Investing

9 Things Investors and Savers Will Love About Tax Reform

Jon C. Ogg

Published: December 16, 2017 10:55 am

Last Updated: January 12, 2020 5:23 am

The passage of tax reform now appears to be almost a done deal. The formal vote still has to be taken this coming Tuesday, but the merged House and Senate plans look to have the 50 votes needed for passage ahead of the Christmas break. Numerous issues have to be considered under tax reform. Not all the results will be positive, and not all of them will be negative.

Savers and investors really will like numerous issues under tax reform. Some of the changes actually may be higher taxes than in prior years or under prior administrations. The reality is that some of the areas where the taxation toward investors are concerned might not have been jacked up higher by as much as feared. Sometimes “less attractive” is still quite attractive in the grand scheme of things.

Before we get into just how positive the investor view will be, it is important to understand that the merged tax reform markup released on Friday was over 1,000 pages long. It seems almost impossible to believe that 100% of this will go unchanged. Maybe it is changed at the last minute, but many changes and tweaks could be made after the fact if there are unintended consequences.

Again, not everyone will love all aspects of the tax reform as it stands. There are some winners, and some of us will end up paying more. And some of the verbiage is still confusing enough that we will not understand the actual ramifications until we actually see how they work.

The president is expected to sign this bill into law after the House and Senate vote next Tuesday. Here are nine things that look good for investors under the coming tax reform.

1. Corporate taxes will drop to 21% from the current 35%. America has had the highest corporate tax rate of the developed world, and while the initial target of 20% is not the rate settled on, it is still far better for companies and makes them far more competitive with international jurisdictions. This frees up more cash for dividends, stock buybacks, acquisitions and other pro-investor strategies.

2. The highest income tax bracket drops to 37% from the 39.6% rate. While that pertains to adjusted gross income rather than investments, the reality is that this lower rate is still a 2.6% drop that will be applicable for short-term (under one year) capital gains. If you like to buy major sell-offs and be opportunistic with market gyrations, your short-term gains likely will be taxed lower in 2018 than they have been in recent years.

3. The silly initial proposal of FIFO (first in, first out) sales rules to stocks and other investments seems to not apply for individual investors as had been previously proposed. This means that you won’t have to count the shares you first bought years ago in a sale if you wanted to count other share sales made more recently. This also can prevent forced long-term gains versus short-term gains and vice-versa, as well as the losses of course.

4) 529 Plans pertain to education rather than to investing, but most 529 plan funds get invested into stocks and bonds to grow tax-deferred or tax-free. Educational savings will be up to $10,000 yearly per student for educational expenses. This money is invested tax-free as long as it is used for educational purposes, but this gets expanded to cover K-12 tuition and expenses for private schools and homeschooling costs.

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5) Some people do not view their home as an investment per se, but for many Americans the number one source of wealth accumulation comes from the long-term capital gains associated with their primary residence and real estate. Initial proposals called for changes to the $250,000 (or $500,000 for married/joint filers) exemption in capital gains from the sale of your primary residence for those who have owned and lived in that home for two of the past five years. There is no change, so capital gains won’t be changing there.

6) The Alternative Minimum Tax (AMT) limits are being raised for individuals. The AMT will still exist, but the exemption levels will rise up to $70,300 for individual tax filers and to $109,400 for joint tax filers. The AMT threshold increasing affected more people over time, but this at least means fewer taxpayers who rely on municipal income and other tax-advantaged items will fall into the AMT trap.

7) Immediately being able to write off the full cost of new equipment by businesses will allow for many aspects of capital spending to be treated as line-item expensing rather than being amortized over years. This can greatly reduce a tax burden in what would have otherwise been a high-income year. And that means more income for investors ahead, or less tax burden now, that can be used for buybacks, dividends and acquisitions.

8) Retirement plan contributions will continue to be deductible and will grow without being taxed until the approved withdrawals begin. Prior discussion had indicated that 401(k) and other qualified retirement plan contributions would be limited or have different bracket limits and thresholds.

9) Billions of dollars in cash can now be repatriated from overseas. The repatriation of currently deferred foreign profits at a rate of 15.5% applies to liquid assets (cash and investments) and 8.0% for illiquid assets. This is higher than in past repatriation compromises, but it still allows for corporations to bring back the more than $1 trillion held overseas without paying an additional 35% tax. This will help fund buybacks and dividends for investors.