I hope that everyone is experiencing a joyous holiday season. When I exchanged holiday greetings, many people wanted my thoughts about whether tax reform was a gift or a lump of coal in our Christmas stockings. The answer is, “It depends.” Just as the recent brush fires randomly burned homes in neighborhoods while other houses were untouched, tax reform affects similarly situated taxpayers in an apparent hap-hazard manner. Lobbyists were heavily involved in the final stages of the legislative process, and the Republicans finally realized that they had to throw some bones to the middle class. Thus, the final version of the bill contains many significant departures from earlier versions. The resetting of the corporate tax rate to 21 percent instead of 20 percent, and the repeal of the individual health care insurance mandate, resulted in about $440 billion of room for Congress to help the middle class and to satisfy lobbyists. Generally households making $77,000 to $400,000 received additional rate cuts, ensuring that many more of those households will see a tax reduction through 2025. Because their rate cuts did not offset their loss of deductions, households earning income in the $400,000-$600,000 range will commonly experience an effective tax rate increase compared to the earlier versions of the bill. The big winners are most households earning more than $600,000. The losers generally include households earning more than $150,000 in states with high state taxes. Taxpayers with high medical expenses, those with outstanding student loans, and graduate students receiving scholarships were among those who had the coal removed from their stockings. Congress eliminated provisions that would have adversely affected them. The average Santa Clarita family of four making $90,000 will see a $2,700 tax cut if they are renters. Similarly situated homeowners will see a more modest $800 tax cut. Both will see a $1,700 tax increase in 2026. One of the most complicated provisions is the so-called pass-through deduction for certain unincorporated businesses. Qualifying businesses will receive a special deduction of 20 percent of their income. The devil is in the details of determining which businesses qualify. Generally service businesses such as providers of medical, legal, accounting, consulting or brokerage services will not qualify. Businesses relying upon “the reputation or skill of one or more of its employees” will also fail to qualify. We now have two tax regimes — lower tax rates for capital-intensive businesses and higher rates for businesses that are labor-intensive. Apparently, many businesses having both components will have to ferret out the portion of their business that qualifies for the deduction. Congress has left the implementation details to the Treasury Department and the IRS, both of which are extremely short-staffed at the moment. Since the new laws have not been implemented and most tax advisors are just getting their hands around them, it is hard to predict the future economic consequences. A few after-effects come to mind. Large corporations have no coal dust in their stockings. AT&T, Comcast and Boeing have announced they will pay employees 2017 year-end bonuses of about 5 percent of their expected 2018 tax savings. One has to wonder whether this will be a permanent phenomenon or whether these companies are merely trying to please the Trump administration. AT&T and Comcast are recent winners in the net neutrality decision, and both have pending anti-trust matters with the Justice Department. Boeing is one of the nation’s largest defense contractors. Providing talking points to help Republicans sell this legislation to the American electorate next year conceivably might result in more favorable treatment by the Trump administration. State and local governments will have to reconfigure their tax systems. Generally, only taxes imposed on business will be deductible going forward; expect states to impose gross margins taxes similar to those imposed by Texas. A gross margin tax is based on the profit of a business before overhead is deducted. In addition to being deductible, during economic downturns it is less volatile than income taxes. My favorite scenario is one that ostensibly has been discussed in Sacramento. While state income taxes now have limited deductibility, charitable contributions remain fully deductible for those who can claim itemized deductions. A taxpayer may deduct, as a charitable donation, any payment gratuitously paid to a state and local government. California may consider allowing a credit (i.e., a dollar-for-dollar reduction against a taxpayer’s state income tax liability) for any donations made to the state. That would convert a nondeductible payment of state income tax to a deductible charitable contribution. It is hard to say whether this works, but it illustrates the new fiscal tensions between federal and state governments. In spite of the much-ballyhooed post card tax return, the new rules will undoubtedly keep tax professionals and the IRS very busy in the coming years. Tax reform will definitely result in greater complexity and uncertainty for many taxpayers. James de Bree is a retired CPA residing in Valencia.