21 years of investment experience
Matt Miller: Congress had this big tax reform in 2018. A lot of big changes. What are the major takeaways for investors?
Jason Bortz: It's a really big bill. [It] completely changes how businesses are taxed. Major changes to international tax. Our individual taxes are going to change. But interestingly, investment tax — capital gains, dividends, the treatment of municipal bonds — those things aren't really going to change. For investors, the big takeaway is that the changes aren't that big. There are a few new opportunities, a few new challenges, but it's nothing like the business-side impacts.
Matt Miller: And so are there specific things that you would urge folks to look at, within that broader context that it’s not a big deal for investors per se?
Jason Bortz: Yeah. So I would think about college savings programs. College 529 programs got a real boost.
Matt Miller: How so?
Jason Bortz: So for the first time, you can use your college 529 savings to pay for K-12 private school tuition. Right? So, big expansion of the universe of eligible expenses. It's only up to $10,000 per yer, per beneficiary. But that's a pretty significant change for people looking to save for their children's education.
Matt Miller: What else?
Jason Bortz: I think another thing to keep an eye out for is going to be the extent to which states conform to federal tax treatment. The states don't necessarily have to have the same rules that the federal government has. And usually they'll decide to conform, so it's easier on individual tax payers. But I think this time through, we're going to see a real hard look from different states about whether they want to have the federal rules. And I think tuition — and college 529 programs — is a real place where you need to pay attention, because we've already heard rumblings from a few states that they're not going to conform.
Matt Miller: How about the impact on financial advisors, that segment of the industry? Are there changes in this law that affect them? And what should they be focused on?
Jason Bortz: One really interesting one is the treatment of advisory fees. So, in the past, if a client paid their advisory fee out of pocket, and it exceeded 2% of their adjusted gross income, they could deduct it on their income tax returns. But this legislation was all about getting rid of little special tax deductions. And so, all of the itemized deductions that were covered by that 2% floor went away.
So for the first time, advisory fees won't be deductible. That's a big change, right? So that's an advantage for people who were paid on a commissionable basis, because commissions are paid out of pre-tax dollars — inside, say, an IRA . . .
Matt Miller: Right, right.
Jason Bortz: . . . or in a taxable account. But now advisory fees won't be able to get the same treatment if they're paid out of the individual's personal account. If instead, they are paid out of an IRA or a 529 program, then they'd be paid out of pre-tax dollars. So a really interesting disconnect in the tax treatment of advisory fees.
Matt Miller: So at the margin, somehow, that incentivizes, again, the 529s or the others?
Jason Bortz: Or IRAs.
Matt Miller: Or IRAs.
Jason Bortz: Yeah, yeah. If you're paying for advisory fees, you're better off paying those through your IRA or your 529 program.
Matt Miller: And if financial advisors are getting questions from their clients on this, it'll really depend on the particular individual's income circumstances and the level of fees involved, etc.?
Jason Bortz: Yeah, not that many people in the past actually deducted their advisory fees.
Matt Miller: Right.
Jason Bortz: Because they really needed to be big to be eligible for the deduction. So you might say, “Hey, how many people are really affected?” And you need to look at each of your individual clients to think about that.