House Ways and Means approves amended Tax Cuts and Jobs bill

The House Ways and Means Committee voted 24–16 on Thursday to send the Tax Cuts and Jobs Act, H.R. 1, to the full House for a vote. However, the bill, as marked up by the committee, contains many changes from the original version of H.R. 1 released last week. Reportedly, some of these changes were made to reduce the 10-year cost of the bill, and according to a preliminary estimate by the Joint Committee on Taxation, the net effect of the bill as marked up would be to reduce federal revenues by $1.437 trillion over 10 years.

Here is a list of changes in the version of the bill that the House will consider:

  1. The amended bill would provide for a new 9% rate on the first $75,000 in net business taxable income passed through to an active owner or shareholder earning less than $150,000 in taxable income. The 9% rate would be phased out as taxable income approaches $225,000. The lower rate would be phased in over five years: It would be 11% in 2018 and 2019, 10% in 2020 and 2021, and 9% starting in 2022.
  2. The current law rules on self-employment income received from a passthrough entity would be preserved.
  3. The adoption tax credit would be preserved in its current form.
  4. Taxpayers would be required to provide Social Security numbers for children before claiming the enhanced child tax credit.
  5. Rollovers between Sec. 529 education savings accounts and Achieving a Better Life Experience (ABLE) Sec. 529A accounts would be permitted.
  6. The exclusion for qualified moving expense reimbursements would be reinstated but only for members of the Armed Forces on active duty who move because of a military order.
  7. The amendment would lower the dividend-received deduction from 80% to 65% and the 70% rate to 50%.
  8. The amendment would change the limitation on deducting interest by businesses, but only for floor plan financing indebtedness (short-term debt used by retailers to finance high-cost items such as cars). Full expensing would not be available to these types of businesses.
  9. The amendment would modify the treatment of S corporations that convert to C corporations after the bill is passed by allowing any Sec. 481 adjustment to be taken into account over a six-year period (Sec. 481 adjustments usually must be taken into account over four years).
  10. For tax years after 2023, taxpayers would be required to amortize Sec. 174 research and experimentation expenses over five years (15 years for research outside the United States).
  11. The amendment would disallow a current deduction for litigation costs advanced by attorneys representing clients on a contingent basis until the contingency is resolved.
  12. The amendment would preserve current law treatment of nonqualified deferred compensation.
  13. The amendment would clarify that holders of restricted stock units cannot make Sec. 83(b) elections.
  14. The amendment would change the 12% and 5% rates on repatriated foreign income to 14% and 7%.
  15.  The amendment would eliminate the markup on deemed expenses for foreign purposes, permit a foreign tax credit of 80% of the foreign taxes paid, and make other changes to the foreign tax credit calculation provisions in H.R. 1.
  16. The amendment would subject to the 1.4% excise tax on investment income endowment funds held by organizations related to the universities and provide an exclusion from the excise tax for any educational institution unless the fair market value of the institution's assets (other than those assets used directly in carrying out its exempt purpose) is at least $250,000 per student.
  17. The amendment would change the repeal of the Johnson amendment to clarify that all Sec. 501(c)(3) organizations (not just religious organizations) are permitted to engage in political speech if the speech is in the ordinary course of the organization's business and the organization incurs de minimis expenses related to the political speech. 
  18. The amendment would require earned income tax credit claims to properly reflect any net earnings from self-employment, require employers to provide additional information on payroll tax returns, and provide the IRS with additional authority to substantiate earned income amounts.
  19. The amendment would reinstate the $5,000 exclusion from income for employer-provided dependent care assistance through 2022 for children under 13 or spouses or other dependents who are unable to care for themselves.
  20. The amendment would reinstate capital gain treatment for self-created musical works.
  21. The amendment would require partners to hold their partnership interest received for performing services for three years to qualify for capital gain treatment.
  22.  Employees who receive stock options or restricted stock units as compensation for services and later exercise them would be allowed to elect to defer recognition of income for up to five years, if the corporation's stock is not publicly traded.
  23. The amendment would change the foreign base erosion rules.


4 Ways to Protect Your Retirement Investments From Your Emotions

We like to think that we make rational financial choices, but that isn't always the case when it comes to our money. Our personal financial decisions are frequently influenced by our emotions. Due to our inability to think long term and our fear around losing money, we make bad investing decisions all the time. Luckily, you can take some pretty basic steps to protect yourself from your irrational side when it comes to preparing for retirement.

Automate your investing. First, you should automate your investing whenever possible. Automated investing keeps you stashing away funds even when it seems like money is tight in your everyday life. If also keeps you from frittering away your funds on spending that feels good now before you can save that extra cash.

The first step is to enroll in your employer’s retirement plan, which will automatically deposit a portion of your paychecks in an investment account. If you’re self-employed or your employer doesn't provide a 401(k), you can set up an automated deduction to a retirement or investment account at the beginning of each month.

Also, remember to automate increases in your investing. When you get a raise, direct at least part of the “new” money to your retirement account right away. If you never see it hit your checking account, you’ll be much less tempted to spend it frivolously.

Get acquainted with your risk tolerance. Your risk tolerance basically means how willing you are to lose money in the market. If you have a high tolerance for risk, you might be able to get better returns on your investments, but it also comes with the possibility of losing more of your capital.

Everyone needs to find a balance between the risks and rewards of investing. But you need to determine your own personal level of risk tolerance. Will you lose sleep if your portfolio’s value drops dramatically overnight? Or can you ride out the market downturn knowing that things will turn back up eventually?

While some people like to micro manage their investments, a buy and hold strategy typically works best for most people. This means potentially holding some investments as they lose value while you wait for them to regain value.

If you can’t handle watching your investments rise and fall in value – or if you can’t afford to lose money because you’re nearing retirement – select less risky investments. This is why experts recommend shifting your portfolio from stocks into more bonds as you near retirement age. You can never completely eliminate risk from your portfolio, but you can mitigate it.

Consider target-date investing. One way to remove your emotions from your retirement investments is to let someone else make the decisions. Robo advisors offer services that make decisions based on a risk tolerance quiz when you open your account.

Another option is to choose a target-date retirement fund from a traditional investment brokerage. Target-date funds automatically adjust your portfolio based on how long you have before retirement. The gradual shift from stocks to bonds occurs without any input from the investor, which can help you make solid investment choices while being fairly hands off.

Imagine your future. Finally, take time to imagine your future as a retiree. It’s easy to overspend in the moment rather than saving money for later. One way to combat this is to take time to envision your retirement and what you want it to look like. If you want to fulfill a dream of spending retirement on the beach, then you better start saving today.


How Self-Employed Workers Can Invest for Retirement

Freelance and self-employed workers may wonder if they can truly save as much as those who work for others, but tax-advantaged investment opportunities abound for the disciplined and resourceful, tax and financial experts say.

"Working for yourself can create challenges when deciding how to save for retirement," says Brannon Lambert, of Canvasback Wealth Management in Raleigh, North Carolina. "The good news, though, is it also gives you flexibility and opportunities you would not have as an employee elsewhere."

Just about all self-employed retirement plan options are available with large investment banks like Fidelity, TD Ameritrade or Vanguard, which also offer low fees on funds and minimal initial investment requirements. Some are tax-deferred and some offer after-tax benefits.

"Regardless of what account type you choose, keep it simple, diversified and low cost," says Lawrence Solomon, director of investments and financial planning at OptiFour Integrated Wealth Management in McLean, Virginia. "Avoid the siren song of picking individual stocks or hot actively managed mutual funds, which have higher fees than passive, index-based funds."

Deciding which retirement plan one to pick can be tricky, particularly if your profits ebb and flow month to month or year to year. Corey Purkat, founder and CEO of Northwoods Fiduciary Advisors in Oakdale, Minnesota, says business owners should ask themselves: How much administrative work do I want to do for a retirement plan? How much can I realistically save? Do I plan to add employees in the near future? Will my spouse be joining the business?

The following plans can be established and you can pick a different one to contribute to annually as your needs change and business grows, Lambert says.

SIMPLE individual retirement account. SIMPLE stands for Savings Incentive Match Plan for Employees and allows employees to make annual pre-tax contributions of up to $12,500 ($15,500 if over 50), not to exceed profit. However, if the business is more profitable this contribution limit can be "limiting for a business owner looking to save more," Lambert says.

Matching employee contributions are a deductible business expense, Purkat says, so if you're the only employee you realize tax savings on both.

A SIMPLE IRA must be in place for three months before the end of the calendar year, Purkat says, and is the only employer plan that can be in a place in a single calendar year (meaning you can't contribute to a SIMPLE and a SEP IRA together).

Only businesses with 100 employees or less can set this up. As an employer you can either contribute 2 percent of your employee's compensation into the SIMPLE IRA or match the first 3 percent of their salary they contribute, Lambert says.

SEP IRA. A SEP IRA is easy to set up and allows a self-employed person to contribute up to 25 percent of their pre-tax compensation up to $54,000. If you have employees, they have to receive the same percentage match as the owner, Purkat says. A SEP only allows employer contributions, not any additional employee contributions.

Your contribution deadline is your tax filing deadline, which means you can "wait to see how much income you earned in a year and how much you can afford to save for retirement, without being locked-in to contributions during the year," says Ben Westerman, senior vice president of HM Capital Management in Clayton, Missouri.

A SEP also allows simultaneous contributions of up to $5,500 in a Roth or traditional IRA. The traditional IRA contribution can be made to the same account as the SEP to minimize administrative responsibility, Lambert says.

Individual 401(k). Self-employed individuals have the most flexibility with a solo or individual 401(k) plan. They can make an $18,000 employee contribution under this arrangement ($24,000 if over 50), plus an additional 25 percent of your total profits or compensation up to $54,000. Employee deferral contributions can be made up of pre-tax and after-tax Roth funds.

"If income is less than approximately $216,000 and you wish to save the maximum of $54,000, then an individual 401(k) is the best solution," Westerman says.

The plan participants must elect to make a contribution by Dec. 31 but actual contributions can be made up until your tax filing deadline. You can also use the individual 401(k) plan for your spouse if he or she works in the business. Any non-spouse employees would have to use another plan.

Though this option is tempting if it's only one or two participants, to satisfy IRS rules, Form 5500-SF must be filed annually if there's more than $250,000 in assets, Purkat says.

You have until Oct. 1 to establish an individual 401(k) and a SIMPLE IRA. Tax-free loan options are available and these plans typically receive better creditor protection, says Brandon LaValley, co-founder of Targeted Wealth Solutions in Colorado Springs, Colorado.

Cash balance pension or defined benefit plan. Freelancers or independent workers that have strong cash flow and expect it to continue should consider adding a cash balance pension or a defined benefit plan, Purkat says. The closer in age to retirement, the larger the contributions that can be made for a given year – it's actuarially pre-determined, based on your age, compensation and IRS regulations.

They could use this in addition to an individual 401(k) that was maxed out and would not violate IRS rules, Purkat says. It's a little more complex to set up, but it's possible to contribute over $200,000 (And over $300,000 if 62 or older) combined with the 401(k) plan.

The plan is defined to be kept in perpetuity. Filing a Form 5500 is required and you may potentially need to file with the Pension Benefit Guaranty Corp. Providers of these plans are not widely available, and Purkat recommends working with an experienced advisor to coordinate with the multiple professionals typically involved, such as a third-party administrator, actuary, retirement plan advisor, accountant and record keeper).

When the owner is ready to retire, the cash balance plan can be converted to an IRA, LaValley says.

Roth IRA. After-tax contributions to a Roth IRA are possible up to $5,500 annually (and $6,500 if over 50). Your income must be below $118,000 for single filers and $186,000 for joint filers, Solomon says.

"The chances are good that right now, your income is lower than it will be at any other time in your life," says Adrian Nazari, founder and CEO of Credit Sesame. "Roth IRAs are beneficial because you pay taxes on the money going in now, but not when you take distributions in retirement. Hopefully, by the time you are in retirement, you'll be in a higher income tax bracket, so it's cheaper to pay the taxes now while you're taxed at a lower rate."