Posts by michelle

Planning for Joy

Posted on Jan 7, 2019 in Community, Health, Simplicity

Yes, losing 10 pounds might bring you joy when it happens. Giving up red meat and quitting smoking will help improve your health over time. Saving more money will result in meeting financial goals sooner, or with greater confidence, and you know I’m going to encourage this, but it won’t happen overnight.

I cannot object to any of these resolutions. They are all laudable. They also require change, and change is hard. It takes at least three weeks to change a habit, and often longer. By all means, get started on those resolutions (or re-start them), but also plan for greater joy.

In addition to my New Year’s Resolutions, here’s what I’m planning to add more joy to my life:

1. Play
My dog has a good life. On her worse days, she suffers from the boredom of watching me work. Since I have to work to keep a doghouse over her head, she’s going to have to learn to deal with it. And yet, that doesn’t mean I can’t learn a thing or two from her, too.

Often when I’m downstairs in the office, she is upstairs in her corner perch, watching the neighborhood scene. I’ll hear her pad down the stairs and come around the corner into the office. Every time she does this, I greet her with my happiest dog-voice, and take a break in what I’m doing for a pet and a little play. I say I do this for her, to have good associations with my office so she’ll hang out here. In truth, I find it is good for me, as well. I am terrible at taking breaks, and the dog is a natural.

I could just set a timer and tell myself to take a break. How much more fun it is, though, to unleash the joy of seeing my dog prance around the office with her little paws in the air, her play-bow, and her goofy look, when I take a breath before I start a new project.

2. Organize My Desk
I know this sounds like work. I am a planner by nature, and I like order in my universe. Maybe it’s a coping mechanism, but it also helps me to focus and relax into whatever I’m doing when I’m in a clutter-free zone. My new house is slowly getting organized, but not yet up to my standards of order, and it’s stressing me out. As a business owner, there is no end to things to do for the job. A clear desk is an accomplishment, too. My plan for the New Year at work is to close out each day putting my desk in order, filing papers, and scheduling the next day.

Earlier in the business I sublet office space from a large engineering firm. The sliding glass doors to each office had no locks. For practical purposes, I ended each work day putting all my projects away, under lock and key. Starting the next day was bliss! Taking joy in sitting down and intentionally beginning a new project, rather than staring down a pile of ongoing work, is my goal for 2019. I’ve done it before, and I know I can do it again!

If you’re inclined to try a bit of rearranging to de-clutter your space but need a little nudge, here are a couple of resources. I was a huge fan of Peter Walsh and his Clean Sweep program on HGTV. The program is 10 years old, but his approach is timeless. His philosophy towards organizing your home and office is the same as mine towards personal finance: arrange your environment (or money) to live a richer, fuller life with less stress. And you can sign up for his #31DaysToGetOrganized daily reminders to help you one day at a time. If Marie Condo’s Life-Changing Magic of Tidying Up is more your speed, you can read her book or go straight to her new series on Netflix to learn how to “KonMari” your spaces.

Kondo talks specifically about joy in organizing your things, and Walsh used his master’s degree in educational psychology to help people let go of the associations they have with things that no longer serve them and to refocus on what really mattered. Both focus special attention on items of sentimental value, and the meaning they add to our lives. Here’s to more joy and greater meaning in your spaces (and at my desk) in 2019!

For more on Peter Walsh: Peter Walsh on YouTube
For Marie Condo on Netflix: Marie Kondo on Netflix

3. Re-invigorate My Hibernation
Even though we are past the Solstice and our days are getting longer, Winter has barely begun and we will have many cold, gloomy days to come. “Hiberation” is from the Latin meaning “to pass the winter” and for many that means hunkering down and doing as little as possible until the warmth and sun call us out into the world again. But therein lies a missed opportunity.

For nine years after my mother’s stroke, I split my weekends into two periods: Saturdays were for life maintenance, running errands, stocking the fridge, doing laundry. Getting the house in order for a new week. Sundays were spent with my mom. Doing her laundry, checking on supplies for her apartment, getting her place in order for the next week, watching a movie or going to a show, and having dinner before going home. I loved the time with my mom, but I was exhausted by the end of the weekend. After she died, I had a hard time figuring out my Sundays. Then one Sunday I had brunch with friends. I remembered the luxury of sleeping in, meeting for eggs and biscuits, and lingering over that final cup of coffee.

Lately I’d been feeling blue again on Sundays. The luxury of a “free” day seemed to be amplifying the freedom single people have: I could do anything. And so sometimes I did nothing, only to feel let down by frittering away my time. I started to plan outings for my Sunday afternoons. A movie, a play, a museum. All the things I loved, things easy to do on my own, and things that would get me out of my own head and return me home refreshed. That was a successful Sunday, a joy.

Winter weekends can be perfect for binge-worthy TV on a comfy sofa with a warm beverage and snacks. They can also be opportunities to explore your neighborhood or city, enjoy a hobby or expand your connection to others. And even if you’ve fallen off the resolution wagon already, get right back on, and as you work on changes for an Improved You, consider a few tweaks for a more joyful You as well.

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Blind Spots and Seeing the Whole Picture

Posted on Jul 27, 2018 in Community, Family, Investments, Planning, Relationship

I’m a huge movie buff. In a different life, I would have been behind a camera, capturing people’s stories on film. One of the best stories I’ve seen on film is a movie making the festival circuit this year, Blindspotting. Daveed Diggs of Hamilton fame, along with longtime friend, poet and fellow actor Rafael Casal, have made a buddy movie like no other. It is smart, funny, painful, intense, and powerful. The writing is tight, the acting top-notch. The pair had been working on finding a way to produce the film for ten years, and its tone and subject matter could not be more pertinent today.

And why am I telling you about this in a personal finance blog? The power of the movie is in its exercise in asking the audience whether they can see more than one thing at the same time: Can you see the two people in profile AND the vase? Can you see a black ex-con and a thoughtful man reinventing himself? Can you see that the friend you’ve known your whole life has a different experience of the world because his skin color is different than yours? Can you see a rich person and someone struggling? Can you actively look to see past your blind spots? This is important because without the ability to do so, you can miss important information about your friends, your family, the people you work with, and the broader world around you, as well as about your finances.

What is “Blindspotting”? You’ll find that out when you go to see the movie. (And seriously, go see it.) We’ve all heard of blind spots: something in your range of vision that you should be able to see, but which is obstructed. The obstructions come from a variety of sources, but they can come straight from you: a blind spot is a predisposition, a prejudice. The most dangerous are the ones that you don’t know you have. Dangerous because you may think you are lighting candlesticks when you are lighting dynamite.

We all have them. We are all products of our own stories and experience: our upbringing, our families, and the shortcuts that help us make sense of the world. Sometimes those shortcuts don’t show us the whole picture and result in blind spots. Here are three common ones that might impact your personal financial life, and one additional that can cause you to negatively affect someone else’s:

Confirmation bias – You embrace information that supports your perspective and cultivate a blind spot to that which contradicts it. You buy a stock and when there is good news about the stock, you acknowledge that and feel you have made a wise investment. When there is negative information about the stock, you discount the news.

Recognizing that you’re likely to have a bias for the choices you make and being able to look past that blind spot and take in all relevant information about an investment will make you a better investor.

Over-confidence – What you’ve done in the past has been successful, so you are confident that you know what you’re doing. You have a blind spot to the role luck can play and to evidence itself, and in investment management, that’s one place where numbers don’t lie.

You invest in real estate and home prices soar. You feel like a brilliant investor. Real estate prices plunge, and you blame the market, not your strategy. The blind spot is your confidence in your ability versus the capriciousness of markets.  Why you were investing in real estate in the first place should be your benchmark: you needed a home and were buying for the long-term, or you wanted a long-term investment in rental property and could carry the on-going costs of the property during the periods you couldn’t rent it. That’s the measure you need to be using as a benchmark for success, not your ability to time a market. It’s hard not to get caught up in a frenzy, which also makes it the best time to go back to your desk and work through the numbers to see if an investment will meet your goals over your time horizon.

Note that the corollary of over-confidence exists as well: under-confidence. You invest in the S&P 500 and the market goes up. You consider yourself lucky. The market falls and you blame yourself for a bad investment. Your blind spot is self-confidence: without question, luck factors into timing of investing. But if you invested in the S&P 500 as a long-term strategy for growth, knowing that there will be market fluctuations, there is no luck or blame, that is a solid strategy.

Rationalizing: You overspend but explain how much you’re saving by buying things on sale. You desperately want to get out of debt but as soon as you’ve freed up some extra income, you’ve committed it to another loan or run up a balance on another credit card. You’ll start saving tomorrow.

We are creatures of habit. We are attached to our rituals, our patterns, our ways of doing things, and accepting that they may not be serving us – to say nothing of actually changing them – is hard to do. The blind spot is what you believe is really important and whether your actions support it. What is your goal? Looking at actions instead of hopes or dreams is where planning comes in. All of the above actions are rational in some way to the person making them. Seeing how the action (buying something you don’t expressly need because it’s on sale) impacts your stated goal (saving for a vacation to Italy) can help you release an old rationale and better align actions with what you really want.

And one more for the other people in your life:

Making an Assumption: This is the quickest shortcut we all use. You don’t give the plum project to the new parent because it involves travel and you assume they wouldn’t be interested in that now. You order a $90 bottle of wine at dinner with a friend, not realizing that her half of the price of the wine was what she was budgeting for the whole meal. You see your neighbor’s new Tesla, their designer shoes, the gardener at their house and you assume they are greedy and material people.

But are you making an assumption that interferes with seeing the whole picture? Your predisposition creates a blind spot. You won’t see the whole picture in each case until you ask questions and learn more. You’ll retain a prejudiced view of what a new parent wants at work, what your friend can afford, and what your neighbor is really like. The effort to see a blind spot takes time and attention and energy, all of which feel for most of us like increasingly scarce resources.

These decisions we make based on our biases, our assumptions, our blind spots, can have a very real impact on the lives – financial and otherwise – of other people. You limit the professional growth of an employee, you burden a friend with an unexpected expense, you fail to offer friendship to a neighbor because you are operating in a blind spot.

Are you seeing what you think you are seeing? Or could there be another way of looking at something? Can you step back and take in the whole picture objectively? Could there be more to the story? People and situations can be more than one thing. In developing an awareness of what we know for a fact, setting aside the shortcuts, expanding our view into blind spots, we get better information for action. Blind spots are not blindness – we can improve the completeness of what we see. It requires observation, attention, and sometimes confronting a limitation under which we’ve been operating.

Financial self-awareness is the first step. Learning to be aware of our blind spots can lead us to greater understanding, compassion, and better decision-making all around.

As for Blindspotting the movie, my experience at the SIFF screening was intense and very personal. There is an art to allowing us to laugh while we cry, something Shakespearean about giving us that release so that we can continue to watch, to engage, to care about these characters, flawed as they may be, in the short time we have with them. This is a powerful film, coming at a time when we are churning up some deeply held beliefs among us, which I continue to believe is the first part of healing. Right now it may not feel like we’re making progress, yet like any problem – or blind spot – you can’t do anything to change it until you recognize it’s there.

It is only a movie. But if it promotes a continued conversation about racial tension, police violence, gentrification, growing income inequality, and how we can promote empathy and compassion while tackling these issues, then it is so much more.  Blindspotting opens nationwide July 27th.

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Awakening From Slumber: Ten Years After The Financial Crisis

Posted on Jun 27, 2018 in Community, Investments, Philanthropy, Planning, Retirement

Ten years ago I was in Rome and passed a shop on Via del Corso that sold crystal balls.  If I Image result for crystal ball shop italycould have figured out how to bring one home without setting off airport security, I would have picked one up for the office. Then when you ask me what I think will happen in the market, I can point you to my little Roman souvenir and you will be able to see the future as well as I can.

One of the closest things I have to a crystal ball is my relationship with PIMCO. In addition to being the largest bond manager in the world, PIMCO has the biggest and most geographically widespread research team I know. Most of you who work with me hold at least one PIMCO fund in your portfolio. Even if you don’t, you have heard of their research: they were the folks who came up with The New Normal to describe economic and financial life after the Great Recession. (And which you are likely using to describe any number of new trends in your own life.)

Each year, PIMCO holds its Secular Forum, a gathering of its internal investment professionals along with guest speakers to discuss and debate the state of the global economy and markets over the next three to five years. Like much of PIMCO’s team, my background is in bonds as well, in markets for which critical to understand not only an individual issuer’s ability to repay a debt, but also the longer-term trends that will affect its ability to do so. As part of PIMCO’s investment process, its Secular Forum is designed to promote new ideas and differing points of view, to look into the future for the trends they believe will have important investment implications. They meet, then they publish their results for their advisory firm clients.

The title of this year’s look at 2018 and beyond is called “Rude Awakenings.” That gives you an idea of where we are headed.

The Great Recession: Ten Years Later
After The New Normal, PIMCO dubbed the last five years (2014-2018) the “New Neutral.” This moniker described the low growth, low interest rate environment we found ourselves in world-wide, chugging along without much economic change, with your savings accounts earning next to nothing, but overall slow and steady growth in the economy.

PIMCO predicts our economy will be more volatile over the next several years than this past New Neutral period, and the global political environment will be rockier as well. Nations which worked together to combat the aftermath of the Financial Crisis are showing nationalistic tendencies, meaning it may be every-nation-for-itself when the downturn comes. Neutral no longer, we will need to be prepared for Rude Awakenings. We will need to be flexible, to be able to respond to changing conditions, and to take advantage of opportunities in the investment landscape as they present themselves.

Here are four of the Rudest Awakenings we can expect:

Rude Awakening #1: You expect the same stock market growth in the next 10 years that we’ve had since the Financial Crisis. The big question many of us are struggling with is the state of the business cycle, and when we will shift from expansion and growth to contraction and recession. PIMCO’s research points to a good chance of recession in the next three to five years, most likely sooner rather than later. It’s surprised many of us that the stock market continues to be supported at its current level.

PIMCO forecasts a downturn in 2020, though they note it could be a little later due to government spending (fiscal stimulus) on infrastructure, which means more jobs and economic growth. But because this type of deficit-spending is coming at a time late in the economic cycle when we have very low unemployment, PIMCO calls this stimulus a “fiscal sugar rush.” The “sugar rush” is the artificial high that comes from spending money we don’t have (deficit spending, thanks to tax law changes) on roads, bridges, and the like and risking overheating the economy when unemployment is already so low. This type of stimulus tends to be an expansion-killer as debt levels become unsustainable, and spending that creates deficits increases uncertainty that PIMCO believes is not yet reflected in the stock market. Any of you with kids know how bad the crash can be after a sugar binge.

The things that most affect the timing of the recession are what the Federal Reserve does to manage inflation, whether we get a rise in worker productivity, and whether the current trade spat turns into a full-fledged war.

Rude Awakening #2: Growth in worker productivity is always good for the economy  Worker productivity has been below average since the Great Recession, and while gains in productivity are typically desired as a means of expanding the economy, productivity growth can have a dark side.

Technology-driven productivity growth could extend the current period of expansion, pushing out the recession to a later year. But technology can also be disruptive to markets and the economy. In the case of new technologies, these have an additional impact on legacy companies: think Amazon and every bookstore chain you’ve ever known. New technologies often disrupt industries and displace/replace workers. This higher “technological unemployment” can lead to a populist reaction, and we’ve seen a snippet of what populist sentiment can reap in a number of countries, the US included.

Rude Awakening #3: Populism doesn’t seem to have much impact on the economy Whatever you might think about the current US administration, the American version of populism has been well-liked by financial markets. But expect a different flavor of populism if we hit a recession: Expect a more radical populism that demands redistribution of wealth or income tax increases, nationalization of key industries, and/or a protectionist trade policy.  Italy is serving up an early 21st century version today, where we’re seeing a widespread populist reaction to world events.

Rude Awakening #4: Protectionist trade policy will level the playing field for US goods PIMCO considers China to be less of a risk to the global economy now than previously, as they have re-centralized power and are exerting more control over their economy; they are less of a loose cannon now. That said, tensions over the trade imbalance with the US and over intellectual property rights are growing. PIMCO sees the US-China smackdown as the Rising Power vs. Ruling Power WWF fight of our time: In ancient times, Athens challenged Sparta, in the last century, Germany challenged Britain. Neither of these bouts ended well for the challenger, but there was a whole lot of disruption to global economic systems. China’s challenge to the US as the world’s pre-eminent power is not expected to lead to armed conflict but could lead to rude awakenings on the geopolitical front. Not even a month after PIMCO’s Secular Forum, it appears this expectation of disruption is becoming reality with escalating trade tariffs.

What Will this Next Recession Look Like?
If the future plays out in these ways, what kind of recession will we be waking up to find? The expectation is that this time, the downturn will be shallower and longer than it was in the Great Recession (December 2007-June 2009). Two things that are different now are that (1) it’s hard to rely on central banks to ride to the rescue this time, and (2) we have much greater economic inequality worldwide. The first issue means we won’t have the same solutions we had during the last downturn to help avoid a global economic meltdown, and the second issue means that more people could be affected in this next time, with seriously frayed social safety nets and little protection against great economic harm.

What To Do?
So now that I’ve given you lots over which you can lose sleep, what are you supposed to do about it? How you can prepare? Consider the following:

Get serious about paying off debt. Whether it’s credit card balances, a home equity line of credit or other non-mortgage borrowing. The next year or two is the time to get serious about paying it down. It’s going to cost you more in interest as the months go by, and you might need that debt capacity if things hit the skids.

Build up your cash reserve. If you’re working with me, I’ve already bored you with the fat cash balance I think you should have in reserve. For the rest of you: plan on setting aside a minimum of six months’ worth of expenses (12 months if you are self-employed) in a savings account, or a couple of CDs.

Start setting aside funds for planned major purchases.  You could end up getting them for cheap. One of the things about a recession is that overcapacity as the economy winds down means many goods such as cars and other big ticket items go on sale, and start to come on the market at better prices. If you can, maybe wait to 2019 or 2020 to pick up a new car or major household appliances for less.

Work on pink slip-proofing your job. You know you are doing a great job at work, but you will need to make sure others know, too. No one is immune to job loss, and if you think you’re high enough up on the food chain to avoid being sent packing, remember from the company’s perspective, getting rid of you means getting rid of your big comp package too.

Retirees need to re-assess their asset allocation. -With the next recession expected to be shallower but longer than previous ones, that means arranging your resources so that you’re not having to liquidate anything at an inopportune time. If you’re working with me, we’re building “buckets” of assets to protect your retirement draws three to five years from now. Going forward, structuring this protection becomes even more important.

Consider stockpiling your resources for charitable giving.  Our social safety net is more frayed now than it has been before, and when the recession comes, more people will need help. Demand on charity will be greater, just at a time when donors are more strapped, too. If you are charitably inclined, using a donor-advised fund to accelerate the tax benefit of your contributions is one way to stockpile funds to donate when needed over the coming years.

Take this time to reflect on what’s really important to you. This is my standard refrain. When times are good, it’s often easy to drift towards all things bright and shiny and to forget about the warm and wonderful: the people you love, the things you like to do, the experiences you want to have. It’s also a hard time to put off gratification when it seems like the whole world is on a shopping spree (they are, but it will more than likely come to no good end.)

In our always-changing world, it should come as no surprise that the next ten years will look very different from the last ten. Best we can tell, you can expect more volatility, and be prepared for a recession in the near term. The timing of a downturn is always a confluence of events that are not hard to see but whose coming together is difficult to predict. In the meantime, be cautious about getting overextended — whether stretching financially to buy a new house or taking on other debt to finance spending — and be mindful about maintaining or stockpiling a cash reserve.

Remember that there are limits to the things you can control, and the trajectory of our global economy is not one of them. Consider what you can do on the list above, and then go out and enjoy the rest of life: take a walk, see friends, hug your dog, hang out with family. These things you can do something about, and ultimately they are what really matter as well.

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Tax ALERT – What to Know For Year-End Planning

Posted on Dec 24, 2017 in Divorce, Health, Taxes

As holiday lights twinkle around me and passersby bundle up against the cold, Congress was hard at work pushing their tax reform bill through the legislature. Their stated goal was to simplify the tax system, stimulate the economy and create jobs.

There’s no simplification here, and economic stimulus is dubious, but there are a few things you need to know now if you want to do some 11th hour planning, especially if you have been itemizing your deductions:

Mortgage interest – Interest on mortgages taken out on 12/15/17 or later is deductible only up to $750,000, down from the current $1,000,000 of mortgage debt
Second Homes – This mortgage interest deduction is available for a personal residence and one other home
Home equity loans – The deduction for home equity loans and lines of credit is repealed; interest on up to $100,000 of this debt was deductible
State and Local Taxes (SALT) – Deductions for these taxes (including sales taxes in states with no income tax) combined with property taxes are capped at $10,000
PLANNING NOTE: You can pre-pay property taxes in jurisdictions where this is allowed. You can check here to see if you can accelerate a property tax payment in King County, WA and the San Francisco Bay Area:
King County, WA: https://www.seattletimes.com/business/real-estate/king-county-dont-prepay-your-property-taxes-now-to-avoid-tax-hit-next-year/

SF Bay Area:  http://www.sfchronicle.com/business/article/Faced-with-loss-of-deduction-more-Bay-Area-12448244.php
You expressly cannot prepay 2018 state and local income tax.
Medical Expenses – The threshold for this deduction is 7.5% retroactive to 2017 through 2019 – then it goes back to 10%.
Charitable Contributions – You now need substantiation for ALL charitable contributions, but the limit on what you can deduct has been increased from 50% of Adjusted Gross Income (AGI) to 60%.
Miscellaneous Itemized Deductions – These deductions are currently subject to a 2%-of-AGI threshold, but are eliminated entirely after 2017:

  • Moving expenses (except for the Armed Forces)
  • Moving expense exclusion (for expenses paid by employer)
  • Unreimbursed employer expenses (you file a Form 2106 for these)
  • Qualified bicycle commuting ($20/month)
  • Personal casualty losses (EXCEPT if in a disaster zone)
  • Safe deposit box fees
  • Tax preparer fees
  • Investment advisory expenses
    PLANNING NOTE: You may want to ask your tax preparer if you would benefit from paying their fee before 12/31/17, while you can still take a deduction for it. Likewise, for your investment advisor. Here is a quick chart to give you an idea of the total of these miscellaneous expenses you must have before even have a deduction:

AGI = $50,000, 2% = $1,000

AGI = $100,000, 2% = $2,000

AGI = $250,000, 2% = $5,000

AGI = $400,000, 2% = $8,000

Note: Any of you with AGI over $313,800 (Married Filing Jointly) / $261,500 (Single) will start to see your Itemized Deductions also reduced by the Pease limitation.

Alimony – Marital support paid to an ex-spouse has been deductible by the payee and includible on the return of the recipient. For new divorce settlements, alimony is no longer deductible after 2018. Note: this change is a revenue raiser: Almost always the person paying alimony is in higher bracket than the recipient.

Obamacare – Despite what the President has stated about repeal, technically the Affordable Care Act (ACA, aka “Obamacare”) is still on the books, as is the individual mandate. The individual mandate has NOT been repealed, but penalty for not having coverage equals 0% after 2017

In my view, the Trump Tax Plan is bad, though not as bad as it could have been based on earlier proposals. Some workers may see a little relief for a couple of years, but the big wins go to public companies and the wealthiest Americans.

It is also unlikely the President will sign the bill into law before the end of the year. By waiting to sign until 2018, cuts to Medicare and Social Security that are part of this package won’t impact voters until after the 2018 mid-term elections.

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Let the Debate Begin: Waiting for Tax Reform Details

Posted on Apr 25, 2017 in Community, Philanthropy, Planning, Simplicity, Tax

Now that your 2016 tax return is behind you, you might be thinking about how tax reform changes expected under the Trump Administration might affect you. We are expecting a big announcement tomorrow, but despite some advance hype of “massive” changes, we’re likely to get only minimal details. The tax code is 4,029 pages and covers a multitude of taxes and entities. Tax reform, like Repeal and Replace, is going to take longer than originally planned.

The Big Three Goals of current tax reform proposals are:

1-Reduction of the corporate tax rate
2-Lower tax rates on individuals (reducing tax brackets from 7 to 3)
3-Simplification

In general, Republican proposals strive to broaden the tax base and lower tax rates. Under the banner of freedom and personal responsibility, these proposals support the idea that government should be as small as possible, providing minimal benefits to individuals, but counter that with lower tax rates, meaning more after-tax dollars in pocket, with which people are free to do what they want.

What are the things to watch for tomorrow? Here’s what I’ll be watching for:

1. Corporate tax rate: Republicans originally wanted a 20-25% top rate, which even they felt was unrealistic. Expect Trump to hold out for the 15% corporate rate he campaigned on.

The argument for a lower corporate tax rate is one of global competitiveness. The Tax Foundation reported that the US ranks 32 of 43 countries in the OECD in terms of international competitiveness. Note that the Tax Foundation is the oldest non-profit think tank in the country, described as an “independent tax policy research center” but it is also noted for a conservative, business-friendly bias.

The top US corporate tax rate is 35%. But who really pays this? The US Government Accountability Office (GAO) issued a report in March 2016 that reviewed US corporate taxes over a five-year period. “From 2008-2012, profitable large US corporations paid, on average, US federal income taxes amounting to about 14% of the pretax net income that they reported in their financial statements. When foreign and state and local income taxes are included, the average effective tax rate across all of those years increases to just over 22%.”

One of my sources for tax policy research is the Tax Policy Center (TPC), a nonpartisan joint venture between the Urban Institute and the Brookings Institution. From TPC’s perspective, a 15% corporate tax rate would make the US one of the lowest corporate tax regimes – until other countries cut their own rates, as they did after the Tax Reform Act of 1986. It would also create a ginormous loophole for high-income individuals. Under the Trump proposal, the 15% rate would apply to partnerships and sole proprietorships, which would create a huge path for tax avoidance by sheltering wages through such an entity. If the new rules let pass-through entities, such as sole proprietors and LLCs (like this firm) be taxed at the lower corporate tax rate, then that benefits me (and dentists).

Let’s be clear about how this works: it’s not like there is one bucket for corporate tax receipts, and a separate one for individual tax payments, and yet another for payroll taxes. All tax receipts go into the same bucket, and go right out again to pay our collective expenses. Those countries with lower corporate tax rates also have much higher personal tax rates. (The plan in the US is to cut those too – at least at the very top levels. You can guess where this is headed.)

The one bright idea in corporate tax reform proposals is to tie corporate tax rate reform to reform of individual tax rates, potentially aligning rates and eliminating this type of income-shifting loophole.

2. Fewer tax brackets for individuals: The idea is to simplify the tax system. The following chart shows how your tax bracket might change under the proposed simplification.

By the way, this doesn’t come without a cost. The deficit is expected to increase by $6 trillion in 10 years. That’s more than a 25% increase. Your kids and grandkids get to figure out how to pay for that.

Ultimately what you care about is what you have in your pocket, as well as what things you have to pay for (health care, city services, college, retirement, etc). While marginal tax brackets are expected to change, if some deductions and exemptions are eliminated as expected, you could end up paying more in taxes. Fortune magazine took a look at the impact of expected changes on take-home pay, and this is the result:

If you’re in the Top 1% of earners, this works for you.

Hand-in-hand with the compressed brackets are higher standard deductions ($15,000 for a single filer, $30,000 for marrieds).  The higher standard deduction could make your tax calculations simpler by eliminating the need to itemize.  It may also make your tax liability higher, and remove incentives for certain spending and investment.

3. Deductibility of state income tax:  One of the items on the chopping block is the deductibility of state income taxes. Let’s not kid ourselves about this being payback to states that went blue and voted for Clinton. The states most effected: California, New York and New Jersey.

That said, Trump is not the only President to use tax reform to rectify political slights. We have the current rule on the non-deductibility of donations to not-for-profit organizations with a political agenda because President Lyndon Johnson was miffed over a preacher literally using his pulpit to bully Johnson. Trump has suggested repealing the Johnson Amendment, which essentially shut down lobbying activity by 501c3 organizations.

But if you don’t have itemized deductions of at least $30,000 for a married couple (or $15,000 for a single filer), it might not make that much difference to you, and might simplify your tax return.

4. Deductibility of mortgage interest: This is a classic middle- to upper-income deduction on the block. Each household can deduct mortgage interest on mortgage indebtedness up to $1,100,000 on up to two homes (that means loans totaling up to $1.1 million, not a deduction of $1.1 million). So mortgage interest on your house (and vacation home) is deductible up to these limits. What if you hold a multi-million loan on your home? Or own more than two homes? You’re not able to deduct that interest anyway. No skin off your nose.

5. Cap on total itemized deductions & 6. Deductibility of charitable donations: One proposal last summer from House Republicans suggested eliminating all itemized deductions except those for home mortgage interest and charitable contributions. The latest scuttlebutt puts charitable donations on the chopping block too. Or at least capping them.

Trump campaigned on capping all itemized deductions at $100,000 for single people and $200,000 for couples. You might not care about this one either, if you’re not making seven figures. But a lot of support to not-for-profits comes from higher earners. A taxpayer making over $1 million paid an average of $260,000 on state and local taxes according to the TPC. At this point, this taxpayer’s itemized deductions would be capped, eliminating the tax incentive for charitable giving by high earners.

One of the arguments made by those favoring smaller government is that people should have the choice of how their money is spent, and if they want to give to social services and other philanthropic causes, they can give to charity directly. Congress created the charitable deduction 100 years ago this year, to incent Americans to support their communities. With smaller government and a capped or eliminated charitable deduction, the landscape of American society will fundamentally change.  If you are in the camp that believes an American spirit of generosity is in part responsible for the success of capitalism (as I am), things won’t be changing for the better. The “compassionate conservatives” in the Republican Party won’t be happy with the reduction in tax incentives for charitable giving either, as it would affect donations to religious organizations.

7. Limits on donor-advised fund deductions: It’s unlikely we’ll hear anything tomorrow on this detail of the tax code. There are already some limits based on income for large charitable contributions, either directly to an organization or to a donor-advised fund (DAF). A DAF allows a taxpayer to “bunch” deductions for future charitable contributions into a single tax year. I recommend DAF contributions to charitably-inclined clients when they have a windfall, to off-set some of the tax they would otherwise pay in that year. Proposals here have included a time limit on the pay-out of DAF money through grants. Under current law, there is no limit on how quickly you need to make donations from a DAF; some proposals are suggesting funds be distributed to charities in 5 years.

Simpler is not always better. In my view we have the wacky tax code we have due to the same strong special interests we have always had, and because our economic world has grown more complicated. If you think about the tax code as a tool to incent certain behavior, as an example, you get to deduct your mortgage interest and property taxes because as a society we think it’s better for wealth building and maintaining capital stock for individuals to own their own homes. We have other tax rules to rectify imbalances, such as the Alternative Minimum Tax (AMT), which was created because in 1962 it was discovered that a bunch of millionaires were paying no tax, and that seemed unfair. That it was not inflation-adjusted and had unintended consequences years later doesn’t mean it was a bad idea, it means it needed to evolve as the economic landscape did.

For a quick overview of the three main proposals and detail on some of the main changes up for consideration that you may hear about tomorrow, check out http://www.taxpolicycenter.org/feature/preparing-2017-tax-debate

Remember that Trump views himself as a disrupter and a master negotiator, and as such, he’s not likely to start with a centrist proposal meant to bring everyone into the fold. Once we do have a detailed bill to consider, the legislative process begins. That means lots of hearings, followed by changes, more review and comments before the House then Senate vote. But Democrats in Congress are not aligned, and Republicans  may attempt to push through a tax bill with only Republican votes, though they may not have enough.

Alternatively, Republicans can use the Budget Reconciliation process to overcome this legislative hurdle. There are many rules that need to be followed, but it’s possible we’ll get tax reform this way. We got the Affordable Care Act this way under Obama and the 2001 tax cuts under Bush.

To date, there has generally been strong support for tax incentives for retirement savings, home ownership, and some charitable giving. Under the proposals being floated thus far, these tax-preferenced items are expected to have less value in the future.

We’ll find out more tomorrow.

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