Taxes

Breaking Down the 2020 Debates: Health Care

Posted on Sep 11, 2019 in Health, Planning, Retirement, Taxes

Whatever you might think about politics and politicians, decisions made in your state house, the White House and houses of Congress have an impact on you and your personal finances.

I’m writing this mini-series to break down the issues that come up during the Presidential debates in the months leading up to the 2020 elections. When candidates use buzzwords and scare tactics to win at the polls, we lose the real exchange about how we want our lives to look. You need to understand how a tax proposal, health care plan or student loan forgiveness could affect you.

Upfront I want to say that I offer this with no political agenda. My goal is to take the politics out of policy and try to outline what you need to consider in evaluating a proposal or a politician’s platform. What matters to me are the problems we all face, and solutions to them.

So with that in mind, let’s talk about health care. This a long post, so sit back, get a second cup of coffee (or something stronger), and let’s dive in.

WHAT IS HEALTH CARE?
Let’s start by separating the three components of this subject:
1. Health care insurance
2. Health care services
3. Health – your physical and mental well being

All three components have been touched on during the debates, but it’s the first part – insurance – that is the main focus at this point. Employer plans, the Affordable Care Act, “Obamacare” – this is what the “health care debate” has come to mean. That is: How do we pay for help to maintain, enhance and recover our health over the course of our lives?

We’ll start with an overview of the health care insurance system we have, a little history about how we got here, and the various proposals up for debate.

WHAT WE WANT
Here’s what I think most of us want when we think about health care:

• We want to live long, healthy lives.
• We want to prevent illness and understand that preventative care, check-ups and routine testing, can catch big health issues early and help us avoid them.
• We want quality medical care for accidental injury or the Big Issues we haven’t been able to avoid that treats us without bankrupting us.

WHAT WE HAVE
Our system is almost completely backward. Kristen Gillibrand, Tulsi Gabbard, and Marianne Williamson are all correct that we have a “sick care” system that emphasizes treating illness and not a health care system geared towards preventing it.  We see this in data like that from the OECD which shows that the U.S. has a much higher rate of hospital admissions for preventable diseases than in comparable countries.

In the U.S. we have FOUR health care systems:
• Government-paid / government-provided (the Veterans’ Administration (VA) system)
• Government paid / privately provided (Medicare)
• Privately paid / privately provided (Employer plans)
• Self-pay (the individual covers all costs)

Most countries incorporate everything into one system. Our patchwork arrangement was stitched together over time, during various presidential administrations and political regimes. The VA system was in place when Truman (1945-1953) introduced a proposal that 15 years later would become Medicare. When Eisenhower was president (1953-1961), only 9% of single elderly and 14% of elderly couples had insurance coverage for medical expenses.

Before Medicare, less than 15% of older Americans had insurance coverage for medical expenses

Eisenhower signed into law the bill that gave employers a tax exemption for workplace health insurance plans. The insurance industry does not want to deal with selling and administering plans to individuals, and the lobby behind keeping employer plans and their tax exemption is huge. Kennedy (1961-1963) introduced Medicare but it didn’t pass. It was under Johnson (1963-1969) in 1965 that Congress enacted Medicare under Title XVIII of the Social Security Act to provide health insurance to people age 65 and older, regardless of income or medical history.

Friend, colleague and adviser/physician Carolyn McClanahan notes that the concern at the time was coverage over cost; if the Congressional Budget Office (CBO) were to review the program today, it would not be found to be cost effective. Note also that there was no requirement that Medicare recipients pay into the system. The next time you cringe about “socialist” programs, consider that our wildly popular health insurance system for older Americans could be labeled this way. Put the labels aside and consider a program or proposal’s costs and benefits.

Sidebar: Interestingly, it was former President Truman and his wife former First Lady Bess Truman who were the first two recipients of Medicare

So here we are, 50 years after Medicare, and we are still battling two conflicted camps:
Coverage over cost (universal coverage) and Cost over coverage (lowest cost). The Democrats tend to fall into the first camp, Republicans into the second, and the emphasis in the second camp is not the total cost of the program, but the cost to the government.

What you should ask: When politicos are throwing around concerns
about the “cost” of care, ask “The cost to whom?” What we need to be concerned about is total cost to you in premiums, deductibles, out-of-pocket costs and taxes.

The first camp led us to the Affordable Care Act (the ACA, aka Obamacare) and the second is dismantling it in favor of a free market approach. So what does “Medicare For All” offer us?

WHAT IS “MEDICARE FOR ALL”?
If you are confused about what they’re talking about when they say “Medicare for All,” it’s with good reason. There are TEN VERSIONS of health care insurance reform that fall into four broad categories:

Single-Payer (“Medicare-for-All”):
1. Jayapal (D-WA) and
2. Sanders (D-VT) – Single-payer programs covering all US residents, plus long-term care coverage, replaces all private health insurance by extending Medicare.
Public Program with Opt-Out (“Medicare-for-All-Who-Want-It”):
3. DeLauro (D-CT) & Schakowky (D-IL) – Makes Medicare a private option; individuals are auto-enrolled in Medicare for America, a new national health insurance pro-gram, but can opt-out in a year when they have other qualified coverage; employers can continue to offer group plan coverage or pay 8% of payroll for employee cover-age in Medicare for America; Medicare Advantage plans are retained.
Public Plan Options:
4. Cardin (D-MD) – Extends ACA, giving individuals the option to buy a federal public plan (i.e. Medicare); private and public coverages are retained
5. Bennet (D-CO)/Kaine (D-VA)/Delgado (D-NY) – Similar to #4
6. Schakowsky/Whitehouse (D-RI) – Similar to #4
7. Merkley (D-OR)/Richmond (D-LA) – Similar to #4 with employers able to offer a federal public plan
Medicare Buy-In:
8. Stabenow (D-MI) – Individuals can buy into Medicare at age 55; Medicare Advantage plans retained
9. Higgins (R-LA) – Similar to #8
MedicAID Buy-In:
10. Schatz (D-HI) /Rep. Lujan (D-NM) – States can offer a public plan option based on Medicaid

The Kaiser Family Foundation has created a side-by-side comparison of the competing proposals (current as of May 2019) with a futher breakdown of the details: Get KFF’s Side-by-Side Comparison

From a personal finance perspective, you care most about (1) what is a plan going to cost you, and (2) what benefits do you get with it. From a public policy perspective, we have to think about program costs, and cost containment.

WHO PAYS?
The short answer is, we all do. Directly and indirectly. A lot of people stop listening to the debate out of fear that their health care costs will increase or they will lose benefits with any kind of change. You need to think comprehensively about all the ways you pay for health care coverage, and whether you might get better or more comprehensive coverage under a new proposal.

It’s likely you are paying more for the coverage you have today than you did even a year or two ago. According to the National Conference of State Legislatures, in 2018 the average annual premium for employer-based family coverage rose 5% to $19,616 for by 3% for single coverage, to $6,896. Single employees carried 18% of their premium cost and workers with family coverage carried 29% of their cost, on average.

And it costs all of us by skipping preventative care and developing chronic disease.

How it Works Now
Under our current crazy quilt of coverage, if you’re over 65 and covered by Medicare, you still have premiums to pay; if your income in retirement is above certain thresholds, you’re paying a Medicare surcharge on top of that.

If you’re working, you’ll pay 1.45% of your gross wages with no income limit to Medicare as part of your payroll taxes. (Wages include things like RSU vests – you’ll pay $1,450 to Medicare on a $100,000 vest.) If you make over $200,000 (or $250,000 as a married person), you’ll pay an additional tax of 0.9% on earned income over those thresholds to Medicare, and another 3.8% on net investment income over thresholds.

In addition to your 1.45%, your employer is kicking in another 1.45%. If you’re self-employed, you’re paying the full 2.9% (and possibly + 0.9% + 3.8% over the above-noted thresholds). In case that’s hard to follow, you can find more detail on how these taxes work here.

If you’re working, you may have health care coverage through your employer – though 40% of workers do not. Even with an employer plan, you’ll still pay a portion of the cost for that, and your share has been growing as the costs of health care grow. If you’re self-employed, you’re paying into Medicare and covering your own health care insurance costs at market rates.

On top of your premiums and expenses up to your deductible, a portion of your federal taxes beyond payroll taxes goes to Medicare, and you have out-of-pocket costs for things your plan doesn’t cover as well.

Other Costs
The other ways we pay are through choices we can’t make without losing health care coverage:
• if you want to retire early (before age 65), you’ll have to factor in how to cover health care insurance costs before Medicare kicks in;
• if you lose your job, you’ll be paying the full costs of your insurance coverage (COBRA allows you to continue coverage, but not at the rate your former employer subsidized – you’re paying the full cost);
• if you want to leave your job to start a business, you’ll be doing the same, covering the full cost of your insurance as well as the cash burn of your business;
• if you’ve been covered on a spouse’s plan and want to leave a marriage when you don’t have a job that provides health insurance, you’ll have to find a way to pay for your health insurance.

Or you go without coverage, and we are right back to the problem of avoiding preventative care and facing potentially bigger problems down the road, a burden we all bear. All of these costs stifle the free movement of people and business and innovation.

THE HURDLES OF REFORM
A lot of the discussion about these new proposals centers around cost. And it should: our current system is not only not effective, it’s not sustainable. All the costs you have that are noted above are still not covering the cost of care. Medicare premiums and payroll taxes only cover about half the cost of the program. The balance of what’s needed comes out of the federal budget, and each year the share of your taxes going to pay for Medicare increases. In 2018, Medicare cost $582 billion, accounting for 14% of the federal budget and making it the second largest federal program.  And Medicare does not cover vision, dental, or long-term care.

A major scare tactic in the health care debate is that the new plans will cost you more. During the second presidential debate in July, Elizabeth Warren got it exactly right when she refused to be pushed into saying taxes would rise under a Medicare-for-All plan just in order to get a sound bite for the nightly news. Whether you would pay more in taxes is a red herring. That’s not the only cost you have. What you care about is your total cost for health care coverage.

If I am paying $10,000/year for health insurance with a $6,500 deductible, and someone says I could reduce my premiums to $8,000/year and lower my deductible to $5,000 if I pay $1,500 more in tax, my total annual cost for health care falls by $2,000 (and by even more if my expenses exceed $5,000), for an additional $1,500 in taxes. That $500 net savings is real money to me. Sign me up.

What you should ask: When fear-mongers are raising the issue of higher taxes from insurance reform, ask “What is the TOTAL COST to me?” You pay premiums, deductibles, taxes and co-pays; you need to be concerned about the total cost to you.

Not taking into account total health care expenses is often a costly mistake in retirement planning. According to Fidelity’s Annual Retiree Health Care Cost Estimate, a 65-year old couple retiring in 2019 can expect to spend $285,000 in health care and medical expenses throughout retirement, compared with $280,000 in 2018. For single retirees, the health care cost estimate is $150,000 for women and $135,000 for men.

Some of the proposals would result in substantially greater federal tax revenue, but not from you. Plans that remove the burden of health care coverage from employers also remove the tax deduction Eisenhower gave them for that expense. What happens when you lose a tax deduction? You pay more in taxes. Without the cost of having to provide an employer plan, businesses will pay more in taxes. McClanahan calculated the additional tax revenue to be $250 billion per year.

There are also protectionist obstacles to changing our system. With plenty of profit being made by insurers and fee-for-service specialty care providers, those factions and their lobbyists will do their best to maintain the status quo.

Changes in insurance plans isn’t a complete solution, though. The way we deliver health care in the U.S. has to change, too. We spend $3.2 trillion annually on health care in the U.S and 25% to 30% of that is overhead, while overhead in other countries runs 5-15%. By McClanahan’s calculations, we could provide primary care to all just by reducing overhead to 15%.

What you should ask: When you hear that “we can’t afford” a particular proposal, ask “Since the cost of our existing health care system is unsustainable, what is your proposal to reduce overhead costs?”

REAL REFORM
We started this discussion with the two primary concerns of the cost of care and the benefits you can receive. So far we’ve discussed is insurance coverage for individuals and families; none of this addresses the cost of the health care system, meaning the medical professionals, clinics and hospitals that deliver care, and the range of benefits for which you may be eligible under different plans.

Fixing our health care system mean changes not only in insurance options, but in the administration and delivery of medical care. Watch for who mentions these as the debate continues:
• Moving from four systems to ONE (like Canada);
• Using a single billing system (like France);
• Removing primary care from insurance, providing it as a public service (through Community Health Centers (like Spain);
• Developing a nationalized electronic database for our individual medical information, removing it as an asset that belongs to a specific insurer or hospital network, and shifting its focus from billing to patient history (like the VA ”blue button” system here in the U.S.).

These are all big ideas, but they are not new ideas. Preventative care is not an insurable event, it is something each of us needs and makes more sense to be offered outside of an insurance program. A hybrid system that combines a public-provided “primary care for all” for preventative medicine with public and private options for everything else would give us a couple of things:

All Americans would have the preventative care needed to stay as healthy as possible
We preserve choice for health care beyond basic preventative medicine by offering both public and private options for specialists and care that requires hospitalization
Competition can drive down costs further by having a not-for-profit provider like a public option in the mix to force down costs of for-profit organizations.

It’s hard not to get swept up in the histrionics that make up political debate. Getting to the root of a proposal or plan, and understanding how it might affect you, is the only way to really protect your interests. When the candidates turn to health care, you’re now knowledgeable about the 10 flavors of “Medicare-for-All,” savvy enough to ask about whether they mean single payer, a public option, or a buy-in, and sharp enough to look past labels to the actual plans, to evaluate what they might mean for you.

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Inverted Yield Curves, the Next Recession, and You

Posted on Aug 20, 2019 in Investments, Planning, Taxes

I initially started this post two weeks ago, after we woke up to the news of Dayton and El Paso, which made it feel like the world was falling apart. That shock was followed by China’s devaluation of its currency, a different kind of shock, and the financial world seemed like it was falling apart, too.

By the time I’d finished a first draft that Monday morning and guessed that China would be labeled a currency manipulator, markets rebounded. And China was labeled a currency manipulator. Then came this last week, when we saw an inverted yield curve, and markets tanked again. By the end of the week, markets had recovered, and you were probably throwing your hands up or wishing there was a nice pile of sand into which to stick your head.

Let’s look at what happened to the stock market over the first two weeks of August when all this was going on, then we can talk about what was behind it. The S&P 500 tracks the largest US companies, and we’ll use that index here:

The first dip in the chart is China’s devaluation of its currency. The next, leading up to the plunge on Friday, August 9th, was related to squabbling over name-calling between the US and China, increasing tensions in Hong Kong when anti-government protests over a proposed extradition law turned violent,  and the beginnings of investor flight from stocks to bonds. The sharp uptick of markets opening the following week on August 13th was a reaction to the Trump’s Administration’s announcement of a delay in implementing new tariffs on China from September until mid-December. News of the inverted yield curve came on the 14th, and markets collapsed. On Friday, Walmart’s quarterly earnings beat estimates, and that news along with other strong earnings numbers led to a rise in non-tech stocks.

So, yeah, if you’re feeling like following the ups and downs of the market is like playing whack-a-mole, you’d be right.

The big issues of a trade war with China and an overall flight to safety in financial markets are the two main things to watch, and we’ll take each in turn.

China’s Currency Devaluation
At the beginning of the month, the People’s Bank of China (PBOC) devalued the yuan, citing “unilateral and protectionist measures as well as the expectation of additional future tariffs on Chinese goods.” President Trump had threatened China with an additional 10% tariff on Chinese goods to go into effect in September, despite reported progress on trade.

When I was in grad school, even after studying economics in college and working in finance, taking an international investments class was like trying to think in an extra dimension. Supply and demand charts I understood. But now throw in the impact of multiple currencies? Until we all move to bitcoin, global commerce will still require an extra step: If I want to buy something made by someone using a different currency, first I have to buy some of their currency, then buy their product using their currency.

And let’s be clear: US importers and their US customers (i.e. you) pay the cost of the tariffs.  China “pays” in that their exports are more expensive to offshore buyers.

When the US puts a tariff on Chinese goods, it costs more to buyers here to import their products. So your Chinese-made clothes and electronics become more expensive to the stores here. Those stores have to buy their products in the local currency (yuan). By lowering the exchange rate with the US dollar, the Chinese have made their products cheaper for US stores to buy. By devaluing the yuan, China essentially canceled out the effect of the US tariffs for its buyers.

This doesn’t sound so bad, right? I can buy a new iPhone or a new sweater for the same price to me (and profit to the US company) than I would have before our current trade kerfuffle began.

Yes…and no. That China devalued the yuan to immunize their exports from US tariffs also means they are taking a hard line with regard to trade talks.

Currency manipulation
My guess on what would happen next was that the US would label China a currency manipulator (which is true) and the President would double-down on an ineffective trade policy. I was three-quarters right. We’re experts at name-calling these days, and so China was called out for manipulating its currency. Financial markets reacted. The market wasn’t expecting the devaluation of the yuan or the uncertainties that come with it. Turmoil ensued.

You could make the case that the US manipulated the US dollar when we implemented Quantitative Easing (QE) during the financial crisis. At that time, we (the US government) bought our own Treasury securities, pumping millions of dollars into the economy. This flood of dollars drove interest rates down, and drove down the value of the dollar. Sound familiar?

The Federal Reserve, China and Leverage
The Fed’s main job is to manage inflation. To do this it serves as the gatekeeper for the flow of dollars in and out of the economy by changing interest rates (the Fed Funds rate specifically). The Fed decided to lower rates by 0.25% at the end of July. This cut was the first in a decade, and many in the financial world saw this move as politically motivated, anathema to the tradition of the central bank as an independent inflation watchdog, not the political pawn of an administration wanting to stay in power. Typically, interest rate cuts are used to stimulate the economy. But wait – we’re told the economy is “tremendous.” Why does it need stimulating?

One factor that seems to be left out of the trade mix is the heavy investment of China in the US. We have been financing our growing deficits by selling Treasury securities – and outside of the US, the largest owner of US Treasuries is China. The “nuclear option” in the trade war would be for China to start dumping US Treasuries. The dollar would collapse and interest rates would spike. Everyone says this would never happen, as it would hurt China too.  Yet we live in unusual times, and brinkmanship can send both parties tumbling over a cliff. Our President is used to doing deals based on other people’s money, and he eventually will walk away from the Oval Office. What remains to be seen is whether the aftermath here will be similar to the multiple bankruptcies from which he has also walked away, leaving the mess for someone else.

And yet, we managed to wade through all that, with markets having recovered by the end of the first week of August. Then some fool noticed the inverted yield curve.

The Inverted Yield Curve
You think about yield curves even if you don’t realize it. When you’re deciding on a mortgage, you know that a 15-year loan comes with a lower interest rate than a 30-year loan: with the longer term mortgage, there is more risk to the lender that something might interfere with your ability to repay, and the money they’ll get back will be worth less with each passing year, thanks to inflation. What the lender is expecting to receive – the interest payments over the loan term – is the yield.

Each type of debt has its own yield curve, and a basic one for US Treasuries normally looks like this:

Normally, the longer you are asked to loan money, the more you’re going to expect in return. The yield curve typically shows how you need to pay more in interest the longer the period over which you borrow money. If you loan a friend $100 overnight, you might be fine with just getting the $100 the next day. If you loan them $100 for a year, you might be a little worried that you might not get it back. In addition, the $100 you get back in a year might not cover the cost of that bauble you’re planning to buy with it a year from now. You can’t be sure that the price of baubles won’t go up. Possible price increases equal inflation risk. And you want to be compensated for that risk, too.

The term structure of interest rates (the finance-fancy name for the chart above) shows how when you loan money, you want to be compensated for the decline in purchasing power of your loaned dollars (inflation), and for the risk that something will happen to interfere with repayment of the loan (default risk). Normally we expect short-term loans to have low interest rates, intermediate term loans higher rates, and long-term loans higher rates still.

But last week, the inverted yield curve showed the reverse: some longer-term loans had a lower interest rate than short-term loans:

How does that make sense?

To make it extra confusing, there is more than one reason why the yield curve might invert. When investors think a downturn is looming, they might want to hold longer-term bonds, and this demand causes the inversion. Another theory is that lenders have a reduced incentive to lend for the long term – they can make as much or more money lending in the short-term.

Even though the news reported that “this was the first time the yield curve inverted since 2007” (prior to the Financial Crisis), that’s not precisely true. Different parts of the yield curve have been inverted since then; in March the 10-year Treasury bond yield fell below the 3-month yield. What got everyone’s panties in a bunch this past week was that it was the two-month bond yield that pivoted higher than the 10-year bond yield.

Not many paid too much attention to the March inversion because the 3-month yield isn’t used as a benchmark in the same way as the 2-month. Going back to the mortgage example, most of us might note a change in the interest rate on 15-year or 30-year mortgages – those are industry benchmarks – but not care too much if the rate changed on a 20-year mortgage.

Does This Mean We’re Going to Have a Recession?
A yield curve shifts for a variety of reasons, but here the curve showed something akin to a herd phenomenon: investors wanted to move out of stocks (risk) and into bonds (safety). The reason an inverted yield curve is considered a sign of recession is because it signals an unwillingness to take risk, it shows a flight to safety. The media enthusiastically reported that “the yield curve has inverted before every U.S. recession since 1955”. But it tells us nothing about the timing of this next recession.

An inverted yield curve doesn’t “predict” recessions or downturns. It’s an indicator, a sign, that market participants watch. It’s important because markets are made up of people (and computers, but they are programmed by people). When people lose confidence, they choose safety over risk.

But remember, the same folks who look at “signs” to predict downturns completely missed this back in 2007 – and some of the same people also look at skirt hemlines and who wins the Super Bowl to predict future market behavior. An inverted yield curve might occur months or YEARS before a recession.

Which brings us back to what most economic forecasts have been saying (and which I relayed in my last Market Report to clients): it’s more likely than not that the US will move into a recessionary period sometime in the next year or two. With the uptick in trade tensions, we might be more on the short end of that range now.

Trade Tensions
As mentioned, when I started this post, the stock market had tanked on the news of the devaluation of the yuan.

Circling back to where we started the month, last week after the market downturn, President Trump decided to delay his now completely ineffective new tariffs – which he says don’t cost Americans anything – until after Christmas to help holiday shoppers. Markets responded favorably. Thanks, Santa.

What It Means for You
Between now and the Presidential Election, there will be noteworthy economic statistics and there will be bellowing and bluster. You need to listen for the noise in the numbers:

• The US unemployment rate is at a historic low – but not everyone is in a good job, with many taking on second jobs or “gigs” to make ends meet.

• Tax cuts were supposed to lift wages and stimulate the economy, but after an initial round of meager bonuses from a few big corporations, more individual taxpayers were left with a reduced tax refund – or tax due – in 2018.

• With the tax benefits to individual taxpayers skewed to the early years of the tax plan, you’ll likely see higher taxes in coming years – unless even more tax gimmicks are passed to prop up consumer spending today at a higher cost tomorrow.  The latest chatter is a payroll tax cut.

• While there is a new school of Modern Money Theory (MMT) that says deficits don’t matter (Democrats like this theory to fund proposed social programs, the Republicans have applied it to pay for the big tax breaks to corporations and the ultra-wealthy), some of us think running deficits while you have a booming economy is woeful mismanagement.

When a recession does come, we won’t have the capacity to stimulate the economy with monetary policy through more rate cuts (because we will have lowered rates as low as they can go) or fiscal policy through spending on infrastructure projects, keeping people employed and getting improved assets in the bargain (because we will have maxed out our collective credit card, aka the national debt).

What you can do is tidy up your finances:

• If you’ve run down your cash reserves, make it a priority to build them back up.

• If you are still in the workforce, spend a weekend updating your resume and professional online presence; watch for opportunities to add to your portable career equity – those projects and skills that would be valuable to another employer, not just your current one.

• If you’re retired, review your “buckets,” the portions of your savings that are allocated for near-term and intermediate-term spending. Most clients will have 5-7 years of savings set aside in these buckets.

• Working or retired, if you’ve taken on debt – credit card balances, no-interest-until-sometime-later deals, draws on home equity and the like – look hard at repaying it as soon as you can, both reduce your monthly spending and to clear out borrowing capacity if you need it later.

Remember that the stock market is NOT the economy. With a cash reserve and “buckets” for near-term spending if you’re in retirement, you can ride out stock market fluctuations.

The stock market is also NOT your personal economy. Your personal economy is your household, and your ability to pull in enough income to cover your expenses. If you’ve diversified your investments, you won’t be beholden to the performance of one company or one sector to finance your life in the event a stock market decline hits some industries more than others. And if you’re working, you’re keeping your tools sharp and skills current in the event a downturn affects your company and your job.

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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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