Here are a few articles we were reading this month that we wanted to pass along to you. Happy New Year and enjoy!
Major tax reform typically only occurs once every decade or few. But after a tumultuous series of negotiations in both the House and Senate, a final reconciled version of the Tax Cuts and Jobs Act of 2017 appears to be heading shortly to President Trump for signature.
The legislation will result in substantive tax reform for corporations, with the elimination of the AMT and consolidation down to a single 21% tax rate, all of which are permanent. However, when it comes to individuals, the new legislation is more of a series of cuts and tweaks, which arguably introduce more tax planning complexity for many, and will be subject to another infamous sunset provision after the year 2025.
Nonetheless, the new tax laws have a lot to like for individual households, almost all of whom will see a reduction of taxes in the coming years (though not after the 2025 sunset). While 7 tax brackets remain, most are decreased by a few percentage points (to a top rate of 37%), along with the repeal of the Pease limitation. The AMT remains, but its exemption is widened. Most common deductions remain, though they are more limited, and an expanded standard deduction means fewer will likely claim itemized deductions at all in the future. There is a new crackdown on the Kiddie Tax (subjected to trust tax rates instead of parents’ tax rates), but a much wider range of families will benefit from a great expanded Child Tax Credit (with drastically higher income phaseouts). And a doubling of the estate tax exemption amount – to $11.2M for individuals, and $22.4M for couples with portability, will make estate tax planning irrelevant in 2018 and beyond for all but the wealthiest of ultra-HNW clients.
Ultimately, the new tax rules are actually complex enough that it will likely take months or even years for all of the new tax strategies to emerge, from when it will (or won’t) make sense to convert to a pass-through business, to navigating the new tax brackets, and the emergence of strategies like “charitable lumping” to navigate a higher standard deduction.
One of the more complex but useful provisions of the new tax bill will be the pass-thru income deduction, where many employees may decide to become independent contractors, while small business owners may want to reorganize their business structure. If applicable, this article gives a great run through to prime a conversation with your tax preparer.
IRS wealth statistics paint a fascinating picture of the wealthiest Americans—but oddly a picture that diverges from what the mainstream media depicts.
In this blog post, therefore, Stephen Nelson describes the most recent IRS wealth statistics on the top quarter of one percent—they’ve been available for a couple of months—and points out some of the most interesting features that pop out.
As we pass the 10-year anniversary of the Great Recession of 2008, researchers at the Cleveland Fed have done an in-depth analysis on what really happened during the financial crisis, and in the aftermath, in an attempt to better understand the risk that it might happen again (and how to handle it next time).
From the Fed’s perspective, their primary focus was and is on the banking system itself, scrutinizing the safety and liquidity and funding needs of banks as the number of bank failures spiked over 150 by 2010 (with the majority of bank failures in Georgia, Florida, Illinois, California, and Minnesota). Fortunately, at this point bank failures are back down to just a half dozen per year that fail (nationwide), but median family net worths still haven’t recovered to pre-crisis highs, and the Fed is now much more cognizant of the systemic risks in the banking system. Of course, the underlying challenge was the belief that “housing prices only go up”, or at least that if they ever went down, it would only happen in a small region due to local factors; the sheer national scale of the real estate decline was what ultimately put pressure on the banking system nationwide (even as failures were concentrated in the most high-flying real estate markets).
At the same time, though, the Fed notes that there were still large swaths of banks that escaped relatively unscathed, that were still profitable every quarter, and never had to cut their dividend through the financial crisis. The most lasting impact seems to be in the realm of commercial real estate loans in particular, which still haven’t fully recovered from their speculative boom volume of the 2000s (and home equity loans are still down 37% from their 2007 highs as well). And from the Fed’s perspective, their oversight of banks now involves a much wider range of stress tests to evaluate the consequences of potential severe economic downturns, which for many have led to an increase in the level of (risk-based) capital reserves that banks are now required to hold.
At the same time, though, the Fed is cognizant that the growth of the “shadow banking” system, from hedge funds and investment banks, to alternative payment platforms like PayPal, Venmo, and Bitcoin, mean that more money than ever moves outside the Fed’s purview, which means even as the Fed tries to prepare to better deal with the next crisis, it acknowledges there is still uncertainty in how the next inevitable recession will unfold.
The classic 8-hour workday was created during the industrial revolution as a way to limit the number of hours of manual labor that workers could realistically endure on the factory floor… which, at the time was a more humane approach to work, but arguably is poorly suited to today’s more knowledge-based and creative work. In fact, when it comes to knowledge-based work, a recent study found that what impacts people’s cumulative productivity for the day the most is not how many hours they way, but the way in which they structure their day.
Specifically, the research found that those worked for about an hour at a time, and then took 15 minute breaks (or more precisely, an ideal work-to-break ratio of 52 minutes of work to 17 minutes of rest), were the most focused and productive. In essence, this schedule allows us to be 100% dedicated to a task that needs to be accomplished – and actually be able to focus – and then get the break we need to refresh. Or stated more simply, our brains seem to be built to only sustain a limited duration of about an hour of focused energy, before it must be refreshed…but it can be especially productive if you are able to focus for that hour.
Accordingly, this means optimal productivity is all about breaking your day into hourly intervals (close enough to 52 minutes), where you “respect” the hour by trying hard to stay focused for that hour, knowing that a rest is coming. And then when the time comes, take a real rest, like walking or reading or chatting, not just pausing to answer work emails or phone messages, which is just another form of work (that doesn’t give the body and brain the recharge it needs).