The Tax Bill Has Been Signed — Now What?

We have a new tax bill; some people are thrilled, and some are outraged, but we will all be affected by it (some more than others). What about you? How will you be affected?

This is not an article providing an overview of the bill and recommendations for specific year-end steps; we published one of those last week, and there are plenty more coming from many sources. Instead, we wanted to share some thoughts with the hope of providing a little perspective. We aren’t going to address the politics of all this; we are just looking at reality as it is and thinking about what it will mean for you. That is what we do.

The central change is the reduction in the corporate tax rate, from 35% to 21%. This lower rate is more in line with tax rates abroad (although many countries have rates lower than this), and it is hoped that this will result in more business activity in the U.S., more economic growth, more jobs. The equity markets have been moving up sharply, as we know, and many observers attribute at least some of this to a positive view of the tax bill and the expectation that it would be passed. Whatever each of us believes about this bill, the reality is that it passed, and now we will simply have to wait and see.

One important point about business taxes: this tax cut does not apply to many private businesses. For example, many services businesses (in so-called “pass-through entities”) — including CPAs, lawyers, financial planners, consultants, etc. — are largely excluded from any benefit under the new tax bill. It is complicated — no point going into the detail here, but it is clear these companies were not the target of the tax reduction.

Another issue getting a lot of attention is the limit imposed on the deductibility of SALT — state and local taxes — of $10,000. High-income people in high-tax states who are not in AMT (alternative minimum tax) will lose some of their deduction for federal tax. That nets against the modest reduction in the federal personal tax rates, which now top out at 37%. Only your CPA knows for sure; it is complicated. But some high-income people in places like New York, California and Minnesota, to name three, will probably see a net increase.

Meanwhile, the average taxpayer will benefit from significant increases in the standard deduction and child tax credits and some other things. These changes, however, are not permanent — they will be coming up again in a few years. Stay tuned.

Speaking of CPAs, you have to feel for them. Here we are a few days before the New Year, and suddenly they have to scramble to address tax issues raised by this bill. For example: for some people, prepaying 2018 real estate taxes while they can still deduct them could be beneficial. But it is complicated — a lot of work to be done very quickly. Making charitable donations or prepaying some other expenses could also be beneficial, maybe. You will need to talk to your tax advisor ASAP if you think there is something for you to do before year end. Time is very short.

There are many other important changes in this bill, but we did not want to get too deeply into them here and now. Your tax advisor can tell you if there is something for you to do in the next few days; otherwise, we can all wait for the in-depth analyses that are coming soon, and for the discussions with our tax advisors about all the issues and potential strategies we should consider.

Meanwhile, we hope you enjoy your holidays, and let’s toast to what has been a very good year for global equities. Despite the political turmoil of the past year, we did not even think about translating anyone’s optimism, pessimism or outrage into a change in our disciplined approach to planning and investing. However you feel and whatever you fear, we hope you are glad that you maintained your discipline. We truly believe this is the key to success.

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OneBite Editorial Staff
OneBite Editorial Staff

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The Tax Bill Has Been Signed — Now What?

time to read: 3 min