The Running of The Bulls and Why We Need to Underreact to the New Tax Bill

The Running of The Bulls and Why We Need to Underreact to the New Tax Bill

Every summer in the first two weeks of July, crowds descend upon Spain’s Basque Country for the Fiesta de San Fermin. We all know the scene - men (mostly) in white clothing with a red scarf, fueled by little more than sangria and bravado, running through the streets of Pamplona hoping to avoid being gored by the bulls.

In sharp contrast is the artful performance happening in the bullring - the main event of the festival. Matadors are masters of controlling the bulls using capes, swords and lances in a ritualistic dance. 

Consider those who run with the bulls, merely reacting to their environment, juxtaposed against the bullfighters who are actually in control of their destiny, through their experience and measured approach.  As the bullfighting aficionado Ernest Hemingway was rumored to have said, “Never mistake motion for action.”

The Frenzy of Tax Planning Information

Why do we care about the running of the bulls as we consider how to react to the new tax law?  In psychology, reaction time is that which elapses between being presented with a stimulus and initiating a motor response to that it. We react quickly as a way to curb anxiety – it’s fight or flight and nothing illustrates that better than the running of the bulls and the runners frantically moving to escape danger.

That is exactly what we are starting to see as a reaction to the new tax law.  When the law passed in mid-December, a flurry of news articles and television news stories focused on a timeworn tax technique of prepaying state and local taxes, as well as property taxes.  The goal was to accelerate deductions into tax year 2017 that would disappear under the new law in 2018.

People across the country took this advice and simply moved on it.  They wrote checks for state and property tax bills that they were assessed without giving their activity any context.  What many of these people will discover in April is that, due to Alternative Minimum Tax (AMT) issues, they got no benefit at all.

Why would people take action based simply on advice in the media? Fear and anxiety about taxes is the likely reason, because most Americans are in the dark as to where they are tax-wise. But reacting to frenzy is not the best course of action in tax planning.

Changing Our Dynamics of Tax Planning

Rather than be financially gored by reacting unwisely to the tax law changes, take your inspiration from the matador and consider how to be measured – even artful - in your approach. Tax planning is a bit like baking a soufflé – if you take it out of the oven too soon, you’re left with a flat pancake. Instead, your your tax planning should be appropriately timed and well thought through. 

In order to maximize your tax (and financial) planning, start with the concept of mindful decision-making, which involves framing the issues, gathering information, and coming to a thoughtful, informed decision. 

  1. Be Clear On The End Goal - You want to achieve the best possible outcome within the system we are required to comply with. Your goal should be precise and unambiguous - to understand where you were before the change, and what you should do to maximize the tax change to your advantage.

     

    Invest in your tax planning by finding a CPA, accountant or other tax practitioner who can consult with you on your tax picture, understand your expectations and help you frame the appropriate tax issues. 

     

    To be fair to these professionals, remember that the law is so new, it hasn’t been fully vetted by the field.  So think strategically when you set up this time to discuss where you will be tax-wise.  An appointment after April 15th might be the optimal time versus trying to make decisions in early 2018. 

     

  2. Think Outside the Box and Don’t Silo - Tax planning as a whole is a complex system.  A decision on how to approach one part of your return might impact other parts – either positively or negatively.  

     

    If you have an entity through which you run your business, perhaps it’s time to revisit whether that structure still makes sense. Think through the overall impact on your other areas of planning. As you do your analysis, recognize that some decisions may require participation of your multiple advisors – attorneys, financial planners, CPAs.

     

  3. Ask What Others in Similar Positions Are Doing - There are great planning ideas out there for taxpayers.  It may be helpful to understand what others in financial positions similar to yours, might be doing.

     

    For instance, one planning technique that may be of interest is frontloading charity.  With the new law change, it is estimated that 85% of all taxpayers will now use the standard deduction of $24,000 Married Filing Joint or $12,000 Single. 

     

    If you are the charitable type and, based on your current giving pattern, you aren’t able to reach/exceed the standard deduction under the new law, ask your tax professional about the possibility of front-loading your next few years of charitable deductions into one year, through a Donor Advised Fund. You can then itemize in the year you do that and then take the standard deduction in the other years.

Strive to be the matador in the tax-law ring, in control, with a clear goal. Tune out the noise around you and find an appropriate professional to guide you, and your planning, through the process that will result in the greatest benefit to you.

Money Stories – Father Knows Best

Money Stories – Father Knows Best

Nothing Off Limits Podcast with Michelle Ann Owens: Megan Gorman On Making Tax and Wealth Planning Cool

Nothing Off Limits Podcast with Michelle Ann Owens: Megan Gorman On Making Tax and Wealth Planning Cool