facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause

Two Things to Know About the Current Tax Proposals

Just like I hate predicting future investment returns, I also hate talking about proposed tax legislation. The struggle comes from talking about things that may never come to pass, or may change by the time you read this. However, there are a couple of things in the current proposals that call for attention before the end of 2017.

First, a basic summary of where things stand.

· The House and Senate both have tax proposals on the table.

· The House version has already been passed, while the Senate version is still in the “mark-up” phase.

· There are similarities between the House and Senate bills, but also a good number of differences which would have to be worked out in the “reconciliation” process. This is what makes discussing tax changes at this point so hard.

· Whatever the outcome, this looks to be the largest tax bill since the Tax Reform Act of 1986. In other words, there are many provisions involving many key aspects of the tax code, including personal and corporate income tax and the estate tax.

· It’s hard to predict the timing of passage and effective date(s) of the final law given the steps that remain in getting legislation to the President’s desk.

With that as background, and acknowledging that our focus is potential impacts on personal financial planning, here are two things that seem worth keeping an eye on between now and December 31.

Roth Conversions & Re-characterizations

A current provision of tax law allows a taxpayer with pre-tax IRA assets to convert some or all of those assets to a Roth IRA. This causes the converted assets to become taxable in the year of conversion, but ultimately tax-free from the Roth down the road if certain conditions are met. This would be beneficial particularly if the tax rate on conversion now would be less than (and maybe equal to) the tax rate down the road.

A great planning aspect of this conversion strategy has been the ability to re-characterize (undo) part or all of the conversion. Even better is the time that is allowed. A conversion done in one year can be re-characterized up to Oct. 15 of the year following the conversion. So, a conversion done in January 2016 could be undone as late as October 15, 2017. This provides wonderful flexibility in “fine-tuning” the ideal amount of taxable income desired from the conversion.

The bad news is both the House and Senate bills include language to repeal re-characterizations beginning in 2018. This is noteworthy because:

  • We are given an effective date.
  • The Senate version did not initially have this change included, but was changed to currently include it. This seems to indicate agreement on this provision between the House and Senate (whereas we have to guess about ultimate agreement on other things where the bills differ).
  • Anyone who has already converted in 2017 expecting to have the option to re-characterize in 2018 may not have that option.


The last bullet above is the most important. This will need to be watched closely by those who convert in 2017. As currently written, you will want to be very comfortable with the amount converted in 2017 because there is a reasonable chance you will be stuck with it. Remember, neither conversions nor re-characterizations are all-or-none. A large conversion done in 2017 can be partially re-characterized before the end of the year to arrive at a lower taxable amount.

Changing Tax Brackets and Deductions/Exemptions

The headline changes in Tax Reform are changing tax brackets and a shift to less itemized deductions, no personal exemptions and expanded standard deductions. First, a big note of disclaimer that the following discussion is general in nature because (1) there are quite a few differences between House and Senate on these points and (2) there is no across the board answer who would pay more or less under the proposals.

With that said, the following opportunities bear watching over the balance of the year. While charitable deductions would generally still be allowed, they effectively may not since other itemized deductions (such as state and local sales and income taxes) are on the chopping block and the standard deduction amounts would roughly double. Also, many (though not all) taxpayers could be in a lower effective tax bracket. For those who may effectively lose their itemized deductions in 2018 and/or those who may be in a lower tax bracket, consideration should be given to accelerating itemized deductions into 2017, such as charitable contributions or pre-paying state/local taxes or other itemized expenses where there is control of timing.

This will not be an easy analysis in December because the playing field will almost certainly shift several times as the reconciliation process plays out. For those who want to accelerate charitable giving but aren’t ready for the organization to receive the funds, consider using a donor advised fund to collect the gift now and use the fund to distribute the gifts later.


Any information presented here is general in nature, believed to be reliable as of the date published and is not intended to be and should not be taken as legal, tax, investment or individual financial planning advice. Competent, licensed professionals should be consulted when implementing any kind of financial, estate, tax or investment strategy.

facebook linkedin | Client Website & Vault  |  Schwab