Implications of the First Major Tax Overhaul in 30 YearsSubmitted by Fountain Financial Associates | Financial Advisors on February 20th, 2018
Before leaving for Christmas break, President Trump officially signed the Republican tax bill into law. The last time this country reformed its tax code, Mike Tyson became the youngest Heavyweight Champion in history, the Oprah Winfrey show had just debuted on television, and the movie “Wall Street” had not yet been released. Such sweeping reform obviously included many details and covered many issues. Here is a summary to highlight changes that will be of particular interest to our clients.
Individuals may start to see the impacts to their paychecks as early as this February, but will not likely feel the full scope of its effects until filing their 2018 tax returns in 2019. There will continue to be seven tax brackets; however, the income thresholds will be higher and the graduated tax rates will be lower. The dreaded Alternative Minimum Tax (AMT) for individuals is being curtailed while the standard deduction was doubled and the amount one can deduct for mortgage interest and state taxes was reduced. The estate tax exemption and child tax credit were also doubled. The individual mandate for health care was repealed, so Americans will no longer be forced to buy health insurance or suffer a tax penalty for not having it.
For companies, the corporate tax rate is being cut from 35% to 21%, which brings the U.S. tax rate roughly in line with the rest of the world. The AMT tax for corporations was eliminated, and to incent corporations to repatriate cash, there is a one-time time break of 15.5%. Corporations can now expense 100% of the cost of eligible property through 2022 and many small business owners may now deduct 20% of their eligible pass-through income.
For investors, tax rates on dividends and capital gains, tax lot-selling rules, and rules regarding 401k plans remain unchanged. Parents and grandparents of school-age children may be happy to hear that 529 plans were expanded to include private K-12 education costs.
Looking to financial markets, likely early beneficiaries include companies doing the majority of their business in the United States as well as smaller companies, which tend to pay higher tax rates than larger corporations. Companies in sectors such as consumer staples, consumer discretionary, telecom and financials generally have higher tax rates and thus stand to benefit more than companies in technology, energy and real estate which generally have lower tax rates. Sectors that are domestically focused and consumer-driven - industries such as telecom, media and retail – may also benefit from consumers having more money to spend. New provisions for the accelerated expensing of capital expenditures should benefit manufacturing companies.
It remains to be seen how much of the expected benefit of the tax plan is already priced into the markets, and how the tax plan will ultimately impact companies differently. In the short run, the plan will likely spur economic growth as consumers have more money to spend (consumption makes up roughly 70% of GDP). Faster growth could spur inflationary pressure and interest rate increases by the Federal Reserve would likely follow. Additionally, some economists estimate that the package could add significantly to the federal deficit, depending on how much growth the package generates. These factors will affect the economy and markets over the long run.
Predicting how all this plays out is difficult and the impact on each person’s tax return could be different. We are here to support you and your tax advisor as we continue to examine the impacts of this new legislation and the opportunities it creates for our clients.