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Dec 21, 201712:56 PMFinancial Perspectives

with Michael Dubis, CFP

Grasshoppers v. ants, and tax reform

Tax reform has, after much deliberation, passed. It took me 30 minutes to read a summary of the reform. Summaries should not take 30 minutes. It is wildly complex; it’s the most complex I’ve ever read. Washing label instructions are complex to me though.

It is also way beyond the ability of a blog post like this to provide deep-dive knowledge. If you want to do deep dive on your own, first call your tax advisor — as in right now. If you’re interested in reading the details, I’d refer you to Michael Kitces’ website and read his very deep dived review of the tax reform legislation. Otherwise, I’m sure you’ll find a number of articles daily for the next few weeks highlighting changes.

As I write, the tax reform legislation still hasn’t quite gotten over the finish line, and the cynic in me thinks it’s because the government waits until the last minute knowing it’s almost impossible to act fully on it going into year end. I think the government reflects on the timeless story of the ant and grasshopper, knowing that there are few ants and mostly grasshoppers when it comes to planning. Grasshoppers generally wait until the last minute and run out of time to get things done, and then scramble hoping others will save them from their procrastination. Ants, on the other hand, plan ahead and work hard in advance, and so are prepared or already acting on it.

First off, some good news — there will be a lot of time to adapt to the new, complex rules in the future. Most of the dial movers occur over the next year and going forward, and politics aside, it appears that the vast majority of U.S. taxpayers will benefit from reform.

These are also good (or maybe bad) times for tax advisors depending on what currency you value the most: time or money. Complex reform will understandably suggest higher tax advisor fees, all while it appears even more people will need tax services. Unfortunately, tax advisors will also be working a lot harder than they already are, all while it appears the tax reform will complicate data gathering, squeezing deadlines as a result. March and April 2019 will not be fun for these folks. These issues are unfortunately a hidden tax in complex tax reform. In the tax advisors’ defense, the handful of conversations I’ve had with my cherished and respected tax colleagues suggests they are not excited for this additional work and would gladly trade it back!

So, a few things that matter before year’s end:

  1. Grasshopper, if you’re just thinking about this now, you are running out of time to do serious, paperwork-intensive planning around it for 2017. Most of the last minute planning primarily relates to advanced charitable planning and accelerating deductions.
  2. Practically speaking, your tax advisor also does not have software to run detailed assumptions since software companies need weeks to reprogram calculators, which also take weeks to develop.
  3. The best they can all do is give you sensible direction, but even then it’s not certain you’ll have enough time to actually do anything with that direction. There’s simply not enough time (about seven days left as I write) or “people power” at the tax and brokerage firms to process all of the required analysis and paperwork before year’s end. For example, some custodians and brokerage firms already are setting their hard cutoff for most paperwork this week! Most of these places already get five to 10 times the paperwork in December than any other month of the year. They will all do their best to get things done, but it’s simply not practical to assume they will get it all done before year's end. They don’t like dealing with grasshoppers either.
  4. If you do have charitable intentions at this point, and the advice from your tax advisor is to make more donations before year’s end, then be very clear with them whether you should do it directly to charity or if they are advising setting up a fund. If they’re advising setting up a fund, you better all understand what it takes to get that done. It can take a number of days, or longer, to set up a donor-advised fund, especially if you plan to fund it with stock. Cash is much easier. Different places offer different resources and support, and given the time of the year you want support! For example, (and this is not an endorsement for compliance CYA reasons), a local donor-advised fund, such as the Madison Community Foundation, has a lot of staff to support to help. They’re busy helping their ants, but they may be able to accommodate your grasshopper request. It won’t hurt to call and at a minimum, you can learn more about what they do for the community. If your personality is grasshopper though, it’s probably best to ask your tax advisor if it’s better to make donations directly to the charities of choice and not run around in haste trying to set up a donor-advised fund or complex foundation at this point.
  5. Finally, there are some things you can plan around for 2017 that you can do with a just checkbook and a mailbox. Tax reform encourages what many have historically already done: defer income into the new lower tax brackets in 2018 and then consider accelerating state, property, and miscellaneous deductions this year, especially since some of those deductions may disappear or not be as valuable in the future. Of course, for those of you impacted by the AMT (Alternative Minimum Tax) accelerating some deductions doesn’t matter since you don’t get them anyway.

Again, you will definitely want to call your tax advisor before year’s end if you think you might benefit from year-end planning. If you’re a grasshopper and any of these or other year-end ideas are of benefit to you, you should have stopped reading this article 5 minutes ago so you can talk to your your tax advisor about your options.

Perhaps my best advice is this: If you’re not already, set your New Year’s resolutions on becoming an ant for 2018.

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About This Blog

It is an understatement to say the world has experienced a radical shift in capital markets. There are more layers of information and opinions on the direction of the world than we've seen in decades. The internet and the media do not always make it easier, but Michael Dubis' contribution through IB blogs will help you sift through the noise and give you some perspective. You can find his company online.

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