TAX CUTS AND JOBS ACT: Winners, Losers, and Investment Strategies

The Tax Cuts and Jobs Act (TCJA) is a 500+ page piece of legislation passed by both houses of Congress and signed into law on Friday, December 22, 2017, with most of its provisions affecting taxes in 2018 and beyond.  It’s a massive piece of legislation that some analysts feel is the most extensive overhaul of our taxation system since the Tax Reform Act of 1986 under President Reagan.  It touches most aspects of our economy, from taxes and incentives for individuals, trusts and estates, sole proprietors, partnerships and corporations to a major change in healthcare with the repeal of the individual mandate under the Affordable Care Act (ACA).  It is worth noting that almost all of the individual tax changes are due to expire at the end of 2025, a budgetary strategy GOP senators used to pass the bill with a simple majority, rather than a filibuster-proof 60 votes.

Rather than recount every detail of TCJA, here we link two chart-based summaries of TCJA:

Below we try to distill its major provisions into a set of Winners and Losers, with commentary on how the law’s changes will affect tax-paying investors, and what to consider in positioning your investment portfolio accordingly. 


  1. The U.S. economy, through the repatriation of U.S. corporate profits held overseas in foreign subsidiaries through a clawback provision in TCJA.  Cash assets will be taxed at a rate of 15.5% and non-cash assets at 8%.  Corporations can then use that net-of-tax capital for domestic purposes: research and development, capital purchases, hiring, debt refinancing, stock buybacks, dividends, etc.  The increased revenue to the IRS through this measure will partly offset the cost of the tax cuts, although TCJA is projected to increase the national debt by between $1.4 – $2 trillion over 10 years.
  2. For-profit C-corporations that pay U.S. taxes, with their tax rate lowered by 14 percentage points to 21%, with AMT eliminated and full expensing of short-lived capital assets for 5 years.  With a territorial corporate tax system now adopted by the IRS, corporations are free to invest and produce in whatever global tax domain is most advantageous.  By extension, corporate profits and associated equity share-holders stand to benefit. 
  3. Fossil fuel energy companies eager to extract natural resources from the Arctic National Wildlife Refuge, which is now open to commercial exploration under TCJA.  By extension, native species of flora and fauna in the area could stand to suffer from associated habitat changes/degradation and commercial exploration disasters, such as oil spills. 
  4. Owners/partners of pass-through businesses entities (non-services related, including Architects and Engineers, above $157.5/$315k income and all businesses below those levels) that can now deduct 20% of Qualified Business Income (QBI) on personal returns, subject to some limitations on level of W2 wages paid by the firm.  The law especially favors passive owners who don’t collect a salary from the business, who could potentially receive a 20% deduction on all of that income.   The law could introduce unintended consequences for businesses, with some employees moving to sever employment in favor of establishing a pass-through entity and contract/consult-back agreement with their former employer or other businesses.  This provision includes shareholders of REITs, who will now enjoy deductibility of 20% of dividend payments, while the trusts retain full deductibility of interest on debt.  Shareholders of REITs in taxable accounts will specifically benefit.  The nonpartisan Congressional Budget Office (CBO) reported that under TCJA individuals and pass-through entities like partnerships and S corporations would receive about $1.125 trillion in net benefits (i.e. net tax cuts offset by reduced healthcare subsidies) over 10 years.
  5. Investment managers of private investment vehicles, like hedge funds, venture capital, private equity, and real estate.  The tax treatment of carried interest remained largely unchanged, despite GOP political promises to repeal it, allowing these managers to have their investment performance income taxed at the same rate as long term capital gains from public stocks: 15 – 20% plus the 3.8% investment surtax (for high income earners), as opposed to ordinary income at a top rate of 37%.  Under TCJA, the time period that an investment must be held to qualify for the advantageous carried interest tax treatment did lengthen from 1 year to 3 years.
  6. The wealthy, with a marginal tax rate deduction of between 2.6% – 4.6%, depending on income levels, from the highest bracket (39.6%) under old law.  In addition, people paying Alternative Minimum Tax (AMT) have their exemption floor and ceiling phase-out amounts move significantly higher, e.g., ceiling phase out moved from $164k to $1MM for a married couple.  For many folks AMT exposure was caused by high itemized deductions for state and local income and property taxes and lots of personal and dependent exemption deductions. Those breaks were disallowed under the AMT rules. With the new limits in deductions for state and local taxes, the elimination of personal and dependent exemption deductions, and larger AMT exemption deductions, many previous victims of the AMT will find themselves off the hook, starting next year.  For those with the ability to exercise incentive stock options (ISOs) – one of the AMT triggers –  the AMT rules become much more accommodative to that income stream under TCJA.  Further, the Pease Limitation was repealed, which limited deductions based on income levels, effectively removing a 1-1.2% surtax for upper income earners. High income earners now have no limitations on their itemized deductions – $261,500 single/$313,800 married previously. Thus one could argue that the top marginal tax rate dropped from 40.8% to 37% with repeal of Pease and the TCJA top income rate reduction from 39.6% to 37%. The Tax Policy Center estimates that a new 20% tax deduction for pass-through income, a doubling of the estate tax exemption, lower ordinary income tax rates, and a more generous alternative minimum tax will send 65.3% of TCJA’s individual benefits to people in the top 20% of the income spectrum, with the top 1% getting a $50,000 tax cut on average in 2018.
  7. Heirs to the wealthy, with a more than doubling of the estate tax exclusion under TCJA to $11.2MM single/$22.4MM married.  Conversely, estate planning attorneys will likely lose a large chunk of business from those clients who fall below the new thresholds and use their services under existing law.
  8. Low income and middle class tax-payers.  Income tax rates are reduced under TCJA in 2018 at all income levels from $9,525 to $157,500 (single) and $19,050 to $400,000 (married filing jointly).  Amazingly, the $37,951st dollar earned under the old tax law was taxed at a higher rate than the $157,499th dollar will be taxed under TCJA (single filer), with a similar spread for those married filing jointly ($75,901 – $314,999).  Changes to exemptions and deductions under TCJA will affect realized income as well, with most filers in these income ranges projected to see a tax benefit.    
  9. Families/head of household with children or dependents.  House Speaker Paul Ryan has spoken publicly about his desire to increase family sizes, thus expanding the tax base, to offset the cost of aging Baby Boomers. TCJA contributes in this regard, at least through upper middle class income families (ironically, there is still a marriage “penalty” in TCJA for those married couples earning over $600k to $1MM).  The tax law does eliminate personal exemptions, which incentivized additional dependents, but it Increase the child/dependent tax credit by $1k/$500, respectively, which is a net benefit for those making less than $200k single/$400k married, where child tax credit is eliminated/reduced.  Analyzed holistically, the expanded standard deduction under TCJA isn’t enough to make up for the loss of personal exemptions for families, which could have previously claimed a $4,050 (in 2017) personal exemption per family member, but is trumped by the increased benefit of the child tax credit.  Examples: A family of 5 would have had 5 x $4,050 = $20,250 of personal exemptions, plus a $12,700 standard deduction, for a total of $32,950 in deductions. Under the new law, the new standard deduction remains at just $24,000. In fact, even adding two children – such that the family could have claimed 4 personal exemptions – leaves the family with a smaller deduction under the new rules than existed under prior/current law.  Under the new rules, the couple’s joint Standard Deduction would be $24,000, instead of $28,900. However, the couple will now be eligible for 2 x $2,000 = $4,000 of child tax credits, assuming they meet income thresholds. As a result, while they may pay $1,225 in additional taxes due to the loss of $4,900 of deductions (assuming prior 25% rate), the addition of $4,000 in new child tax credits means their net tax liability is still reduced by $2,775.
  10. Families who want to save for the cost of primary education (k through 12), other than home schooling.  529 plans were expanded, with $10k/per year per child now available from these plans to fund those costs, tax-free.  Conversely, the expansion of 529 payout eligibility, which favors the high cost of private schools, may cause lower enrollment/funding at public schools.
  11. Divorcees who receive alimony, who, in a reversal of current law, will pay no tax on this income under TCJA.  Conversely, those paying alimony will lose the deduction for that expense, beginning in 2019.  Nominally, many analysts believe this change will lower divorce rates, as the higher income earner will have a financial disincentive to separate, which is in-line with House Speaker Ryan’s stated objective of increasing the U.S. birth rate to widen the tax base.
  12. Those with high medical expenses, which can be itemized deductions if in aggregate they are above 7.5% of Adjusted Gross Income, reduced from from 10% in 2017 and 2018.  Note that the standard deduction was approximately doubled, negating itemized deductions for many people moving forward. 
  13. Tax preparers, tax lawyers, and financial planners with increased work due to 500+ pages of new tax laws and an overall tax code that many would argue is equally if not more complex than before, at least for individuals (example: capital gains rates will be based on current tax brackets, not the new thresholds under TCJA).  The boon to these service professionals may be offset somewhat by elimination of personal deductions for tax preparation and investment advisory expenses (under miscellaneous deductions), which could lessen their appeal to those who itemize deductions. 
  14. Potential future victims of sexual harassment in the workplace.  Corporations can’t deduct costs associated to sexual harassment cases from their income if they are subject to a nondisclosure agreement as part of the settlement, which may provide an incentive for companies to invest in employee education, stricter workplace guidelines, more extensive employee vetting, etc. in this area. 


  1. Foreign governments that lured U.S. businesses to their shores to shelter corporate profits from U.S. taxation, which will lose future taxation on that capital under TCJA.  TCJA requires repatriation of those profits, with cash assets taxed at a rate of 15.5% and non-cash assets at 8%.  The lowered U.S. corporate tax rate to 21% could spur an international corporate tax war, with each sovereign government doing its best to court multi-national corporations, which would have unpredictable consequences for their own tax revenue streams.
  2. The Internal Revenue Service and the U.S. Treasury, which will lose significant revenue due to TCJA, to the tune of an estimated $1.455 Trillion in additional U.S. debt over 10 years, according to the Congressional Budget Office.
  3. Potentially entitlement programs, such as Medicare and Medicaid, which must receive mandatory cuts based on the debt expansion enacted under the tax law, unless new legislation is passed to avoid it (which the GOP has pledged to do).  Regardless, the budget will be under pressure for cuts to counter-balance the lost revenue from the tax cuts, and that points to entitlement reform, something Speaker Paul Ryan has pledged for 2018. The Tax Policy Center (TPC) estimated 72% of taxpayers would be adversely impacted in 2019 and beyond, if the tax cuts are paid for by spending cuts separate from the legislation, as most spending cuts would impact lower- to middle-income taxpayers and outweigh the benefits from the tax cuts.
  4. Charities and non-profits, which stand to lose contributions with the approximate doubling of the standard deduction, nullifying the tax benefit of giving for some Americans.  Estimates are 2-7% less giving under TCJA, even though the ceiling for charitable giving was increased to 60% of Adjusted Gross Income from 50%.  Some givers may skip giving in some years in order to double or triple, etc. their contribution in one year to reap a tax benefit, creating uneven cash flows and difficult revenue forecasting for recipients, unless dispersed periodically through a donor advised fund.  In addition, highly compensated employees at non-profits incur an excise tax of 21% on salaries over $1MM.
  5. Sectors of residential real estate.  TCJA includes numerous provisions that are unfriendly to residential real estate: mortgage interest deduction reduced to debt below $750k from $1MM (for reference, 64% of mortgages in New York City are for > $750k); Home Equity Line Of Credit (HELOC) (or any home equity indebtedness not used to improve the home) interest no longer deductible; a $10k state and local tax (SALT) cap on property, income and sales taxes (for reference, 4.1MM Americans pay > $10k in property tax alone); the standard deduction approximately doubled, negating the mortgage interest and property tax deductions for many Americans.  TCJA could prove specifically harmful to housing at both 1) the higher end of home prices above the mortgage interest deduction cap and equivalent property tax deduction cap, and 2) the lower end of home prices that don’t equate to an itemized deduction benefit under the new rules. 
  6. Those buying insurance through the Affordable Care Act exchanges, which under TCJA no longer require insurance to avoid a tax penalty, beginning in 2019.  With fewer people electing to buy insurance without the mandate, CBO projections are 13MM fewer people insured and annualized health care premium price increases of 10% or more.
  7. Those residing in high income/sales tax & property tax states.  TCJA institutes a deduction cap at $10k for State and local tax (SALT) deductions for both single and married filers, with an approximate doubling of the standard deduction, effectively punishing tax-payers in states with high costs in these areas.  These high SALT states are primarily located along the north Atlantic and Pacific coasts.    
  8. Those who disproportionately rely on CPI-U inflation (normally low-income earners taking advantage of the earned income tax credit), as TCJA now employs a chained CPI-U calculation (which is generally lower than CPI-U) for yearly increases in thresholds, such as deductions, credits, and exemptions, due to inflation.  This change means these values are worth less through time, as they won’t rise as quickly under the new CPI calculations, and all taxpayers will be pushed into higher tax brackets at a quicker pace, as the inflation calculation which sets their boundaries rises at a slower pace.
  9. Single filers with taxable income between $385k – $416.5k in 2018.  In a strange anomaly in the TCJA tax brackets, these filers are the only group to see a tax increase as a result of the tax changes.  All other filers, including all those married filing jointly, will see a tax decrease based on the new law’s tax brackets.  (Note: This analysis does not consider application of changes in exemptions, credits, and deductions, which are specific to each filer and can significantly alter taxable income.) 
  10. People who incur unreimbursed business expenses or expenses to move for work. The miscellaneous deductions category, subject to a floor of 2% of AGI, was eliminated under TCJA, which now disallows deductions for unreimbursed business expenses.  Also, tax filers can no longer use an above-the-line deduction for moving expenses or receive a tax-free benefit from an employer who pays for them (they will be considered taxable income). 
  11. Those employees with funds in deferred compensation plans.  TCJA changes the timing of taxation of deferred compensation plans to the point at which the funds lose the risk of forfeiture (become fully vested), not when they are paid.  This change could result in large, unexpected income streams for some employees in 2018, unless the deferred compensation plans are restructured. 
  12. Children (under 19, students under 24) who have unearned income, e.g., an inherited IRA. For income over $12.5k, children are now taxed at 37% trust tax rates, instead of their parents’ rates.  This change will punish children with unearned income other than those who have parents in the highest marginal tax bracket.
  13. Owners of non-real estate investment property (classic cars, boats, airplanes, etc.), who planned to enter into a 1031 exchange with a counterparty to avoid capital gains on sale.  Beginning in 2018, 1031 exchanges are permitted for real estate only.


  1. Review allocation to domestic equity.  Regardless of how the re-patriated capital and increased profitability from decreased corporate tax rates is used, e.g., share buybacks, dividends, research & development, debt restructuring, capital expenditures for business expansion (which a Yale survey pegs at only 14% of increased profits), it is likely to have a stimulative effect on equity prices, all else held equal.  Potential international corporate tax competition through the new territorial tax system could also increase profits of domestic corporations. 
  2. Review allocation to high-yield debt.  TCJA limits the deductibility of net interest expense to 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) for four years, and 30 percent of earnings before interest and taxes (EBIT) thereafter.  For firms with significant debt, forcing a high nominal interest rate, this new law could negatively affect taxes due, even with the lowered corporate rate, and possibly force credit downgrades.  Bond expert Jeff Gundlach commented earlier this month, “There’s probably going to be some unintended consequences [of the tax bill]; it will probably harm some companies and some sectors [in the high-yield market].”
  3. Reconsider Roth Conversion Strategies.  Re-characterizations of Roth IRA conversions are no longer allowed after 2017.  That means early calendar year conversions (benefiting from potential intra-year gains) in anticipation of income levels will prove more risky, and likely move some conversions to year-end when income levels are known (and a Roth conversion is deemed appropriate based on its increased income recognition).  This tax law change also affects conversions into down markets when more shares could be converted at the same dollar amount with a re-characterization, albeit in a different tax year.  It means one must commit to the tax consequences of the conversion and the market levels at the time of the conversion. 
  4. Consider placement of REIT investments in taxable accounts. Given that REITs are considered a pass-through entity, where their income stream will receive a full 20% deduction under TCJA, their placement in a taxable account will prove advantageous against other investments that produce ordinary income (depending on the magnitude of the income stream).   Note that at every income level under TCJA, investments that produce qualified dividends and long-term capital gains will be taxed at lower levels than income on REITs, so proper analysis of potential distributions from each type of investment is necessary to locate it in the appropriate tax-free, tax-deferred, or taxable account.
  5. Consider holding off buying a new home/speed up the sale of an existing home, depending on your tax circumstances.  As detailed in Losers section, there are four TCJA changes working against the tax appeal of residential real estate, especially at the low and high ends of the price spectrum.  If you are considering a transaction in real estate in the near future, consider how the new law would affect what you are buying and/or selling, as well as its effect on mortgage rates (see below).  Note that the mortgage interest deduction limitation only applies to new purchases, which could incentivize some people to remain in their existing homes (especially since they can refinance existing loan principal moving forward under the old limits).
  6. Consider refinancing short term debt to long-term debt, reconsider asset duration, and beware of inflation.  The fiscal provisions in TCJA could prove economically stimulative, especially for corporations, which may lead to higher interest rates and increased borrowing costs, with higher inflation.  The Federal Reserve could need to counteract the loose fiscal policy of TCJA, combined with a U.S. economy that has grow over 3% in two straight quarters, with tighter monetary policy.  This tightening would likely take the form of higher interest rates, set through the target Federal Funds rate and Discount rate, combined with unwinding its bloated balance sheet, increased to over $4.5 trillion from the Global Financial Crisis, a process which began in Q4 2017.  In addition, interest rates will receive upward pressures with the U.S. Treasury in need of significant additional debt issuance to finance TCJA. For investments in debt, consider the full term-structure of interest rates when determining the duration of an investment strategy.  Increasing short-term interest rates, the only rates set directly by the Fed, may not affect longer maturity bonds to the same degree, as they can be less sensitive to short-term changes in economic dynamics.  Also consider investments that are inflation-hedged, like TIPS and commodities, or less inflation sensitive, like variable rate debt and real estate.  Conversely, lock into debt, such as student loans or mortgages, for longer periods of time, which will lower your cost of debt if interest rates increase and see its principal value erode if inflation increases.
A Winner & A Loser

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