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Tax Reform: Frequently Asked Questions

The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party, nor should the analysis be considered tax advice.

As Congress grapples with the most sweeping tax overhaul effort in decades, investors have many questions: How will this affect me? What should I do now?

It’s important to remember that bills aren’t laws, and significant differences between the House and Senate bills remain to be bridged before a final bill heads to Congress for another vote. We believe it would be premature for individual investors to make changes now, given the high degree of uncertainty over any eventual new tax law.

That said, here are some things to consider, based on the questions I’m hearing most frequently:

What should I do today to prepare for the new tax rules?

In general, investors should not make significant changes to their investments or financial plans right now. We believe investors should not overreact to potential changes in tax law or market movements, especially if they have a long-term investment strategy and financial plan.

What effect will the new tax plan have on my 2017 or future tax liability?

If passed, many of the proposals in the plan will phase in starting in 2018. It’s unlikely that anything in the tax bill will have a significant effect on your 2017 tax return.

Many independent think tanks, including the Tax Foundation and the Tax Policy Center, have projected that the main provisions in both the House and Senate bills would provide a net benefit to most taxpayers. There would be no impact in 2017 under the current bills, and the benefit or impact may change depending on income level over time until 2025, when portions of the current Senate bill would expire. Our conclusion is similar, but it’s important to remember that details will vary by individual, depending on the final bill and each taxpayer’s situation.

Should I increase my deductions for 2017 and try to push income into 2018?

We don’t recommend making any significant tax decisions based on the proposed tax bills. There is no guarantee that a final tax bill will be passed into law, so making decisions based on the current proposals could be risky.

Should I push medical expenses into 2017, in case the medical expense deduction disappears in 2018?

Medical decisions should be based on a conversation between you and your doctor. Don’t let tax issues cloud your decision-making process, especially when it comes to your health.

The Senate bill continues to allow the deduction for medical expenses, and would temporarily allow taxpayers to deduct qualified medical expenses that exceed 7.5% of their adjusted gross income in 2017 and 2018, from 10% currently, after which the limit changes back to 10%. The House bill eliminates the deduction for medical expenses.

Should I make additional charitable contributions this year, in case I’m not able to itemize my deductions next year?

If you have enough to meet your needs, giving to others is always a good thing. Both tax bills would allow a deduction for charitable giving—but with the potential loss of many itemized deductions, some people may decide to use the standard deduction, instead of itemizing, if the tax bill gets passed into law. 

If you think you may be on the borderline between using the standard deduction or itemizing, it’s a good idea to talk to your tax advisor to see if you could benefit from some additional giving this year versus waiting until next year. Of course, getting a tax deduction is only a side benefit of charitable giving, so it’s better to base your charitable-giving decision on other factors, such as the satisfaction of helping worthy causes.

Should I wait to sell assets until 2018, when the tax rates could be lower?

The primary motivation for selling assets should be market conditions or your financial needs. Taxes are an important part of that decision, but normally shouldn’t be the primary motivating factor.

At this point, the proposed ordinary income tax brackets are quite different in the Senate and House bills. Long-term capital gains tax rates remain essentially unchanged in both bills, and short-term capital gains would be taxed at the adjusted ordinary income tax rates. 

Right now it’s hard to know if selling a short-term asset will result in an increase or decrease in your tax bill, because each taxpayer’s circumstances are different and the tax brackets have not been finalized. We don’t recommend making any significant changes to the timing of business transactions, earned income or investment decisions based on proposed tax brackets. They are likely to change during the next few weeks and the impact of the tax bill, if passed, will vary based on your income and personal situation.

Should I meet with my tax professional before year end to prepare for these changes?

It’s always a good idea to meet with your tax and financial advisor—not just to talk about the potential impact of the tax bills, but (more importantly) to review any changes in your current financial situation and to discuss your plans for the coming year.

I itemize my deductions every year and live in a state with high taxes. How will the tax bill affect me? Should I do anything in 2017 to keep from paying more taxes next year?

Although the bills appear to benefit most taxpayers, most does not mean all. Some taxpayers who itemize their deductions could be negatively affected, including those who pay a significant amount in state or local taxes, have large mortgage interest deductions, or have high real estate taxes.

The taxpayers who tend to take itemized deductions generally have annual incomes of $100,000 or more. Even assuming the loss of some itemized deductions, many taxpayers in this group may still see a reduction in their taxes, due to the proposed changes in the tax brackets, which overall would shift income to lower tax rates.

Most people will not be able to make significant changes in 2017 to mitigate the effect of these proposals. That said, it’s always a good idea to talk with a tax professional at year end to discuss your tax situation and circumstances.

I heard that the tax bill will require me to use the “first-in, first-out” method when I sell an investment, which could cause me to recognize a larger taxable gain. Should I sell my investments before year end to avoid this rule?

Only the Senate tax bill has a provision in it that would require investors to use the first-in, first-out (FIFO) method to account for sales of investments. Depending on when investments were purchased and their cost basis, requiring sellers to use the FIFO method could result in a higher tax bill for some investors.

Under current law, you have the option to use other methods when selling investments, such as the “specific identification” method. This allows you to select the specific shares to sell, which can help you manage the taxable gain or loss generated by the sale. 

It is not clear at this time if the FIFO provision will end up in the final tax bill. The House bill doesn’t include it, and there is opposition to it from brokerage firms because it is unfriendly to investors. At this point, we don’t believe clients should sell investments in 2017 in anticipation of this provision, as there is a possibility it won’t be in the final tax bill. In the end, your decision to sell an investment shouldn’t be based solely on a proposed tax change, but on your overall investment plan, market conditions or your need for funds.

 

What you can do next

  • If you’ve already created a financial plan to achieve your goals, ignore the political noise and wait until conditions are clear before considering any changes.
  • But now might be a good time to check in with a financial consultant to make sure your plan is up to date. Call Schwab at 800-355-2162, visit a branch, or find a consultant.
  • If you haven’t yet created a financial plan, Schwab can help. Learn more about investment advice at Schwab.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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