E+R=O, a Formula for Success

Written by Dimensional Fund Advisors & Gerald E Gasber, CFP®, CIMA®, CPFA.

Combining an enduring investment philosophy with a simple formula that helps maintain investment discipline can increase the odds of having a positive financial experience.

"The important thing about an investment philosophy
is that you have one you can stick with."

David Booth
Founder and Executive Chairman
Dimensional Fund Advisors


Investing is a long-term endeavor. Indeed, people will spend decades pursuing their financial goals. But being an investor can be complicated, challenging, frustrating, and sometimes frightening. This is exactly why, as David Booth says, it is important to have an investment philosophy you can stick with, one that can help you stay the course.

This simple idea highlights an important question: How can investors, maintain discipline through bull markets, bear markets, political strife, economic instability, or whatever crisis du jour threatens progress towards their investment goals?

Over their lifetimes, investors face many decisions, prompted by events that are both within and outside their control. Without an enduring philosophy to inform their choices, they can potentially suffer unnecessary anxiety, leading
to poor decisions and outcomes that are damaging to their long-term financial well-being.

When they don't get the results they want, many investors blame things outside their control. They might point the finger at the government, central banks, markets, or the economy. Unfortunately, the majority will not do the things that might be more beneficial—evaluating and reflecting on their own responses to events and taking responsibility for their decisions.

Some people suggest that among the characteristics that separate highly successful people from the rest of us is a focus on influencing outcomes by controlling one's reactions to events, rather than the events themselves. This relationship can be described in the following formula:

e+r=o (Event + Response = Outcome)

Simply put, this means an outcome—either positive or negative—is the result of how you respond to an event, not just the result of the event itself. Of course, events are important and influence outcomes, but not exclusively. If this were the case, everyone would have the same outcome regardless of their response.

Let's think about this concept in a hypothetical investment context. Say a major political surprise, such as Brexit, causes a market to fall (event). In a panicked response, potentially fueled by gloomy media speculation of the resulting uncertainty, an investor sells some or all of his or her investment (response). Lacking a long-term perspective and reacting to the short-term news, our investor misses out on the subsequent market recovery and suffers anxiety about when, or if, to get back in, leading to suboptimal investment returns (outcome).

To see the same hypothetical example from a different perspective, a surprise event causes markets to fall suddenly (e). Based on his or her understanding of the long-term nature of returns and the short-term nature of volatility spikes around news events, an investor is able to control his or her emotions (r) and maintain investment discipline, leading to a higher chance of a successful long term outcome (o).

This example reveals why having an investment philosophy is so important. By understanding how markets work and maintaining a long-term perspective on past events, investors can focus on ensuring that their responses to events are consistent with their long-term plan.


An enduring investment philosophy is built on solid principles backed by decades of empirical academic evidence. Examples of such principles might be: trusting that prices are set to provide a fair expected return; recognizing the difference between investing and speculating; relying on the power of diversification to manage risk and increase the reliability of outcomes; and benchmarking your progress against your own realistic long-term investment goals.

Combined, these principles might help us react better to market events, even when those events are globally significant or when, as some might suggest, a paradigm shift has occurred, leading to claims that "it's different this time." Adhering to these principles can also help investors resist the siren calls of new investment fads or worse, outright scams.


Without education and training—sometimes gained from bitter experience—it is hard for non-investment professionals to develop a cogent investment philosophy. And even the most self-aware find it hard to manage their own responses to events. This is why a financial advisor can be so valuable—by providing the foundation of an investment philosophy and acting as an experienced counselor when responding to events.

Investing will always be both alluring and scary at times, but a view of how to approach investing combined with the guidance of a professional advisor can help people stay the course through challenging times. Advisors can provide an objective view and help investors separate emotions from investment decisions. Moreover, great advisors can educate, communicate, set realistic financial goals, and help their clients deal with their responses even to the most extreme market events.

In the spirit of the e+r=o formula, good advice, driven by a sound philosophy, can help increase the probability of having a successful financial outcome.

Adapted from "E+R=O, a Formula for Success," The Front Foot Adviser, by David Jones, Vice President and Head of Financial Adviser Services, EMEA

Tuning Out the Noise

Written by Dimensional Fund Advisors & Gerald E Gasber, CFP®, CIMA®, CPFA.

For investors, it can be easy to feel overwhelmed by the relentless stream of news about markets. Being
bombarded with data and headlines presented as impactful to your financial well-being can evoke strong
emotional responses from even the most experienced investors. Headlines from the "lost decade"1 can help
illustrate several periods that may have led market participants to question their approach.
  • May 1999: Dow Jones Industrial Average Closes Above 11,000 for the First Time
  • March 2000: Nasdaq Stock Exchange Index Reaches an All-Time High of 5,048
  • April 2000: In Less Than a Month, Nearly a Trillion Dollars of Stock Value Evaporates
  • October 2002: Nasdaq Hits a Bear-Market Low of 1,114
  • September 2005: Home Prices Post Record Gains
  • September 2008: Lehman Files for Bankruptcy, Merrill Is Sold

While these events are now a decade or more behind us, they can still serve as an important reminder for investors today. For many, feelings of elation or despair can accompany headlines like these. We should remember that markets can be volatile and recognize that, in the moment, doing nothing may feel paralyzing. Throughout these ups and downs, however, if one had hypothetically invested $10,000 in US stocks in May 1999 and stayed invested, that investment would be worth approximately $28,000 today.2

When faced with short-term noise, it is easy to lose sight of the potential long-term benefits of staying invested. While no one has a crystal ball, adopting a long-term perspective can help change how investors view market volatility and help them look beyond the headlines.

The Value of a Trusted Advisor

Part of being able to avoid giving in to emotion during periods of uncertainty is having an appropriate asset allocation that is aligned with an investor’s willingness and ability to bear risk. It also helps to remember that if returns were guaranteed, you would not expect to earn a premium. Creating a portfolio investors are comfortable with, understanding that uncertainty is a part of investing, and sticking to a plan may ultimately lead to a better investment experience.

However, as with many aspects of life, we can all benefit from a bit of help in reaching our goals. The best athletes in the world work closely with a coach to increase their odds of winning, and many successful professionals rely on the assistance of a mentor or career coach to help them manage the obstacles that arise during a career. Why? They understand that the wisdom of an experienced professional, combined with the discipline to forge ahead during challenging times, can keep them on the right track. The right financial advisor can play this vital role for an investor. A financial advisor can provide the expertise, perspective, and encouragement to keep you focused on your destination and in your seat when it matters most. A recent survey conducted by Dimensional Fund Advisors found that, along with progress towards their goals, investors place a high value on the sense of security they receive from their relationship with a financial advisor.

Having a strong relationship with an advisor can help you be better prepared to live your life through the ups and downs of the market. That’s the value of discipline, perspective, and calm. That’s the difference the right financial advisor makes.

For a short video on this topic, please see


Sailing with the Tides

Written by Jim Parker, Vice President DFA Australia Ltd, and Gerald E Gasber, CFP®, CIMA®, CPFA.

Embarking on a financial plan is like sailing around the world. The voyage won't always go to plan, and there'll be rough seas. But the odds of reaching your destination increase greatly if you are prepared, flexible, patient, and well-advised.

A mistake many inexperienced sailors make is not having a plan at all. They embark without a clear sense of their destination. And once they do decide, they often find themselves lost at sea in the wrong boat with inadequate provisions. Likewise, in planning an investment journey, you need to decide on your goal. A first step might be to consider whether the goal is realistic and achievable. For instance, while you may long to retire in the south of France, you may not be prepared to sacrifice your needs today to satisfy that distant desire.

Once you are set on a realistic destination, you need to ensure you have the right portfolio to get you there. Have you planned for multiple contingencies? What degree of "bad weather" can your plan withstand along the way?

Key to a successful voyage is a good navigator. A trusted advisor is like that, regularly taking coordinates and making adjustments, if necessary. If your circumstances change, the advisor may suggest you replot your course.

As with the weather at sea, markets can be unpredictable. A sudden squall can whip up waves of volatility, tides can shift, and strong currents can threaten to blow you off course. Like a seasoned sailor, an experienced advisor will work with the conditions.

Once the storm passes, you can pick up speed again. Just as a sturdy vessel will help you withstand most conditions at sea, a well-diversified portfolio can act as a bulwark against the sometimes tempestuous conditions in markets.

Circumnavigating the globe is not exciting every day. Patience is required with local customs and paperwork as you pull into different ports. Likewise, a lack of attention to costs and taxes is the enemy of many a long-term financial plan.

Distractions can also send investors, like sailors, off course. In the face of "hot" investment trends, it takes discipline not to veer from your chosen plan. Like the sirens of Greek mythology, media pundits can also be diverting, tempting you to change tack and act on news that is already priced in to markets.

A lack of flexibility is another impediment to a successful investment journey. If it doesn't look as though you'll make your destination in time, you may have to extend your voyage, take a different route to get there, or even moderate your goal.

The important point is that you become comfortable with the idea that uncertainty is inherent to the investment journey, just as it is with any sea voyage. That is why preparation and planning are so critical. While you can't control every outcome, you can be prepared for the range of possibilities and understand that you have clear choices if things don't go according to plan.

If you can't live with the volatility, you can change your plan. If the goal looks unachievable, you can lower your sights. If it doesn't look as if you'll arrive on time, you can extend your journey.

Of course, not everyone's journey is the same. Neither is everyone's destination. We take different routes to different places, and we meet a range of challenges and opportunities along the way.

But for all of us, it's critical that we are prepared for our journeys in the right vessel, keep our destinations in mind, stick with the plans, and have a trusted navigator to chart our courses and keep us on target.

Could a Trade War Soon Start?

Written by Gerald E Gasber, CFP®, CIMA®, CPFA & MarketingPro, Inc..

What if America taxes imported aluminum and steel? If it does, will other countries impose taxes in response, and what might that mean for the U.S. economy?

Conversations about tariffs and trade wars have been prevalent in the news stream lately. If a trade war does begin in 2018, it is worth considering the potential implications. In the scenario that could unfold, excise taxes would be placed on imported goods or materials sold to consumers or used by industries in America. These taxes would encourage retailers and manufacturers to buy such goods and materials from U.S. sources.1,2

Two tariffs are already in place. In January, President Trump approved a 30% excise tax for imported solar panels (which will gradually reduce to 15% over four years) and a 20% tariff on the first 1.2 million washing machines imported to the U.S. each year, which rises to 50% after the 1.2 million limit is surpassed.1

Foreign steel could be taxed 25%; foreign aluminum, 10%. The White House has proposed such tariffs, with the idea of giving U.S. steel and aluminum producers a major lift and possibly saving some jobs as a byproduct.2

The potential downside? If the shift to domestic steel and aluminum happens slowly (or ends up being slight), goods made with steel and aluminum might soon cost more for consumers. Since business capital equipment and the footprints of brick-and-mortar firms involve great quantities of these base metals, companies might also pay more to operate. In the worst-case scenario, the hit to the economy is felt not only in higher consumer prices, but also in layoffs.

Would these two excise taxes on metals come with carve-outs? That question is also in the air. An across-the-board tariff on all steel and aluminum importers would apply not just to China, but also to Canada and other primary trading partners. President Trump has noted that Canada and Mexico – two of the five biggest steel importers to America – could be exempted from steel and aluminum tariffs if current trade agreements are revised.3,4

China's steel and aluminum shipments to the U.S. respectively account for about 0.01% and 0.03% of its $11 trillion gross domestic product, so such tariffs might only have a token economic impact in that nation. In terms of countries importing steel to America, it ranks eleventh. Even so, China could retaliate, especially if the U.S. imposes other excise taxes on its electronic, plastic, toy, or furniture goods.5

The fear is that a trade war could become global in scope. Other nations might selectively impose tariffs of their own on imported goods from this or that major trade partner. While the U.S. might not feel economic headwinds from such excise taxes on its exports, the story might be different for nations with manufacturing-centered economies.

Excise taxes on steel and aluminum could provide American suppliers of those base metals with a short-term economic advantage, but a clear protectionist move might also unsettle Wall Street and global investment markets. Economists and investors will have to wait and see how things proceed.


This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.


1 - [1/22/18]
2 - [3/2/18]
3 - [3/5/18]
4 - [3/1/18]
5 - [3/5/18]

Key Changes in the 2018 Tax Cuts & Jobs Act

Written by Gerald E Gasber, CFP®, CIMA®, CPFA & MarketingPro, Inc..

Key Tax Changes for Households

Whether you file singly, jointly, or as a head of household, you will want to keep these significant alterations to federal tax law in mind. These new tax provisions will remain in place through at least 2025.

1 Lower income tax rates and adjusted tax brackets.

Thanks to the tax reforms, the seven income tax brackets of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% have been revised to 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The new taxable income thresholds:

Bracket Single Filers Married Filing Jointly Married Filing Head of Household
or Qualifying Widower Separately

10% $0 - $9,525 $0 - $19,050 $0 - $9,525 $0 - $13,600
12% $9,526 - $38,700 $19,051 - $77,400 $9,526 - $38,700 $13,601 - $51,800
22% $38,701 - $82,500 $77,401 - $165,000 $38,701 - $82,500 $51,801 - $82,500
24% $82,501 - $157,500 $165,001 - $315,000 $82,501 - $157,500 $82,501 - $157,500
32% $157,501 - $200,000 $315,001 - $400,000 $157,501 - $200,000 $157,001 - $200,000
35% $200,001 - $500,000 $400,001 - $600,000 $200,001 - $300,000 $200,001 - $500,000
37% $500,001 and up $600,001 and up $300,001 and up $500,001 and up

The federal government is now using the Chained Consumer Price Index to calculate inflation. That should reduce the size of the yearly adjustments to these brackets.

In scrutinizing all this, you may notice something: the "marriage penalty" applying to combined incomes is nearly gone. That is, the thresholds for joint filers are simply double what they are for single filers for five of the seven brackets. Only married couples in the two uppermost brackets now face the "marriage penalty."1,2

2 The standard deduction nearly doubles.

While the personal exemption is gone (more about that later), the new law gives an enormous boost to the standard deduction in 2018 for all filers.2

*Single filer: $12,000 (instead of $6,500)
*Married couples filing separately: $12,000 (instead of $6,500)
*Head of household: $18,000 (instead of $9,350)
*Married couples filing jointly & surviving spouses: $24,000 (instead of $13,000)

Incidentally, the additional standard deduction remains in place. Single filers who are blind, disabled, or aged 65 or older can claim an additional $1,600 deduction for 2018. Married joint filers can claim additional standard deductions of $1,300 each for a total additional standard deduction of $2,600 in 2018.3

3 AMT exemption amounts are much larger.

The Alternative Minimum Tax was never intended to apply to the middle class – but because it went decades without inflation adjustments, it sometimes did. Thanks to the tax reforms, the AMT exemption amounts are now permanently subject to inflation indexing.

Look at the change in AMT exemption amounts for 2018:

*Single filer or head of household: $70,300 (was $54,300 in 2017)
*Married couples filing separately: $54,700 (was $42,250 in 2017)
*Married couples filing jointly & surviving spouses: $109,400 (was $84,500 in 2017)

These increases are certainly sizable, yet they pale in proportion to the increase in the phase-out thresholds. They are now at $500,000 for individuals and $1 million for joint filers, as opposed to respective, prior thresholds of $120,700 and $160,900.2

4 The Child Tax Credit doubles to $2,000.

In compensation for the loss of the personal exemption, the Tax Cuts & Jobs Act boosted this credit, which is especially significant for large families. Up to $1,400 of the CTC is now refundable. Phase-out thresholds for the credit have moved north dramatically. They are now set at the following modified adjusted gross income (MAGI) levels:

*Single filer or head of household: $200,000 (was $75,000 in 2017)
*Married couples filing separately: $400,000 (was $110,000 in 2017)

Also, the Child & Dependent Care Tax Credit remains – parents still have a chance to deduct qualified child care expenses of up to $1,050 for one child under age 13 or $2,100 for two children under age 13. Dependent care Flexible Spending Accounts (FSAs) are still allowed as well: employees may save up to $5,000 of pre-tax dollars per year to help pay for qualified child care expenses.

Lastly, see the "Other Interesting Developments" section of this guide to learn about a significant non-financial change involving the Child Tax Credit.2,4

5 You may be eligible to claim a new $500 non-refundable credit for non-child dependents.

This represents an effort to compensate for the loss of the personal exemption taxpayers could previously claim for non-child dependents. The MAGI phase-out thresholds applicable to the Child Tax Credit also apply to this "family credit." You are eligible to claim it if you have qualifying dependents in your household who do not meet the federal tax definition of a qualifying child: parents, relatives, children age 17 or older.2,5

6 The yearly SALT deduction is capped at $10,000.

This is arguably the most controversial tax law change of 2018 for individual taxpayers. If you live in a high-tax state (or alternately, a state that imposes no income tax), you may be grumbling about the new cap on the state and local tax (SALT) deduction. You can now only deduct up to $10,000 of some combination of a) state and local property taxes or (b) state and local income taxes or sales taxes annually. Taxes paid or accumulated as a consequence of trade activity or business activity are exempt from the $10,000 limit.

The SALT deduction cap is just $5,000 for married taxpayers who file their returns separately.1,6

7 The ceiling on the mortgage interest deduction falls to $750,000.

As the median U.S. home price is well under $750,000, a relatively small percentage of homebuyers will be affected by this change. The new annual $750,000 limit applies for any taxpayer taking out a home loan between December 15, 2017 and December 31, 2025. For those who arranged their mortgages prior to this window of time, the $1 million ceiling remains in place.

There is much more to note on this topic. When the Bipartisan Budget Act of 2018 became law on February 9, a pair of expired tax breaks were retroactively reinstated for the 2017 tax year: taxpayers still have an opportunity to deduct mortgage insurance premiums and may also exclude income from the discharge of debt on their principal residence, if eligible for such a deduction. Regarding mortgage insurance premiums, a taxpayer is fully eligible to claim that deduction when his or her adjusted gross income (AGI) is below $100,000 (a phase-out range occurs between $100,000-$110,000). The total of the mortgage insurance premiums is treated as additional deductible mortgage interest. 7

Homeowners should also be aware that the annual mortgage interest deduction is now just $375,000 for married taxpayers filing separately and that the deduction for interest paid on home equity debt has disappeared.2,6

8 The qualified medical expense deduction improves.

One of the few itemized deductions kept under the tax reforms also has a lower threshold this year. You can now deduct any out-of-pocket medical expenses exceeding 7.5% of your adjusted gross income (AGI). This applies to qualified medical expenses in 2017 and 2018. (The old deduction threshold was 10%.)2,6

9 529 plan assets may now be used to pay for qualified elementary education expenses.

Prior to 2018, 529 plans were college savings vehicles only; assets within them were earmarked for payment of qualified higher education expenses. Now, federal tax law says you can also distribute up to $10,000 a year from a 529 plan to pay for K-12 tuition, tutoring, and linked curriculum materials and that these qualified distributions will be tax free. Some state laws governing 529 plans do not allow this, however. As a result, 529 plan participants in select states are being told to wait before devoting any 529 plan assets to elementary education, as they risk wading into a gray area in terms of tax law by doing so.6,8

Incidentally, funds from 529 plans may not be used to pay homeschooling expenses for students who would otherwise attend classes in grades K-12.8

10 No one may recharacterize a Roth IRA conversion.

Before this year, a traditional IRA owner who "went Roth" and subsequently changed his or her mind had a chance to undo the conversion within a certain time frame. This option is now disallowed.9

11 The federal estate tax exemption doubles.

Very few households will pay any death taxes during 2018-25. This year, the estate tax threshold is $11.2 million for individuals and $22.4 million for married couples; these amounts will be indexed for inflation. The top death tax rate stays at 40%.2,6

12 Two changes apply to the charitable deduction.

The charitable deduction was retained amid the tax reforms, but middle-class taxpayers may have far less incentive to donate to charity than they once did due to the greater standard deduction. A pair of adjustments have been made. One, taxpayers can now deduct charitable donations equal to 60% of their incomes; previously, the limit was 50%. Two, charitable contributions made to a university or college that give the donor the right to buy sports tickets are no longer deductible.2

13 Certain types of discharged student loan debt are now exempt from income tax.

From 2018-25, no income tax will be applied to federal or private student loan debt discharged because of the borrower's death or disability.

In the past, if a borrower died or became severely disabled while carrying an outstanding education loan balance, the lender could release the borrower from liability and reduce the debt to zero. The only problem: the I.R.S. viewed the discharged debt as the equivalent of income. A $10,000 discharged student loan would have ordinary income tax levied on it. Now, that will not happen. The new law does not mandate private lenders to discharge debt on these occasions, however.6

Key Tax Changes for Businesses

Some of these alterations to the Internal Revenue Code are permanent, unlike nearly all the changes affecting households.

1 The corporate tax rate is now a flat 21%.

Last year, the corporate tax rate was marginally structured and topped out at 35%. While corporations with taxable income of $75,000 or less looked at no more than a 25% marginal rate, more profitable corporations faced a rate of at least 34%. The new, permanent 21% flat rate brings U.S. corporate taxation in line with that in many other nations. Only corporations with annual profits of less than $50,000 will see their taxes go up this year, as their rate will move north from 15% to 21%.2,6

2 Our corporate tax system is now territorial.

The 2018 federal tax reforms instruct the I.R.S. to treat foreign profits more gently. Before the reforms, the U.S. corporate tax system was a worldwide system, meaning that American corporations paid American taxes on profits earned outside America; that amounted to a double tax on those profits, and those profits could be subjected to a 35% corporate tax rate in the process.

Now repatriated earnings are being taxed differently to encourage U.S. companies to bring profits home rather than leave them overseas. A new, one-time repatriation rate of 15.5% on cash (and cash equivalents) and 8% on illiquid assets is in place, payable over a comfortable, 8-year term.2

3 The corporate AMT has been eliminated.

The 2018 tax reforms permanently repealed this 20% supplemental tax.2

4 Many pass-through businesses can claim a 20% deduction on earnings.

Some fine print accompanies this change. The basic benefit is that business owners whose firms are LLCs, partnerships, S corporations, or sole proprietorships can now deduct 20% of qualified business income, promoting reduced tax liability. (Trusts, estates, and cooperatives are also eligible for the 20% pass-through deduction.)

Not every pass-through business entity will qualify for this tax break in full, though. Doctors, lawyers, consultants, and owners of other types of professional services businesses meeting the definition of a specified service business may make enough to enter the phase-out range for the deduction; it starts above $157,500 for single filers and above $315,000 for joint filers. Above these business income thresholds, the deduction for a business other than a specified service business is capped at 50% of total wages paid or at 25% of total wages paid, plus 2.5% of the cost of tangible depreciable property, whichever amount is larger.6,10

5 The Section 179 deduction doubles.

Business owners who want to deduct the whole cost of an asset during its first year of use will appreciate the new $1 million cap on the Section 179 deduction. In addition, the phaseout threshold rises by $500,000 this year to $2.5 million.1

6 Bonus depreciation also doubles.

This is a near-term perk, one that, starting in 2027, will likely vanish for most pass-through firms and corporations. The first-year "bonus depreciation deduction" is now set at 100% with a 5-year limit, so a company can now write off 100% of qualified property costs through 2022 rather than through a longer period. Besides the jump from 50% to 100%, there is another eye-opener here: bonus depreciation now applies for used equipment as well as new equipment.1,10

7 1031 exchanges are restricted to real estate.

Before 2018, 1031 exchanges of capital equipment, patents, domain names, private income contracts, ships, planes, and other miscellaneous forms of personal property were permitted under the Internal Revenue Code. Now, only like-kind exchanges of real property pass muster.10

8 Deductions for business interest expenses are now limited to 30% of AGI for large firms.

This limit pertains to firms with over $25 million in gross receipts.1,10

9 Carryover and deduction rules applying to net operating losses change.

Before 2018, most net operating losses incurred were eligible for a 2-year carryback and a 20-year carryforward, and both carryovers and carrybacks could offset as much as 100% of taxable income. While carrybacks are still permitted for two years, NOLs may now be carried forward indefinitely – but they can only offset up to 80% of income.10,11

Tax Breaks Gone in 2018

Due to the reforms, some standbys of federal tax law are gone this year and for the foreseeable future. It is too early to tell if they will return in coming years.

1 Personal exemptions are eliminated.

In the interest of simplification, the new tax reforms repeal the core personal exemption, plus the exemptions taxpayers could claim for relatives and dependent children. (The personal exemption phase-out rule naturally disappears as well.) The new $12,000 standard deduction financially surpasses the previously scheduled combination of the personal exemption and standard deduction for 2018 ($6,500 standard deduction + $4,150 personal exemption).1,2

2 Many itemized deductions are gone.

When the Tax Cuts & Jobs Act headed to Congress in fall 2017, it appeared the list of repealed deductions would be very long. While some itemized deductions were retained, the list of lost deductions includes the following:

*Home equity loan interest deduction
*Moving expenses deduction
*Casualty and theft losses deduction (though it still applies this year in certain areas; see the "Other Interesting Developments" section)
*Unreimbursed employee expenses deduction
*Subsidized employee parking and transit deduction
*Tax preparation fees deduction
*Investment fees and expenses deduction
*IRA trustee fees (if paid separately)
*Convenience fees for debit and credit card use for federal tax payments
*Home office deduction
*Unreimbursed travel and mileage deduction

Under the conditions set by the reforms, many of these deductions could be absent through 2025.12,13

Several expired deductions have been put back into place for the 2017 tax year, thanks to the Bipartisan Budget Act of 2018.

*The above-the-line deduction for qualified tuition and related expenses was retroactively reinstated for TY 2017. With this in place again, a taxpayer has the option to take a deduction for the amount of tuition and linked higher education expenses from adjusted gross income (AGI) on page 1 of Form 1040, if it provides a better tax break than claiming the Lifetime Learning Credit or the American Opportunity Tax Credit for the same expenses.
*As noted earlier, the deduction for mortgage insurance premiums is back.
*So is the chance to exclude the amount of debt forgiven on your principal residence from your taxable income.
*Three credits pertaining to energy efficiency have been restored for 2017. One, the 10% tax credit for energy-efficient home improvements returns, with its $500 ceiling now limited to a lifetime available credit. Two, the 10% residential energy property credit for the use of qualified fuel cell, small wind energy, fiberoptic solar lighting, and geothermal heat pump components returns – in fact, these credits will be offered through 2021. Three, the 10% tax credit for buying a two-wheeled, plug-in electric vehicle returns, with a limit of $2,500.
*If you are eligible to claim the Earned Income Tax Credit for 2017, you can either use your earned income from 2016 or 2017 to calculate the credit – whichever amount gives you the chance for a larger tax break.7

Social Security & Medicare Changes

1 Social Security benefits increase 2.0%.

This increase in retirement income is essentially eaten up by higher Medicare Part B premiums for many seniors, however (see #3 below).14

2 Social Security withholding thresholds are higher.

Before and during the year you reach Full Retirement Age, Social Security withholds some of your benefits when your earned income surpasses certain thresholds.

If you have yet to reach your FRA, you may earn up to $17,040 in 2018 before having $1 in benefits withheld for each additional $2 in earned income above that level.

If you reach your FRA in 2017, you may earn as much as $45,360 before having $1 in benefits withheld for each additional $3 in earned income above that level.14

3 Many seniors are paying higher Medicare Part B premiums this year.

In 2017, Medicare's "hold harmless" statute held Part B premium costs down for about 70% of Medicare enrollees. While around 30% of Medicare recipients paid about $134 per month for Part B coverage, others paid Part B premiums of just $107-109 as a result. They got this discount because the "hold harmless" rule says that on an annual basis, Part B premiums cannot increase more than Social Security's cost-of-living adjustment – and the 2017 COLA was tiny.

This year, about 42% of Medicare recipients will pay the standard Part B premium even though they are subject to the "hold harmless" provision, as the annual increase in their Social Security benefits will equal or surpass the increase in their Part B premiums. Around 28% of recipients will pay less than $134 per month for Part B, since the annual increase in their Social Security benefits will be less than the Part B premium increase.15

4 Medicare's Part A deductible increases.

In 2017, the Part A deductible (on hospital stays) is $24 higher than in 2017, rising to $1,340. The yearly Part B deductible remains at $183.15

5 There are some Part D adjustments of note.

Medicare enrollees in Part D drug plans will pay only 35% of the cost of brand-name medications and 44% of the cost of generics while in the "donut hole" in 2018. Average monthly premiums for standalone Part D drug plans are expected to become $1.20 cheaper this year; the projected average is $33.50. The annual Part D plan deductible limit rises $5 this year to $405.16

6 New I.D. cards are being issued to Medicare recipients.

"Why did Medicare put my Social Security Number on my Medicare I.D. card?" If you have ever asked this question (and in this age of rampant identity theft, you may have asked it more than once), you will be glad to know an answer to this problem is just ahead. Medicare is mailing out new I.D. cards in April. These new cards will not have your SSN, but a new 11-character Medicare Beneficiary Identifier (MBI) code made up of numbers and upper-case letters.17

COLAs & Phase-Out Range Adjustments

Here are some details pertaining to retirement plans and other items largely unaffected by the 2018 tax reforms.

1 Many cost-of-living adjustments have been made.

*401(k), 403(b), 457 Plan Contribution Limits
The ceiling on elective deferrals to these plans rises to $18,500, with an additional standard catch-up contribution of up to $6,000 permitted for those who will be 50 or older by the end of 2018.18

*Defined Contribution Plan Annual Addition Limit
In 2018, the cap on annual employer profit-sharing additions to these plans heads from $54,000 up to $55,000.18

*SEP Plan Contribution Limits
Employers may contribute up to $55,000 (or up to 25% of eligible compensation per employee) to a SEP plan in 2018, to a cap of $275,000. Both limits were $5,000 lower in 2017. The minimum compensation level is again at $600.18

*Limit on ESOP Maximum Balance
This improves by $25,000 to $1,105,000 in 2018.18

*Amount for Lengthening of 5-Year ESOP Period
As in 2017, this limit gets a COLA of $5,000, moving north to $220,000.18

*Limit on Annual Retirement Benefit Payable from a Defined Benefit Plan
Another $5,000 COLA also pushes this limit to $220,000.18

*Limit on Income Subject to Social Security Tax
For 2018, the taxable wage base rises to $128,400, an increase of $1,200. 18

*Health Savings Account Contribution Limits
The annual contribution limit for a self-only policy increases $50 this year to $3,450. It is $4,450 for those who will be 55 and older in 2018. The contribution limit on a family policy rises $150 this year to $6,900 and $7,900 for those who will be 55 and older this year.19

*Out-of-Pocket Amount Limits for Medical Savings Accounts (MSAs)
The 2018 caps are $4,600 for self-only coverage (a $100 increase) and $8,400 for family coverage (up by $150).20

*Earned Income Credit
If your family has three or more qualifying children and you are married and filing jointly, the maximum EIC is $6,444 this year, $126 more than last year.20

*Adoption Credit
The credit has a limit of $13,840 in 2018, a $270 increase. (Married couples who file separately may not be eligible to claim it.)21

*Annual Gift Tax Exclusion
For the first time in five years, this limit gets a COLA. It rises $1,000 to $15,000 in
2018. (It is never adjusted in increments greater than $1,000.)21

*Foreign Earned Income Exclusion
This rises $2,000 to $104,100 in 2018.20

No 2018 COLAs Have Been Made to These Limits

*IRA Contribution Limit

The yearly cap of $5,500 stays in place. An additional $1,000 catch-up contribution
is allowed for those who will be 50 or older by the end of 2018, so the cap for those
IRA owners is $6,500.18

*SIMPLE Plan Contribution Limit
The annual limit is still $12,500 with a $3,000 catch-up contribution permitted for those who will be 50 or older by the end of this year.18

*Definition of a Key Employee
The dollar limitation linked to the definition of a key employee in a top-heavy plan stays at $175,000.18

*Definition of a Highly Compensated Employee
The definition (used with regard to defined contribution and defined benefit plans) stays at $120,000 this year.18

Numerous Phase-Out Ranges Have Been Adjusted Higher for Inflation

*Traditional IRA Contribution Deductions When You or Your Spouse Have Access to a Retirement Plan at Work

In 2018, the MAGI phase-out ranges are:

*Single filer or head of household: $63,000-$73,000 ($1,000 higher)
*Married couples filing jointly: $101,000-$121,000 ($2,000 higher)
*Married couples filing separately: $0-$10,000 (it never changes)

Below the phase-out ranges, you may claim a dollar-for-dollar deduction for contributions to a traditional (i.e., deductible) IRA. These are not phase-outs affecting the amount of your traditional IRA contributions. They only affect the amount of the deduction you may take on your 1040 form for making them during 2018.22

*Traditional IRA Contributions if You Lack Access to a Workplace Retirement Plan, but Your Spouse Has Access to Such a Plan
Note the slight increase for joint filers here.

*Married couples filing jointly: $189,000-$199,000 ($3,000 higher)
*Married couples filing separately: $0-$10,000 (it never changes)22

*Roth IRA Contributions

Your ability to make a 2018 Roth IRA contribution is reduced when your MAGI falls into these phase-out ranges. If it exceeds the high end of these ranges, you cannot make one.

*Single filer or head of household: $120,000-$135,000 ($2,000 higher)
*Married couples filing jointly: $189,000-$199,000 ($3,000 higher)
*Married couples filing separately: $0-$10,000 (it never changes)22

*Lifetime Learning Credit

This year, the phase-out ranges start at $57,000 for single filers ($1,000 higher) and $114,000 for joint filers ($2,000 higher).21

*Adoption Credit

The MAGI phase-out range in 2018 rises by $4,040 to $207,580-$247,580. This range applies for all filing statuses.21

*Saver's Credit

In 2018, taxpayers are not eligible to claim this credit of up to $2,000 if their MAGI is above $63,000 as a joint filer, $47,250 as a head of household, or $31,500 otherwise.22

Other Interesting Developments

1 The long-term capital gains tax rate thresholds do not quite sync with the new income tax thresholds.

Taxpayers in the bottom two marginal tax brackets paid no tax on long-term capital gains tax in 2017. Taxpayers in the top marginal bracket paid a tax of 20%. Everyone else faced a tax of 15%. This year, the long-term capital gains rates are structured as follows:

Bracket Single Filers Married Filing Jointly Married Filing Head of Household
or Qualifying Widower Separately

0% $0 - $38,600 $0 - $77,200 $0 - $38,600 $0 - $51,700
15% $38,601 - $425,800 $77,201 - $479,000 $38,601 - $239,800 $51,701 - $452,400
20% $425,801 and up $479,000 and up $239,501 and up $452,401 and up

As for short-term capital gains, they are taxed as ordinary income – and since tax rates fell slightly at the beginning of 2018, any short-term gains you take in could be taxed less than they would have been last year.

The highest earners should know that the 3.8% net investment income tax still exists – it was not repealed in December, and its income thresholds remain the same.2

2 The individual health insurance mandate is still here for 2018, but scheduled for repeal in 2019.

The Affordable Care Act instituted tax penalties for individual taxpayers who went without health coverage. As a condition of the 2018 tax reforms, no taxpayer will be penalized for a lack of health insurance next year. Adults who do not have qualifying health coverage will face an unchanged I.R.S. individual penalty of $695 this year.1,20

3 The electric car credit is still around.

Electric car buyers can claim a credit of as much as $7,500 this year. The credit begins to phase out for buyers of certain makes, however, once a manufacturer sells more than 200,000 plug-in vehicles.23

4 The school supplies deduction remains.

This is the deduction that teachers take for out-of-pocket expenses they incur to buy classroom materials. Although certain legislators in Washington wanted to double it as part of the tax reform package, it was not sweetened. It stays at $250 this year, and teachers may take it whether or not they choose to itemize.6,23

5 Business owners can no longer deduct some food and entertainment costs.

If you are accustomed to writing off some of the cost of a corporate lunch, you are in luck: in most cases, businesses may still deduct 50% of the expenses of qualifying meals. The cost of complimentary snacks you put out for your workers, however, is now just 50% deductible – it gets the same federal tax treatment as restaurant meals you provide to employees.

The deduction for business expenses for employee entertainment fell victim to the reforms and is gone as of 2018.1,23

6 Two important education tax breaks are preserved.

First, tuition waivers for graduate students engaged by universities as researchers or teaching assistants remain tax free. Some worried that their waivers would be subject to income tax as a result of the reforms.

Second, interest on student loan debt can still be deducted, even if a taxpayer declines to itemize deductions.6,23

7 Parents must provide SSNs for their kids when claiming the Child Tax Credit.

You must do this for each child you claim the CTC for in 2018.5

8 Casualty, disaster, and theft losses are still deductible for some taxpayers, depending on where they live.

During 2018-25, taxpayers who suffered such losses as an effect of a federal disaster declared by the President may still qualify to take a federal tax deduction for these types of personal losses.

In addition, the Bipartisan Budget Act of 2018 extends tax benefits to victims of Hurricanes Harvey, Irma, and Maria and California wildfires. Federal tax relief provided for disaster areas declared between September 21 and October 17, 2017 in the aftermath of Hurricanes Harvey, Irma, and Maria has been prolonged. New rules now allow Golden State residents impacted by wildfires access to retirement funds and temporarily lift limits on deductions for charitable contributions. They also permit deductions for personal casualty disaster losses and alter measurement of earned income to help affected taxpayers qualify for the Earned Income Tax Credit.

Taxpayers who live in 2016 presidentially declared disaster areas may take distributions of up to $100,000 from IRAs and workplace retirement plans regardless of age restrictions – they will not be hit with the 10% early withdrawal penalty for withdrawing these assets too early, they can spread the taxable income represented by the withdrawal over three tax years, and they can optionally repay the amount distributed to them within three years.9,13,24

9 Chained CPI is now the benchmark for yearly inflation adjustments to federal tax thresholds.

Before 2018, the Consumer Price Index for All Urban Consumers (CPI-U) was the inflation yardstick used to calculate COLAs. Now, the "chained" version of the CPI-U, commonly called the Chained CPI, is being used.

The Chained CPI makes a subtle but important assumption – it assumes that given higher prices, a consumer will choose to substitute a cheaper product or service for a more expensive one in its class. As increases in the Chained CPI are smaller than those of the CPI-U, the switch to the Chained CPI implies that tax bracket and phase-out thresholds will rise in smaller increments, and it also implies smaller COLAs for some credits and deductions.2


This Special Report is not intended as a guide for the preparation of tax returns. The information contained herein is general in nature and is not intended to be, and should not be construed as, legal, accounting, or tax advice or opinion. No information herein was intended or written to be used by readers for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Readers are cautioned that this material may not be applicable to, or suitable for, their specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. Readers are encouraged to consult with professional advisors for advice concerning specific matters before making any decision. Both «representativename» and MarketingPro, Inc. disclaim any responsibility for positions taken by taxpayers in their individual cases or for any misunderstanding on the part of readers. Neither «representativename» nor MarketingPro, Inc. assume any obligation to inform readers of any changes in tax laws or other factors that could affect the information contained herein.

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