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Tax Reform: What It Could Mean to You

By Matthew Frankel, CFP® - Nov 21, 2017 at 11:09AM

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The Industry Focus: Financials podcast looks at the two tax bills currently making their way through Congress, the differences between them, and the likely winners and losers if a bill passes.

Industry Focus: Financials edition host Michael Douglass and contributor Matt Frankel look at the House and Senate versions of the Tax Cuts and Jobs Act, and the key differences and similarities between them. They also discuss the likely winners and losers from these tax bills as they currently stand, and consider what an eventual compromise between them might look like.

A full transcript follows the video.

This video was recorded on Nov. 20, 2017.

Michael Douglass: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Monday, Nov. 20, and we're talking about the Republican tax bills. I'm your host, Michael Douglass, and I'm joined by Matt Frankel. Matt, good to have you here!

Matt Frankel: Always good to be here!

Douglass: Fantastic! Listeners, I'm letting you know now, we had a power outage here at Fool HQ, so that might be messing up our tech a little bit. So, if the sound quality is a little worse than you're used to, please accept my apologies in advance. It's not you, it's us. So, thinking about these tax bills a little bit, episodes like today happen when I choose to interpret Financials as things that are financial in nature as opposed to merely financial stocks. Personally, I enjoy talking about personal finance and other, broader things that affect our financial picture, so I'm going to live with it. Hopefully, dear listeners, you're happy with that decision as well.

We'll get to talking taxes in just a little bit, but before we hop in, like we mention in most episode, we cannot possibly go into the level of detail that we might like to in a 20-some minute show, but we have some excellent content published on these bills and their potential effects. I've curated what I believe I the best to articles on tax proposals. Shoot us an email at to get that list and my commentary around them. I'm happy to send them along. Again, that's

If we're going to talk about the GOP tax plan, first thing we have to admit is that there isn't one unified plan. The House of Representatives has passed a tax bill. The Senate is considering a second in addition to the House's, and it isn't clear where President Trump will fall on either or both proposals. There are some additional considerations, too. While both houses are controlled by the Republican Party, a narrow margin in the Senate means that a handful of Republican moderates, think folks like Sen. Murkowski from Alaska, Sen. Collins from Maine, and Sen. Heller from Nevada, have a lot more influence than more moderate forces in the House, where a larger Republican majority requires less compromise.

Frankel: Right. This also makes it considerably harder to get tax reform passed in the Senate, because you can only afford to lose two Republican votes, and that's assuming that Vice President Pence is the tiebreaker.

Douglass: Right. And, also, that no Democrats vote for the bill, which may or may not end up being the case. We'll see.

Frankel: Yeah, assuming that no Democrats vote for the bills, which is a good assumption at this point. There's also, the other end of the spectrum, the more fiscally conservative Republicans, people like Sen. Rand Paul come to mind. They have to compromise somehow between the left side of the Republican Party -- the names that you just mentioned -- and the far right like Sen. Paul, and try not to alienate anybody, which is not an easy task.

Douglass: This is why major tax reform very rarely happens. Of course, we're not prognosticators here. I have no idea whether these bills are going to ultimately become law. But, it's certainly interesting to talk through some of those potential differences. Of course, a clear example of this push-pull is on tax brackets. You look at the Senate proposal: It keeps all seven current tax brackets we have for income tax, but changes them a little bit, while the House simplifies them down to three.

Frankel: Right. The House's plan is more in line with what President Trump was saying on the campaign trail, it goes more along the line of simplifying, not just being a tax cut. Instead of seven tax brackets, there's three, and they're keeping the highest rate for people who make over $1 million. So, it's more of a simplification than just a cut. Whereas the Senate essentially lowers the tax rates across the board, with the exception of the lowest 10%, and the 35% bracket. Like, you said, it's more of a cut than a simplification, which is kind of the goal of reform. So, the question is, are we going to get a tax reform, or are we going to get a tax cut? Those are two different things.

Douglass: Right, definitely. Speaking of tax cuts, generally speaking, you look at both bills, one of the things they had in common is they both double the standard deduction.

Frankel: Right. They both roughly double the standard deduction. The House's bill has slightly higher numbers in the language. I think that could just be because the House's bill is based on the 2018 figures and the Senate's is compared to the 2017 IRS figures. But, under the current law, single filers would get a $6,500 standard deduction, and married couples would get $13,000. The House and Senate make those roughly $12,000 and $24,000, respectively, but they get rid of the personal exemption, which for certain people, they would still come out ahead, but for others, like me, for example, it would hurt, because you get a personal exemption for every member of your household, and large families could definitely lose with this.

Douglass: Right. That's interesting. When I was thinking about beneficiaries of the bill this morning, one of the groups that sprang to mind was families, because the adoption tax credit is preserved, you see some expansion of the child tax credit, and of course there's the family flexible credit also introduced in the House bill. But it's interesting, because as you pointed out, losing that personal exemption could make a big difference.

Frankel: Definitely. It depends what the child tax credit winds up being. In the House's bill, it's currently set at $1,600, whereas in the Senate's bill, it's set a little bit higher at $2,000. There's that family flexible credit, which, in the House's bill, can be taken for not only non-child dependents, but for the taxpayer and their spouse themselves, whereas in the Senate, as it's worded, it's just for dependents that aren't children. So, there's a whole lot of wiggle room in the bill right now as it's written, to where we can't really tell who's going to be the winners or losers.

Douglass: And this is one of the key things that I think anyone listening to this episode -- or really any commentary on bills that have not yet been signed into law -- should really consider. There has to be this big pillar of salt, because so much changes between when a bill is introduced and when it's signed into law, and things that may benefit one group are often balanced out by things that can harm that group, as well. That said, it does seem to me that there are some reasonably clear beneficiaries to this bill. I would say companies with lower corporate tax rates are a pretty clear beneficiary.

Frankel: Sure. It's not just the corporate tax rate, it's the immediate deduction of business expenses, that's another big thing. Repatriation of foreign cash is big for companies like Apple ( AAPL 3.08% ), who have $200 billion overseas.

Douglass: Let's talk about repatriation a little bit, because I think that's something that a lot of people don't necessarily understand.

Frankel: Sure. Right now, when a company earns profits overseas and brings them back, they're taxed at the normal 35% corporate tax rates. This incentivizes companies to leave their money overseas, not bring it back to the United States and reinvest, etc. So, in Apple's case, for example, they have almost $250 billion overseas now. People often wonder why they don't bring it back and acquire another company or pay a bigger dividend, or something to that effect. And the reason is, they would take a massive tax hit if they did that, something about between $70 billion and $80 billion. So, repatriation allows them to bring the money back at a lower rate. Currently, one of the two bills is proposing a 10% rate, the other is proposing 14%. Both of those look a whole lot better than 35%. So, Apple would, for example, stand to save $50 billion from repatriation if this was passed. This could be a big, big difference in terms of how much they can pay to shareholders, and their financial flexibility in general.

Douglass: Right. Of course, from Congress' perspective, what they would hope would happen with repatriation is that the company brings the money back to the United States, then invests in more jobs in the U.S. When you think about tax reform, that's usually one of the primary goals -- to put money back in pockets of job creators. Now, one of the differences you'll see in the parties is who they view as the folks who should get the money so that they can then spend it. But, that's certainly one of the intentions here in both lowering corporate tax rates and in making repatriation a lot cheaper.

Frankel: Definitely. Like I said, with Apple, they can theoretically bring that money back and open a new plant to expand one of their product lines, or acquire one of their competitors and create jobs in that manner. Another way this could be beneficial is to pay a bigger dividend to their shareholders and stimulate the economy that way. All told, there's over $2 trillion overseas. So, this is no small amount of money that would be coming back.

Douglass: Absolutely. One of the other groups that seems poised to benefit in a lot of ways from these tax bills are the wealthy. You look at a potential repeal, or at least reduction, of the estate tax, alternative minimum tax, and of course, charitable contributions being preserved in reform. That's not a clean sweep, of course. There are some things that could be less beneficial to the wealthy. But there are a lot of things for them to like in these bills.

Frankel: Definitely. The estate tax is one that only affects the top 0.2% of households, that's who pays the estate tax. But there's good arguments to be made for the changes to all three of them. It's absolutely a tax cut for the rich, but the estate tax, the argument is, these people paid tax on the money when they earned it in the first place, why should it be taxed a second time when they die? The alternative minimum tax was originally implemented to make sure that people in the upper-upper income brackets paid their fair share, no matter how many deductions they had. But, lately, the way the numbers work out, it's affecting more and more middle-class families. So you can make the argument it's not really doing what it was intended to do. And charitable contributions, in theory, it's not just a benefit for the rich. Anybody who itemizes deductions can take advantage of it. But the vast majority of that tax benefit goes to the wealthiest Americans.

Douglass: Right. And one of the issues with the alternative minimum tax is that, essentially, what it says is, as you pointed out, Matt, if you're making a certain amount, no matter how many deductions you take, you still have to pay some sort of minimum percentage in taxes. The alternative minimum tax was never indexed to inflation, so it never increased except when Congress stepped in and increased it, which is one of the reasons why it keeps affecting households who aren't in the top 1% of the wealthy or anything like that anymore. So that's one of the reasons why a potential repeal might make a lot of sense. The other piece, though, and this is sort of on the flip side, is that the mortgage interest deduction is actually reduced in the House bill. Let's talk about that a little bit.

Frankel: This could affect people differently depending on where they live. If you live in an area where the cost of living is high, the new mortgage deduction will be capped at $500,000 of initial mortgage debt. So, in a higher-cost area, like where Michael is right now...

Douglass: [laughs] The D.C. area.

Frankel: ... $500,000 is a middle-class house. That's not rich people. Whereas, in certain parts of the country, like South Carolina where I'm calling in from, a $500,000 house is the top few percent. So this is not necessarily a cut, but it could disproportionately affect people depending on where they live. And it could have an unintended effect of reducing the amount of deductions for certain middle-class households in places like Washington D.C., New York, New Jersey, certain parts of California. The Senate's bill keeps the maximum deduction at the same $1 million mortgage debt cap, which pretty much includes middle class houses all over the country. Maybe there's a few exceptions.

Douglass: Yeah, but I have a hard time thinking of a house that cost $1 million that's completely middle class. At that point, I think we can probably all agree that that family is doing just fine.

Frankel: Right. But $500,000 doesn't really go that far where you are.

Douglass: No. No, it doesn't. [laughs] And while I am a recent homeowner -- and thank you, by the way, to the folks who sent congratulatory or encouraging emails -- my house did not cost nearly $1 million.

Matt, we've talked about some details and some potential winners, at least, the folks who seem to disproportionately benefit a little bit from these tax bills. Let's talk about potential losers a little bit. One of the things that really jumped out at me is that the House proposal repeals the student loan interest deduction. That would certainly seem to be a pretty big benefit for students that's basically going to disappear if that bill becomes law.

Frankel: Yeah, it would absolutely affect student loan borrowers, especially with student loan debt going higher and higher in recent years. But it's not only the student loan deduction. The Republican bill actually makes a whole lot of changes for college students, both in and out of school. For example, the lifetime earning credit, that would go away. That's the one that kicks in after you've used up the American Opportunity credit, or for grad students, or if you're just taking a class for personal enrichment. The whole credit that covers that would go away. Right now, if your employer reimburses you for tuition up to a certain amount, it doesn't count as taxable income. This current bill would change that. Same with grad students who get tuition waivers. There are a lot of experts in the student loan world calling this bill an attack on grad students. It would make that taxable income, which a lot of college students can't afford, because if you get a grad student tuition waiver, that could be tens of thousands of dollars that you would now have to pay tax on. So, this bill has several changes that college students need to be aware of.

Douglass: Yeah. My best friend is a Ph.D. student, and he would have a lot of trouble, let's say, making ends meet if he had to cover the taxes on his waived tuition through his student stipend. Let's also talk about taxpayers in higher-tax states. This is known as the SALT deduction -- State And Local Taxes. It would go away entirely in the Senate bill, and the only part of it that would be preserved is the property tax deduction up to a certain amount in the House bill.

Frankel: Right. That's definitely a move to appease the more moderate Republicans who live in these high-cost states like New York and New Jersey. Basically, the House's bill would allow people to deduct up to $10,000 of property tax each year. If you live in a low-tax state, that's really not as big of a deal. But, neither bill allows anybody to deduct any state income taxes. Which, if you live in California, New York, New Jersey, any of those states with high marginal income tax rates, you would be a big loser of this bill, potentially, even in the middle class. I actually think the SALT deduction has been, over the past few years, the highest dollar IRS deduction available, including mortgage debt and pretty much anything else, by a significant margin. So, this is a big deal, and it disproportionately, like I said, places like California, New York, New Jersey. Is D.C. a high-tax area?

Douglass: It is.

Frankel: So, people up in those areas are not fans of removing the SALT deduction, and are aggressively lobbying against that. So, we'll have to see if that makes its way into a final bill or not.

Douglass: Absolutely. The other thing that's interesting is the way Social Security raises are calculated could potentially change. In the Senate bill, there is a proposal on the table to change how Social Security costs of living increases are calculated each year. Currently, they're weighted by the Consumer Price Index, but the proposal would be to change over to what called the Chained Consumer Price Index, or CPI, which would essentially likely lower the raises that seniors might get from Social Security each year.

Frankel: This is actually the opposite of what many experts say they need to do. Currently, these are based on what's called the CPIW, which is a basket of costs that affect working-age individuals. The Chained CPI would effectively lower the rate at which inflation is calculated. There's another one called the CPIE, I'm not sure the abbreviation, but the CPI that is weighted toward the elderly. This would put more weight on things like healthcare expenses. Seniors actually tend to experience higher inflation than the rest of the population, not lower, so this is kind of going in the wrong direction.

Douglass: Right. And that's certainly a big deal for seniors. Finally, let's talk briefly, and I mean very briefly, about the Affordable Care Act, known more commonly as Obamacare. The Senate bill would change how ACA requirements are done. Currently, the way it works with the Affordable Care Act is, you have to have insurance, or you pay a fine. The Senate bill would basically take that fine and reduce it to $0, which would essentially de-fang the individual mandate.

Frankel: This was a request of the president, I'm pretty sure that's why it's in the bill. I'm pretty sure this was a subject of a tweet shortly before the bill came out. Whether you're in favor or not of repealing the individual mandate is another issue. Whether you want to attach it to tax reform is the subject on the table right now. And we all saw what kind of success Congress had with passing anything related to the Affordable Care Act, even among Republicans. So, this is, at this moment, thought of something that could unnecessarily complicate the process. So I would not be surprised to see that go away when we have any kind of unified bill. But for the time being, this is what the Senate wants to attach to its bill, and their rationale for doing so is, it would raise money that would pay for some of the other tax cuts.

Douglass: Sure.

Frankel: We'll have to see what eventually will come into the final bill. But, I don't see anything related to healthcare being in there, just because Republicans really want to get this done and that makes it much more complicated to do.

Douglass: Yes. One of the key things to remember when every thing about politics in general is, there's a lot of gamesmanship going on. So, you'll initially put in something so that you can then renegotiate it out into something that everyone can agree to. It's part of marking out the edges of the debate. So while we've talked about a lot of things here that might be interesting to you, might be exciting to you, might be scary to you depending on what groups you belong to, how your specific tax situation works, keep in mind that we are still fairly early in this tax reform push, so a lot of things are still up to change. And frankly, when radical tax reform is proposed, it almost never passes in anywhere near as radical a form as it originally was.

Frankel: Right. The thing to remember is, before any tax reform bill can be passed, the House and Senate have to both pass identical bills, and we're very far from that. We haven't even passed the Senate's version of the bill yet. We're still in the early stages of getting this done.

Douglass: Right. If you want more detail on all this, because frankly, we have just scratched the very surface of what is a complicated issue, shoot us an email at As I mentioned earlier, we've got a number of pieces of content on that I think will be very helpful to anyone wanting to learn a little bit more about these bills and some of the potential outcomes. I'm happy to send along some of that best tax content that we've produced about these bills. That's it for this week's Financials show. Questions, comments, you can always reach us at As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is produced by Austin Morgan. For Matt Frankel, I'm Michael Douglass. Thanks for listening and Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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