I have been spending as much time as possible reading about the newly enacted tax bill, the first tax reform signed in 31 years. All sides agree that the bill lowers tax rates for corporations and individuals. After that, there is little consensus on the broad effect of tax reform, who it really helps or harms, and how long it will last. The devil is in the details. Here are a couple items of special interest to investors.
More questions than answers
The tax bill is hundreds of pages of detailed rules, rates and exceptions. In the holiday spirit, I will only talk about investment benefits, sidestepping social policy and theoreticals.
In summary, most of the incentives for saving and investing are retained. Individual tax brackets go down. At the top end 39.6% goes to 37% and at the low end 15% goes to 12%. 10% at the very bottom is unchanged. Many individuals will feel the effects right away, perhaps as early as February when new withholding rates yield higher take-home pay. We’ll just have to see if the pay bump is enough to change spending, saving or investing patterns.
529s for kindergarten
I was surprised to come upon this feature of the tax bill: 529 accounts, previously for college costs only, can now be used for K-12 expenses. Grandparents, parents, aunts and uncles can all benefit from this reform. Your tax-free 529 contributions can now be used to educate young kids before they get to college.
15% tax rate on dividends again
Up to earnings of $479k you now pay 15% on dividends, down from 20%. Almost everyone qualifies for that tax cut. Investors at all levels keep more of their investment cash flow.
We can still “anti-tax”
Tax loss harvesting — which we prefer to call anti-taxing — can boost investment returns by up to 1% per year after taxes. This practice was on the chopping block during tax bill negotiations, but it survived. Many advisors have failed to take advantage of it in the past; now they have another chance. We’ve been doing it since Osbon Capital was established in 2005. Reminder: the IRS rules on this tactic are quite specific. Be sure your advisor coordinates with your accountant to get this benefit.
Enjoy the lull
With the tax bill finally passed and holidays in full swing, market trading is thin almost everywhere. Currencies, alternatives, bonds and stocks have done their work for the year. It’s time to enjoy the market calm before the storm of tax debate resumes in the new year. Some effects of the reform will be quickly apparent. Others may be foggy until early 2019 when tax accountants start compiling returns.
Remember estimated taxes are due January 15th. I recommend having all your investment conversations before that date.
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Any IPO alerts are purely informational and should not be construed as recommendations to invest.
Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.