Effects of Tax Reform on Associate Salaries Forum

[Anonymous User]

Given the limitation on state and local tax deductions, when can we expect a bump in associate salaries to compensate those in certain major legal markets (e.g. NYC, California, Illinois, Massachusetts) for the inability to take the deduction and potentially lower take-home as a result of the tax reform? I am not in one of the aforementioned markets, but my firm typically keeps salaries consistent across its offices. I'm curious what people think will happen, especially since partners will be getting around $30k back into their pockets for the next 5 years (on the low end) given the reduction in the top tax bracket. Salary bump? Summer bonuses? Stagnation and lower take homes?

TL;DR: Tax Reform => NY to 195k?? Summer bonuses?? No change?

Anon because my user name can very easily be traced to my actual name.

[sublime]

We aren’t getting a raise bc of Trumps dumb tax plan.

We are getting a raise bc it’s inevitable. NY to 200!

[cj_dawhg713]

We aren’t getting a raise bc of Trumps dumb tax plan.

We are getting a raise bc it’s inevitable. NY to 200!

+1

[cj_dawhg713]

accidental anon

[BlendedUnicorn]

Law partners are potentially one of the few groups of rich people who don't come out on top from this tax cut- top rate going down will be more than offset for most of them by the SALT changes and big firms are excluded from the special treatment for pass-throughs. You'll be lucky if BONEUS stays even next year. Partners are going to be feeling poor compared to all their non lawyer friends who can game the system more easily.

[Yardbird]

Law partners are potentially one of the few groups of rich people who don't come out on top from this tax cut- top rate going down will be more than offset for most of them by the SALT changes and big firms are excluded from the special treatment for pass-throughs. You'll be lucky if BONEUS stays even next year. Partners are going to be feeling poor compared to all their non lawyer friends who can game the system more easily.

Wouldn’t most of them not be affected by SALT limitations anyways because AMT and the Pease limitations currently limit their ability to deduct SALT (pre-Trump tax plan)? Unless I’m missing something, seems like they aren’t in any worse off position.

[jingosaur]

Law partners are potentially one of the few groups of rich people who don't come out on top from this tax cut- top rate going down will be more than offset for most of them by the SALT changes and big firms are excluded from the special treatment for pass-throughs. You'll be lucky if BONEUS stays even next year. Partners are going to be feeling poor compared to all their non lawyer friends who can game the system more easily.

Wouldn’t most of them not be affected by SALT limitations anyways because AMT and the Pease limitations currently limit their ability to deduct SALT (pre-Trump tax plan)? Unless I’m missing something, seems like they aren’t in any worse off position.

Yeah but the other people in their co-op are going to be pocketing more money and then getting richer is pretty much the same thing as them getting poorer.

I mean what's the point of a beachfront atrium renovation if your neighbor is just gonna get an even better beachfront atrium renovation?

[BlendedUnicorn]

Law partners are potentially one of the few groups of rich people who don't come out on top from this tax cut- top rate going down will be more than offset for most of them by the SALT changes and big firms are excluded from the special treatment for pass-throughs. You'll be lucky if BONEUS stays even next year. Partners are going to be feeling poor compared to all their non lawyer friends who can game the system more easily.

Wouldn’t most of them not be affected by SALT limitations anyways because AMT and the Pease limitations currently limit their ability to deduct SALT (pre-Trump tax plan)? Unless I’m missing something, seems like they aren’t in any worse off position.

Yeah but the other people in their co-op are going to be pocketing more money and then getting richer is pretty much the same thing as them getting poorer.

I mean what's the point of a beachfront atrium renovation if your neighbor is just gonna get an even better beachfront atrium renovation?

Right, this is the driving point. Having never done partner taxes before, I'm not sure if this is right or not but keeping law firms excluded from the pass-through stuff basically ensures that this won't trickle down to associates.

Also I'm pretty sure that if your income is over $1 mil than AMT probably doesn't effect you because your higher rate will end up being the normal one.

[Hikikomorist]

Law partners are potentially one of the few groups of rich people who don't come out on top from this tax cut- top rate going down will be more than offset for most of them by the SALT changes and big firms are excluded from the special treatment for pass-throughs. You'll be lucky if BONEUS stays even next year. Partners are going to be feeling poor compared to all their non lawyer friends who can game the system more easily.

Wouldn’t most of them not be affected by SALT limitations anyways because AMT and the Pease limitations currently limit their ability to deduct SALT (pre-Trump tax plan)? Unless I’m missing something, seems like they aren’t in any worse off position.

Yeah but the other people in their co-op are going to be pocketing more money and then getting richer is pretty much the same thing as them getting poorer.

I mean what's the point of a beachfront atrium renovation if your neighbor is just gonna get an even better beachfront atrium renovation?

That has to be pretty infuriating. Same thing for moderate-to-high income earners in liberal states. Is still don't understand why TLS isn't more upset by this.

[frasier]

Law partners are potentially one of the few groups of rich people who don't come out on top from this tax cut- top rate going down will be more than offset for most of them by the SALT changes and big firms are excluded from the special treatment for pass-throughs. You'll be lucky if BONEUS stays even next year. Partners are going to be feeling poor compared to all their non lawyer friends who can game the system more easily.

Wouldn’t most of them not be affected by SALT limitations anyways because AMT and the Pease limitations currently limit their ability to deduct SALT (pre-Trump tax plan)? Unless I’m missing something, seems like they aren’t in any worse off position.

Yeah but the other people in their co-op are going to be pocketing more money and then getting richer is pretty much the same thing as them getting poorer.

I mean what's the point of a beachfront atrium renovation if your neighbor is just gonna get an even better beachfront atrium renovation?

That has to be pretty infuriating. Same thing for moderate-to-high income earners in liberal states. Is still don't understand why TLS isn't more upset by this.

Because complaining about not getting favorable tax treatment for your high salary kinda cuts against the whole reverse robin hood Trump narrative.

[Anonymous User]

Law partners are potentially one of the few groups of rich people who don't come out on top from this tax cut- top rate going down will be more than offset for most of them by the SALT changes and big firms are excluded from the special treatment for pass-throughs. You'll be lucky if BONEUS stays even next year. Partners are going to be feeling poor compared to all their non lawyer friends who can game the system more easily.

Wouldn’t most of them not be affected by SALT limitations anyways because AMT and the Pease limitations currently limit their ability to deduct SALT (pre-Trump tax plan)? Unless I’m missing something, seems like they aren’t in any worse off position.

No, they are generally worse off. The Pease limitation is basically a haircut on certain deductions - it doesn't phase out/eliminate the deductions. SALT is so high in CA/NY that removing the SALT deduction means that many partners likely wouldn't even be subject to the AMT anymore because their "regular" taxes would be over the AMT thresholds (made even more likely by some taxpayer-friendly changes made to the AMT).

Law partners are potentially one of the few groups of rich people who don't come out on top from this tax cut- top rate going down will be more than offset for most of them by the SALT changes and big firms are excluded from the special treatment for pass-throughs. You'll be lucky if BONEUS stays even next year. Partners are going to be feeling poor compared to all their non lawyer friends who can game the system more easily.

Wouldn’t most of them not be affected by SALT limitations anyways because AMT and the Pease limitations currently limit their ability to deduct SALT (pre-Trump tax plan)? Unless I’m missing something, seems like they aren’t in any worse off position.

Yeah but the other people in their co-op are going to be pocketing more money and then getting richer is pretty much the same thing as them getting poorer.

I mean what's the point of a beachfront atrium renovation if your neighbor is just gonna get an even better beachfront atrium renovation?

Doctors, financiers, etc. are also excluded from the special deduction for pass-through income. Although doctors, financiers, and biglaw partners are all likely to benefit from the provisions that benefit rich people in general (e.g., repatriation tax break that will spur share buybacks and increased floor for the estate tax), and the folks collecting LTCG carried interest kept their bullshit tax break.

[DreamShake]

Law partners are potentially one of the few groups of rich people who don't come out on top from this tax cut- top rate going down will be more than offset for most of them by the SALT changes and big firms are excluded from the special treatment for pass-throughs. You'll be lucky if BONEUS stays even next year. Partners are going to be feeling poor compared to all their non lawyer friends who can game the system more easily.

Wouldn’t most of them not be affected by SALT limitations anyways because AMT and the Pease limitations currently limit their ability to deduct SALT (pre-Trump tax plan)? Unless I’m missing something, seems like they aren’t in any worse off position.

Yeah but the other people in their co-op are going to be pocketing more money and then getting richer is pretty much the same thing as them getting poorer.

I mean what's the point of a beachfront atrium renovation if your neighbor is just gonna get an even better beachfront atrium renovation?

That has to be pretty infuriating. Same thing for moderate-to-high income earners in liberal states. Is still don't understand why TLS isn't more upset by this.

Because complaining about not getting favorable tax treatment for your high salary kinda cuts against the whole reverse robin hood Trump narrative.

I think they're talking more about why people aren't raising more of a stink about things that make taxes worse (restricting SALT deduction to $10k) as opposed to bitching that they don't get the new "good" treatment. Not sure about TLS, but I think people in blue states have been raising plenty of stink. NY/CA are already enormous donor states, and this tax bill reinforces that inequity (which is even more ridiculous given the fact that voters in NY/CA have less of a vote than the idiots in hardcore red, net-negative states).

The "reverse robin hood" thing isn't a narrative, it's just fact that any literate person with high-school level critical thinking and math skills should understand.

[lolwat]

I think they're talking more about why people aren't raising more of a stink about things that make taxes worse (restricting SALT deduction to $10k) as opposed to bitching that they don't get the new "good" treatment. Not sure about TLS, but I think people in blue states have been raising plenty of stink. NY/CA are already enormous donor states, and this tax bill reinforces that inequity (which is even more ridiculous given the fact that voters in NY/CA have less of a vote than the idiots in hardcore red, net-negative states).

The "reverse robin hood" thing isn't a narrative, it's just fact that any literate person with high-school level critical thinking and math skills should understand.

I'm certainly not happy but what am I really going to do about it? For me, raising a stink seems to just up my frustration/anger/depression levels without any benefit. The assholes controlling this country right now--until (hopefully) elections come around--aren't going to change anything no matter how much of a stink people like me make. And there's little else I can do to practically change anything and the stuff I can do are very personal decisions like getting married for the bigger deduction/lower tax brackets lol.

[jbagelboy]

Its really only property owners on salary in NJ/NY/CA/ect. that get fucked. So associates that rent will be OK and probably see a couple thousand in tax break. Salaries aren’t going up to “compensate” associates; they would only go up if clients became immensely more profitable, deal volumes and litigation increased, and the white collar service sectors saw increased demand as a result

Its equally likely the economy will crash

[PeanutsNJam]

Its really only property owners on salary in NJ/NY/CA/ect. that get fucked. So associates that rent will be OK and probably see a couple thousand in tax break.

Why? They’re allowing 10k SALT deductions for property taxes, so wouldn’t that benefit property owners in high SALT states? How will this be a tax break for non-property owners in ny/Cali?

[tomwatts]

Well, the individual rates temporarily go down. So for the first few years, you get a small break on your tax rate while your deductions get cut. It should come out more or less as a wash. (I haven't done the exact calculation, but that's my rough estimate for a junior associate who rents in CA, and NY should be more or less similar.) Over time, it becomes a tax hike as the individual rates go back up and the deduction cut stays permanent.

It'll be interesting to see what Dems coalesce around as a fix. I'm assuming that Ds will run hard against this in 2018 and 2020, because it's pretty much a giveaway to shareholders without much else to it. (By the end of the 10-year window, most people's individual taxes go up.) But I don't know what Ds will propose to do about it.

[Graybrow]

Well, the individual rates temporarily go down. So for the first few years, you get a small break on your tax rate while your deductions get cut. It should come out more or less as a wash. (I haven't done the exact calculation, but that's my rough estimate for a junior associate who rents in CA, and NY should be more or less similar.) Over time, it becomes a tax hike as the individual rates go back up and the deduction cut stays permanent.

It'll be interesting to see what Dems coalesce around as a fix. I'm assuming that Ds will run hard against this in 2018 and 2020, because it's pretty much a giveaway to shareholders without much else to it. (By the end of the 10-year window, most people's individual taxes go up.) But I don't know what Ds will propose to do about it.

The tax cuts will get extended in 2027 just like the Bush tax cuts got extended in 2010 and 2013. The only reason they put an expiration date on them was the Byrd rule. Democrats will be nuts if they campaign on raising people's taxes. And they also know, public rhetoric aside, the U.S. needed to lower its corporate tax rate. They'll run on "corporate tax scam" rhetoric maybe but they won't do anything.

[ughbugchugplug]

Well, the individual rates temporarily go down. So for the first few years, you get a small break on your tax rate while your deductions get cut. It should come out more or less as a wash. (I haven't done the exact calculation, but that's my rough estimate for a junior associate who rents in CA, and NY should be more or less similar.) Over time, it becomes a tax hike as the individual rates go back up and the deduction cut stays permanent.

It'll be interesting to see what Dems coalesce around as a fix. I'm assuming that Ds will run hard against this in 2018 and 2020, because it's pretty much a giveaway to shareholders without much else to it. (By the end of the 10-year window, most people's individual taxes go up.) But I don't know what Ds will propose to do about it.

The tax cuts will get extended in 2027 just like the Bush tax cuts got extended in 2010 and 2013. The only reason they put an expiration date on them was the Byrd rule. Democrats will be nuts if they campaign on raising people's taxes. And they also know, public rhetoric aside, the U.S. needed to lower its corporate tax rate. They'll run on "corporate tax scam" rhetoric maybe but they won't do anything.

This kind of prognosticating seems incredibly overconfident. You’re predicting the political realities of the country 10 years from now, after living through 2007 to 2017 and seeing our first black and orange presidents?

Also I agree that if you think tax rates correlate strongly with economic output then everyone knows the corporate tax rate needed to be lower. The problem is that many economists don’t think that. And even if they did believe it, you have to assume they’ll be in charge of economic policy in 2027.

[BernieTrump]

Lots of misinformation in this.

Law firms are pass through. There won't be more $$ at corporate level to give away. Associate raises will come out of partners' draws, which won't change based on tax reform. The corporate tax rate discussed above doesn't apply.^

There is a cut for entities that are pass through for tax purposes. It phases out completely after 415K for married couples, to the extent the income relates to a service like practicing law. This effectively puts the top rate on such pass through income in the mid high 20s% area. This actually works as a 20% deduction off the top line, but the effect is a much lower rate.

Associates who don't own property/have mortgage will come out ahead, even in high tax states like NY and CA. 1-10K. Not a ton better.

Associates who own property will do about the same, maybe a little worse.

Partners will do better. As has been mentioned the AMT kills partners in the 500-1000K range. Those guys aren't deducting SALT anyway. Neither are senior associates, for that matter (especially in two BIGLAW couples). Pease takes a big chunk out of deductions for high earning partners 2,000-3,000K+. Rates go way down across the board for them. Pease goes away (if they're doing things like making donations). How much better depends a lot on state we're talking about. Some small number might do worse, and as was correctly pointed out, law partners will do worse than high-earning non-service business owners.

The most interesting thing will be how associates get treated to try to get them K-1 income (and, accordingly, the approximately 20-30% top marginal federal rate). Most will be under 315K, so they'd get full use of that new tax cut, even for service industry pass through income. Firms could just admit them to partnership, but that comes with a set of issues. If you make them low value, no-vote equity partners, you still might really under or overpay any given year. IF you make them "salary partners", I suspect there will be audit risk, as income only partners with guaranteed salary and no share of P&L should really be classified as W2 employees for tax purposes. This is very clear in IRS regs. Previously, the IRS has never really cared, as long as taxes were paid (because all the relevant rates were about the same; the only difference was who paid the employer side of FICA payroll tax). I'd bet now that rates will be different, the IRS will take another look at salary "partners". In any event, I can't see firms wanting to make associates, at least those under year 5-6, "partners" in any shape or form, as it would be a risk for the firm to have know-nothing "partners" running around. Associates could form Associates of Cravath, LLP and have Cravath pay their partnership instead of the individual employees, but would cause admin bloat, and, depending on how much control the main firm kept (which would be total control, in any real world case), the IRS might view it as a sham. I suspect we'll see an IRS rule attempting to stop this. But before that happens, I bet someone tries something, as there's a huge tax savings here if people can find a structure that works, (bigger for married couples, but real savings for all associates).

The lawyers making away like bandits are the midlaw and shitlaw people with 350K or less of income, all pass through.



^This assumes nobody takes the radical reorg. and practices law from an entity taxable as a c-corp. I've seen some analysis that, if an accountant will take an aggressive read of certain expensing and depreciation, partners could come out ahead. I doubt this happens because law firms are very conservative.

[jbagelboy]

Well, the individual rates temporarily go down. So for the first few years, you get a small break on your tax rate while your deductions get cut. It should come out more or less as a wash. (I haven't done the exact calculation, but that's my rough estimate for a junior associate who rents in CA, and NY should be more or less similar.) Over time, it becomes a tax hike as the individual rates go back up and the deduction cut stays permanent.

It'll be interesting to see what Dems coalesce around as a fix. I'm assuming that Ds will run hard against this in 2018 and 2020, because it's pretty much a giveaway to shareholders without much else to it. (By the end of the 10-year window, most people's individual taxes go up.) But I don't know what Ds will propose to do about it.

The tax cuts will get extended in 2027 just like the Bush tax cuts got extended in 2010 and 2013. The only reason they put an expiration date on them was the Byrd rule. Democrats will be nuts if they campaign on raising people's taxes. And they also know, public rhetoric aside, the U.S. needed to lower its corporate tax rate. They'll run on "corporate tax scam" rhetoric maybe but they won't do anything.

Dems will leave the cuts for lower and middle class earners in place, but campaign on bringing the top rate back to 39%+ for $1mm+ earners and eliminating the pass through deduction for millionaires via phase-out provisions above certain income levels (like what exists in the GOP tax reform for service entities)

[tomwatts]

(stuff)

I thought the pass-through stuff expressly didn't apply to law firms, though?

[Mr. Blackacre]

Given the limitation on state and local tax deductions, when can we expect a bump in associate salaries to compensate those in certain major legal markets (e.g. NYC, California, Illinois, Massachusetts) for the inability to take the deduction and potentially lower take-home as a result of the tax reform? I am not in one of the aforementioned markets, but my firm typically keeps salaries consistent across its offices. I'm curious what people think will happen, especially since partners will be getting around $30k back into their pockets for the next 5 years (on the low end) given the reduction in the top tax bracket. Salary bump? Summer bonuses? Stagnation and lower take homes?

Egregious anti-DC trolling is egregious.

[grand inquisitor]

massachusetts lol

[Mr. Blackacre]

massachusetts lol

Yeah seriously cry me a bucket about your 5% tax rate.

Anyway I guess I shouldn't complain. People who are rich enough to be impacted by SALT getting slashed are people who don't deserve to be upset over how expensive taxes are.

[PeanutsNJam]

Law firms are pass through.

Yes, but the tax bill excludes "professional service industries" from the tax cut to pass-throughs, unless something has changed? Law firms seem to fit squarely into that category.