next step is for the joint conference between the House and the Senate to hash-out their differences.  These differences are significant, and we cannot forecast how they will be reconciled.

We had an opportunity to pose a direct question to Congressman Charlie Dent as to his estimate of when we will see the final version of the bill. He could not make an estimate – there are too many variables.

No matter when we see the final version, there will be very little time to figure out how it affects you, and to take advantage of year-end tax planning opportunities. For example, some experts predict 90% of taxpayers will not itemize after 2017 if the Bill becomes law. This means 2017 could be the last year 90% of taxpayers can deduct charitable contributions (those affected taxpayers should consider prepaying 2018 and 2019 charitable contributions before 12/31/17). We will not know for sure which of these strategies are right for you until we see the final version of the bill. So, we will stay alert.

The Weekly Commentary will continue to report on this time critical topic as it is finalized.

The income tax Bill made progress through Congress this week to make serious changes in the formula to calculate your federal income taxes. Many of these changes will have a negative impact on your income taxes. The Bill is not guaranteed to pass; but, if it is passed, it will not be passed until the joint conference between the House and the Senate hash-out their differences. These differences are significant, and we cannot forecast how they will be reconciled.

The timeline, according to our estimate, indicates we will not see the results of the House/Senate conference until December 15^th. That leaves only 2 weeks to react, to figure out how it affects you, and to take advantage of year-end tax planning opportunities. For example, some experts predict 90% of taxpayers will not itemize after 2017 if the Bill passes-this means 2017 could be the last year 90% of taxpayers can deduct charitable contributions (those affected taxpayers should consider prepaying 2018 and 2019 charitable contributions before 12/31/17). We will not know for sure which of these strategies are right for you until about 12/15/17.

The Weekly Commentary will continue to report on this time critical topic as it is finalized.

Update on the Income Tax bill

Senate Republicans released an overview of their version of tax reform legislation on Nov. 9, and there are a number of key differences between their version and the bill under consideration in the House of Representatives.

Also on Nov. 9, the House Ways and Means Committee, after four days of debate over dozens of amendments, approved the bill on a party-line vote of 24-16. That action sends the bill to the House floor, where it is expected to be considered this week. A vote to pass the bill in the House is expected before lawmakers break for the Thanksgiving holiday on November 16th or 17th.

Many changes are expected to both versions of the legislation in the days and weeks ahead, but here is our initial take on some of the notable differences between the tax reform approaches of the Senate and the House:

• Seven individual tax brackets. While the House bill reduces the current seven tax brackets to four, the Senate bill would retain seven brackets, reportedly with rates of 10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5%. The Senate bill’s top rate is lower than the 39.6% rate for the highest earners under the House plan.
• Deduction for state and local taxes completely repealed. The House bill repeals the deduction for state and local income taxes, but preserves a deduction for state and local property taxes, up to $10,000. The Senate has no such provision.
• Estate tax exemption increased, but not repealed. The House bill doubles the current $5.49 million exemption amount for individuals and then eliminates the estate tax entirely in 2024. The Senate plan increases the exemption by the same amount, but does not repeal the tax in the future.
• Corporate tax cut delayed by a year. Both plans lower the corporate tax rate to 20%. The House does so in 2018, while the Senate version delays the tax cut until 2019.
• Home mortgage interest deduction maintained. The Senate proposal maintains the deduction for interest paid on newly purchased homes for mortgages up to $1 million, the same as current law. The House bill proposes to cap the deduction at mortgages of $500,000.
• Deduction for medical expenses would continue. The Senate plan preserves this deduction, which was eliminated in the House bill.
• No changes to taxation of investment income or retirement savings incentives. As with the House bill, tax rates for capital gains and dividend income will remain the same as current law. In addition, the bill does not make dramatic changes to retirement savings. Some reports in recent days indicated that the Senate may require some or all contributions to retirement plans to be made to Roth plans, which tax contributions up front. Pressure from the public and the White House to maintain the status quo for retirement savings plans forced the House to back off any changes, and the Senate has followed suit.

Next steps

The two bills are likely to move on parallel tracks this week. The full House is expected to debate that version of the bill, with the hopes of passing the bill on the House floor on or before November 17th. At the same time, the Senate Finance Committee will consider amendments to the Senate bill. Consideration on the floor of the Senate is not expected until after the Thanksgiving break. If and when both chambers have passed their bills, a conference between the two chambers would take place to iron out differences and produce a single, consensus piece of legislation. That compromise would have to be approved by both the House and Senate before the bill could be sent to the president for his signature.

Source: Charles Schwab & Co.

We have reviewed the income tax bill released by the House Ways and Means Committee – titled Tax Cuts and Jobs Act. It is complicated with its 460+ pages being too voluminous to recount here. And, it will be changed as Congress goes hither and thither to finalize. Importantly, more likely than not, an income tax bill will be passed.

As to investment management, we do not see our investment research providers making any significant changes to their economic moat ratings or fair value estimates because of the income tax bill in its current form. We will continue to monitor its development.

The headline corporate tax rate proposed in the Tax Cuts and Jobs Act is 20%, lower than our current 25% assumption..However, many revenue-related parts of the tax reform bill have been scaled back from initial proposals. For example, the latest bill allows the partial deduction of mortgage interest and property taxes. These alterations mean the current bill would likely raise federal debt levels more than many had initially projected. To attain the votes of spending hawks, the aggressiveness of the bill may have to be scaled back. The overall corporate tax rate remains a key lever for negotiation, as effective tax rates truly determine the competitiveness of the U.S. relative to other countries. Industry groups will certainly push to keep their tax credits, and to the extent these credits lower effective tax rates, a modestly higher headline rate can keep the U.S. competitive with other countries.

The Republican race to overhaul the tax code broke into a sprint on Thursday, with House members narrowly clearing a budget blueprint that would allow a tax bill to pass Congress without any Democratic votes, and Senate leaders signaling that the bill could be introduced, debated and approved in both chambers by the end of November. (Source: New York Times)

You may wonder why we continue to emphasize this legislation in our communications to you. It is because this legislation has the potential to be a big deal – perhaps the most important tax legislation in over 30 years. But, we cannot be more specific until we get a chance to take a look at the details which are expected to be released this week. Assuming they are released as anticipated, you can expect to see details in the next Weekly Commentary.

During the last few days, the U.S. Congress took steps to move toward the passage of the very important tax reform legislation. Its passage is a plus for the stock market but will probably be a negative for bond investors. While passage is not assured, we estimate the probability of passage has increased to higher than 50%. And, if Congress is able to pass the tax reform bill, it is likely to have the power base necessary to pass an infrastructure spending bill which could authorize as much as $1 Trillion – another plus for the stock investors and a negative for bond investors.

Investors whose risk tolerance is aggressive or moderately aggressive or moderate will have their portfolio rebalanced to their long term portfolio model as soon as possible. For investors whose risk tolerance is preservation minded, conservative, or moderately conservative, we will wait to see if tax reform passage actually occurs before rebalancing to their long term portfolio model.

Note also that we have already structured the bond portion of the portfolio to reduce the negative effect of rising rates.

The Senate voted to take up the fiscal year 2018 budget resolution (BR) for debate, which includes reconciliation instructions for tax reform, by a party-line vote of 50 to 47). The Senate must pass a budget resolution for GOP lawmakers to have a legislative vehicle for tax reform. A Senate vote on the BR is expected on Friday, October 20, after allowing for 50 hours of debate.

Using a BR unlocks the reconciliation process for tax reform, which enables GOP lawmakers in the Senate to pass legislation by a simple majority, rather than 60 votes, if no Democratic support can be garnered. Senate Democrats criticize the BR for implementing budget cuts for the sake of providing tax cuts to the wealthy.

Sen. Rand Paul, R-Ky., a controversial figure in the BR’s prospect for success, voted yes to take up debate on the BR, but has expressed criticism of the measure for not including budget caps, stating it is not currently fiscally conservative. If approved, the Senate and House will likely go to conference to reconcile the differences between the two BRs.

“Specifically, this budget resolution contains a $1.5-trillion reconciliation instruction for tax reform. That is a good number, putting meaningful tax reform within reach,” Senate Finance Committee (SFC) Chairman Orrin G. Hatch, R-Utah, said on the Senate floor on October 17. Hatch stated that the taxwriting SFC is currently crafting tax reform legislation pursuant to the guideposts of the Trump administration and top GOP lawmakers’ unified framework.

“Our bill, based on the unified tax reform framework, will give much-needed relief to millions of low-to-middle income families. But, without this budget resolution…we’re unlikely to get there,” Hatch said.

Source: CCH

According to CCH, the highly respected tax reporting service, the House approved the Fiscal Year (FY) 2018 Budget Resolution (BR) by a 219–to-206 vote on October 5. The measure is intended to serve as the legislative vehicle for tax reform. All present Democrats and 18 Republicans voted against the measure.

Meanwhile, the Senate Budget Committee approved its own budget resolution (BR) on October 5. A full Senate vote is expected the week of October 16. The two BRs are expected to go to conference to reconcile differences to reach full congressional passage, which would unlock the reconciliation process, enabling tax reform legislation to pass with only a simple GOP majority.

The BR includes a policy statement on tax reform and specifically recommends five policy items:

(1) simplifying the tax code to make it fairer for American families and businesses and reducing time needed for tax compliance;

(2) substantially lowering tax rates for individuals and consolidating the current seven income tax brackets;

(3) repealing the Alternative Minimum Tax (AMT);

(4) reducing the corporate tax rate; and

(5) transitioning the tax code to a more competitive system of international taxation.

We believe Congress is only 20% through the process of passing meaningful tax reform. There are many hurdles to clear before legislation is passed into law. We will keep you informed on the progress of this important legislation.

You may have heard you may be one of at least 143,000,000 victims whose personal information may be at risk because of a data breach at Equifax.  This is a big deal which will result in FBI scrutiny, law enforcement investigations, Congressional inquiry, and numerous efforts on Equifax’s part to appease those who have become a victim.  We intend to follow this mess.  At this time, we recommend you click here and read this consumer information from the Federal Trade Commission.