The US Congress passed arguably the largest and most significant overhaul of the US tax code in decades. The legislation is expected to be signed into law soon, but the exact date is still unknown. As further details are revealed via the media, here are some highlights of the tax reform.
Oddly, considering the potential impact to our respective financial situation, I found an entertaining — and useful — framework through which to view the possible implications: The 10 heuristics of user interface (UI) design.
Overall, I believe one’s respective financial plan is a personal finance user interface (PFUI).
Although PFUI might seem derivative, let’s give it a go.
Select Highlights of the Tax Reform
This summary is not meant to be exhaustive. Refer to other public sources for further details.
- Number of individual brackets ended up remaining at 7, yet with decreased tax rates at the top and in between. The highest tax bracket fell from 39.6 percent to 37 percent (the lowest bracket remained static at 10 percent).
- Changes to individual rates expire in 2025; business/corporate rates, which decreased from 35 percent to 21 percent, do not expire.
- Standard Deduction roughly doubles (depending on respective filing status and other circumstances); raises to 20 percent for pass-through businesses.
- Individual Alternate Minimum Tax (AMT) remains — with increased exemptions but reverts back eventually to current levels; business/corporate AMT is eliminated.
- Personal exemptions are eliminated; student loan interest deduction remains; increases to child tax credit.
- Individual state and local tax deduction capped at $10,000 (combination of property taxes and sales or income taxes).
- Mortgage interest deduction capped at loans of $750,000 for eligible purchases.
- Estate Tax exemption doubles.
- Affordable Care Act, or Obamacare, individual mandate penalties eliminated.
Overall, there are a lot of variables when these and other changes go into effect (as well as who will be impacted by them and to what extent, if any). As always, review your personal situation before making any decisions.
Applying the 10 Heuristics to Your PFUI
[Note: The following content marked with the suffix ** and in italics is from Jacob Nielsen’s Ten Usability Heuristics for User Interface Design — source]
I first came across Jacob Nielsen’s 10 Usability Heuristics in college. But I’ve received a refresher over the last few months while launching Balanced Dividends.
From a tax reform perspective, certain changes might be easier than others to apply to your personal situation. Are you a salaried employee and pretty much know what your AGI will be? You’ll likely have more confidence of which bracket you’ll be in vs. a freelance or commission-based worker (depending on your income levels). However, there are too many scenarios to explore in detail (hence the appeal of a heuristic).
A well-functioning and effective PFUI may better position how you deal with life’s known and unknown milestones. The tax reform is just one, or multiple, milestones.
Here’s a look at the 10 heuristics applied to the PFUI framework.
1. Visibility of system status**
The system should always keep users informed about what is going on, through appropriate feedback within reasonable time.
Consideration: If you don’t have a clear and up-to-date picture of your personal financial situation, it’s likely difficult for you to evaluate what’s going on. You need to have a pulse on your personal economy. Tracking your income, expenses, and net worth is key. Your system should tell you what’s going on. We use Personal Capital for this reason.
2. Match between system and the real world**
The system should speak the users’ language, with words, phrases and concepts familiar to the user, rather than system-oriented terms. Follow real-world conventions, making information appear in a natural and logical order.
Consideration: If you’re uncertain how a particular investment or asset works, it’s best to stay away. When we consider a particular asset, we try to understand not only its tax implications, but its purpose in our portfolio. What are we trying to accomplish with this asset? Whatever the market or a particular asset is telling us, we need to understand it from both the context of the PFUI and the real world. If it doesn’t make sense to you, or if it doesn’t make sense in your PFUI and the real world, pause and reflect. Don’t rush — take your time.
3. User control and freedom**
Users often choose system functions by mistake and will need a clearly marked “emergency exit” to leave the unwanted state without having to go through an extended dialogue. Support undo and redo.
Consideration: Perhaps the easiest correlation is an emergency fund. If prepared and adequately funded, an emergency fund can provide either a direct exit or an immediate form of relief. Unfortunately, your PFUI can’t “undo and redo” mishaps or poor decisions. However, an emergency fund can potentially lessen the burden or impact when you don’t have control (or if in need of an exit). An emergency fund can also provide user control by offering the ability to take a calculated risk that you might otherwise not have been able to pursue.
4. Consistency and standards**
Users should not have to wonder whether different words, situations, or actions mean the same thing. Follow platform conventions.
Consideration: Seek conformity where possible. For us, this meant goals and objectives. While terms and words can be interpreted in different ways, being on the same page as other users in your PFUI is important. Are you alone in your PFUI? That’s fine, but also be mindful of indirect users outside your PFUI, who either have their own PFUI or might be impacted by your actions. Did you get a gift at the office for the holidays and don’t plan to return the favor? You might want to reconsider. Better yet, next time, try to get ahead of the situation and set or agree the standards beforehand.
5. Error prevention**
Even better than good error messages is a careful design which prevents a problem from occurring in the first place. Either eliminate error-prone conditions or check for them and present users with a confirmation option before they commit to the action.
Consideration: I like to check my site stats daily. I like to check my net worth daily (although I’m doing this less frequently). I like to check my portfolio frequently. And then I think of dumb things to do. My PFUI leverages various account types and keeps funds in certain buckets to prevent me from doing dumb things. It helps prevent user errors. Additionally, the system tells me I’m being stupid. Whether you use email alerts, separate savings accounts, or print your plan and put it on your fridge, utilize your PFUI to prevent errors.
6. Recognition rather than recall**
Minimize the user’s memory load by making objects, actions, and options visible. The user should not have to remember information from one part of the dialogue to another. Instructions for use of the system should be visible or easily retrievable whenever appropriate.
Consideration: If I can’t remember my grocery list, how can I successfully remember other details of life each day — whether financial or anything else? Use bill pay reminders. Set spending alerts. Whatever works for you, optimize your PFUI so you can focus on important tasks to make positive decisions. Utilize the knowledge of your PFUI to instill effective behaviors in your daily actions.
7. Flexibility and efficiency of use**
Accelerators — unseen by the novice user — may often speed up the interaction for the expert user such that the system can cater to both inexperienced and experienced users. Allow users to tailor frequent actions.
Consideration: When Mrs. BD and I got married in 2010, we also fell in love with a lot of the great apps and other tools that we use today. We both had — and still do — varying degrees of technical proficiency (Mrs. BD is the one I’d consider a digerati; I’m more of a Luddite in most things). But various tools in our PFUI enable both an advanced user and a n00b to become proficient. Unfortunately, I haven’t found a solution for fixing stuff with my hands — yet.
8. Aesthetic and minimalist design**
Dialogues should not contain information which is irrelevant or rarely needed. Every extra unit of information in a dialogue competes with the relevant units of information and diminishes their relative visibility.
Consideration: Perhaps related to the prior heuristic, your PFUI shouldn’t be over-engineered (I’m guilty at times of getting carried away with our PFUI). But if it works well for you, great — just be mindful of any other users who are part of your financial picture. Try to avoid excess and distractions. Don’t over complicate things. Less is often more.
9. Help users recognize, diagnose, and recover from errors**
Error messages should be expressed in plain language (no codes), precisely indicate the problem, and constructively suggest a solution.
Consideration: For me, this meant how one shares experiences and lessons learned. It could be consulting with a mentor, a trusted adviser, a qualified professional (which I’m not, as my disclaimer tells you on each and every post/page), or a teacher. Different individuals offer guidance and advice. Pay it forward and do the same if you’re able to do so in a positive and qualified way.
10. Help and documentation**
Even though it is better if the system can be used without documentation, it may be necessary to provide help and documentation. Any such information should be easy to search, focused on the user’s task, list concrete steps to be carried out, and not be too large.
Consideration: At first, I thought of a prospectus, user agreements, and FAQs. Or seeking professional advice or guidance. Those perhaps relate, but then a morbid, yet realistic, thought crossed my mind: I’m going to die. I don’t know how, where, or when. But I will someday. It’s best to consider what could happen versus what you’d like to happen when you do. Whether it’s a trust, a will, or any other type of final preparations, it’s a sobering but responsible task.
Wrapping It Up
The tax reform changes will likely have some type of impact on most individuals. Even if you live outside the US or are not paying US taxes, the corporate landscape is also drastically going to change. Are you invested in any US companies or assets? A few things to consider:
- Your income: How much or how little you earn regardless of method (e.g., W2, dividends, long/short-term capital gains) is likely the first item that comes to mind. Continue to be mindful of how your income is recognized or categorized for tax purposes. The rates can vary significantly.
- Your asset allocation: Again, different types of assets get treated differently for tax purposes, but also be mindful of the placement of assets in different account types.
- Your timeline: With some of the tax reductions set to expire, while others are permanent, don’t forget to consider your respective timeline. Assess both short- and long-term plans.
- Your personal status: While related the three items above, this can include your housing situation, where you live, if you’re single or married, if you have dependents, etc. Understand what is unique and important to you.
Your respective outlook depends on many unique variables. Like any investment, you should consider your needs and circumstances prior to investing in any type of security or asset. A well-tuned PFUI can help.
Looking Back and — More Importantly — Ahead
I’ve spent countless hours over the years reviewing our personal tax considerations, asset allocation, security selection, and other variables. Overall, it helps to keep things simple. There might be a particular niche that I want to dive into and explore further, but it’s better to make it less complex.
I don’t know how/if the tax reform will impact every aspect of our lives. An ineffective PFUI can cloud our judgement and ability to analyze. It needs to be periodically fine-tuned.
Readers, how are you evaluating the revised tax law and how it may influence your goals and plans? Are there any aspects of the plan that present an opportunity and/or area for further consideration? What are your other thoughts?