New Tax Law: 529s and More

John Osbon - December 27, 2017

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.

– John Osbon









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