The views and opinions expressed in this presentation are those of the author and

presenter and do not necessarily reflect the views and opinions of the sponsoring

companies or their affiliates.

Disclosure

Neither Andrew Friedman, nor any law firm with which he may be associated, is

providing legal or tax advice as to the matters discussed herein. The discussion

herein is general in nature and is provided for informational purposes only. There is

no guarantee as to its accuracy or completeness. It is not intended and may not be

regarded as legal or tax advice, and financial advisors and other recipients of this

information may not rely upon it (including for purposes of avoiding tax penalties

imposed by the IRS or state and local tax authorities). Advisors should consult with

their firm’s legal and tax counsel as to matters discussed herein. Clients should

consult their own legal and tax counsel before entering into any investment, annuity,

estate planning, or trust arrangement, and financial advisors should advise their

clients to do so.

Copyright Andrew H. Friedman 2015. Printed by permission. All rights reserved.

New Yorker (November 2014)

2014 Election

Results

• Unlike in 2012 (when Republicans lost Senate seats),

in 2014 the Republican Senate candidates typically

were from the moderate wing of the party, permitting

them to attract Independent votes.

• As moderates, most Senate Republicans are likely to

seek incremental progress through limited bipartisan

legislative efforts.

2014 Elections - Senate

2014 Elections – House Redistricting

• Most House incumbents worry about winning the

primary more than the general election. As such, they

tend to be more from the conservative wing of the

party.

• Conservatives often have preferred to fight rather

than compromise on core beliefs, even if that means

passing only bills that will not become law. They may

be more willing than Senate moderates to stake out

positions for 2016 by sending Obama legislation he is

likely to veto.

2014 Elections - House

2014 Elections

“[Republicans] have to govern responsibly. We have to

show that we can be a productive party. That will have a

direct effect on whether we’re able to elect a Republican as

president in 2016.”

Senator John McCain (R.-Ariz.)

January 2015

“Conservatives ought not to delude themselves that [a]

Republican Senate majority will somehow be a conservative

majority. We should have no expectation whatsoever that

they will listen. That’s why we’re fighting.”

L. Brent Bozell III, President, Media Research Center.

May 2014

• Treat Republican victory as a repudiation of his policies

(seek compromise with Republican Congress), or

• Treat Republican victory as just another impediment to

the implementation of his legacy (seek to bypass

Congress and act by executive order).

Split government continues.

2014 Elections –

Split Government (Obama)

• Eliminate stepped-up basis at death (“trust fund loophole”).

• Increase top capital gains and dividend tax rate to 28%.

• Impose 7 bps fee on the liabilities of U.S. financial firms with

assets over $50 billion.

• Prohibit contributions to qualified retirement plans if total

balances exceed $3.4 million.

Raises $320B to “pay for additional reforms that will help the

paychecks of middle-class and working families go further to

cover the cost of child care, college, and a secure retirement.”

Obama Tax Proposal (2015)

• Homeland Security funding (February 27)

• Debt ceiling (March 15)

• Medicare “doc fix” (March 28)

• Highway funding (May 31)

• Export-Import Bank (June 30)

• Government funding (September 30)

• Tax extenders (December 31)

Beware tax revenue raisers

2015 “Must Do” Legislation

(Forcing Events)

• Tax offshore earnings of U.S. multinationals

• Tax sale of “carried interest” as ordinary income

• Eliminate pass-through treatment for oil and gas MLPs

• Curtail “stretch” IRAs and 401k’s

• Limit Roth conversions to pre-tax dollars

• Apply RMD rules to Roth accounts beginning age 70-1/2

• Treat all distributions from S corps and partnerships to

owner-employees as subject to employment taxes.

• Curtail sophisticated wealth transfer techniques

Obama Budget Plan – “Loophole” Closers

“Forcing” Events

• Government appropriations (budget)

• Foreign trade

• Obamacare

• Energy

• Tax reform

2015 Possible Legislation

Mandatory Programs

(Entitlements)

$2,096 (60%)

Interest

$229 (6%)

Defense

$583 (17%)

Domestic

$583 (17%)

Source: The Budget and Economic Outlook: Fiscal Years 2015 to 2025, Congressional Budget Office (Jan 2015)

2014 Federal Spending ($3.5T) (in billions of dollars)

• Deficits will begin to rise in 2018.

• Interest payments will double by 2019.

• Spending will grow faster than the economy for Social

Security; the major health care programs, including

Medicare, Medicaid, and subsidies offered through

insurance exchanges; and net interest costs.

• Outstanding federal debt will exceed 100% of GDP 25

years from now and will continue on an upward

trajectory thereafter, “a trend that could not be

sustained.”

Source: The Budget and Economic Outlook: Fiscal Years 2015 to 2025, Congressional Budget Office (Jan 2015)

Fiscal Outlook (CBO Report)

“Such large and growing federal debt would have

serious negative consequences, including

increasing federal spending for interest

payments; restraining economic growth in the

long term; giving policymakers less flexibility to

respond to unexpected challenges; and

eventually heightening the risk of a fiscal crisis.”

Congressional Budget Office

January 2015

Fiscal Outlook (CBO Report)

• 50% of the sequestration cuts are cuts to defense. Those

cuts continue for many more years and are incompatible

with the need to fund significant military operations abroad.

• Absent a change in circumstances, Obama is likely to

continue a middle path, offering air support but short of full

scale military involvement.

• Events that compel a stronger response: terrorist attack on

U.S. soil or an invasion of Israel or a NATO country.

Geopolitical Issues – U.S. Involvement

• Obama is seeking Congress’ approval for the Trans

Pacific Partnership, a 12 nation free-trade pact in the

Asia-Pacific region. The free trade zone established

would be the world’s largest.

- TPP would lower tariffs, establish guidelines on patents

and copyrights, and level the competition for international

companies that compete with government-backed

businesses.

- Goal is to boost U.S. exports to Asia at a time when the

United States faces increasing competition from China.

Foreign Trade

• Most Congressional Republicans support the TPP as

fostering global commerce and enhancing U.S.

company exports.

• Most Congressional Democrats oppose the agreement

as detrimental to U.S. labor by opening up labor

competition overseas. Last term, Senate Democratic

leadership refused even to allow a vote on the TPP.

Foreign Trade

Health Care Reform

Health Care Reform

Health Care Reform

Health Care Reform

Health Care Reform

• 2015: Supreme Court decision on premium subsidies in

federal exchange states

• 2016: Employers with 50-100 employees must begin to

provide health insurance coverage to employees.

• 2017: No more insurance company subsidies

• 2018: Cadillac tax takes effect

Affordable Care Act

• Keystone pipeline

• Drilling on federal land

• Offshore drilling

• Oil and liquid natural gas exports

• Alternative energy

• Proposed EPA regulations curtailing greenhouse gas

National Energy Policy

• Reduce tax rates

• Eliminate “loopholes”

• Simplify the tax code

• Eliminate the alternative minimum tax

Tax Reform

• Revenue neutral or generate new revenue

• Cannot favor the wealthy, who benefit from reduction in tax

rates

• Must eliminate or cap some “sacred” deductions and

exemptions to recoup revenue

Tax Reform – Stumbling Blocks

• 25% tax rate, plus 10% surtax on income > $450K

- Tax-exempt bond interest and employer-provided health

insurance premiums included in surtax. No deductions (other

than charitable contributions) allowed in computing surtax.

• Mortgage interest deduction limited to $500K of debt

• No deduction for state and local taxes

• Charitable contributions deductible only to extent greater

than 2% of AGI

• Half of 401k contributions treated as Roth (non-deductible)

• AMT repealed

Camp Tax Reform Proposal (Individual)

• Bipartisan desire to lower the corporate tax rate to

keep companies from moving operations offshore.

• Need to recoup revenue lost by lower tax rate will

produce winners and losers:

- Possible winners: service industries, retailers

- Possible losers: technology, oil, manufacturing,

financial services

Corporate Tax Reform

35%

15%

44.6%

25%

Maximum Tax Rate – Investment Income

2012 2012 Today Today

Ordinary Investment Income Capital Gains

Tax Rates

“[Current tax] rates are well above the average

rates [during the past 35 years] for households in

the top of the income distribution.”

Congressional Budget Office Report

November 2014

Investment Planning

• Give increased attention to “tax drag” on investments.

- Harvesting losses

- Buy-and-hold strategies

- Municipal bonds, master limited partnerships, REITs

- Tax-efficient mutual funds

- Other professionally managed tax-advantaged strategies

- Hold tax-inefficient investments inside tax deferral vehicles

Takeaways

• Potential market declines on “forcing events” may provide

buying opportunities

• Trans Pacific Partnership may benefit companies with

Asian sales or operations

• Adverse Supreme Court decision may hurt companies

dependent on ACA

• Corporate tax reform may produce winners and losers

• Consider tax drag on investment income

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@TheWashUpdate

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The views and opinions expressed in this presentation are those of the author and

presenter and do not necessarily reflect the views and opinions of the sponsoring

companies or their affiliates.