Investing

9 Things That Savers and Investors Will Love About Tax Reform

Jon C. Ogg

Published: December 19, 2017 3:15 pm

Last Updated: January 12, 2020 5:17 am

The U.S. House of Representatives has passed the Tax Cuts and Jobs Act. Many people have doubted that the bill would come to fruition, but now it just has to get past the Senate to be signed into law by President Trump. The issues that have to be considered under tax reform are numerous. Not all the results will be positive, and not all of them will be negative. And most provisions are set to expire at the end of 2025 rather than being permanent.

It turns out that savers and investors are going to enjoy many issues under the new tax reform. Some of the changes actually may be higher taxes than in prior years or under prior administrations, but there are still some improvements as some of the “less attractive” aspects might be better than what some of the initial points were targeting.

The merged tax reform markup released late last Friday was over 1,000 pages long. Now the House has voted in favor of the bill and the Senate has to do its part. It seems possible to expect that some changes and tweaks could be made after the fact (in 2018 or beyond) 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 people will end up paying more. Here are nine issues inside the merged tax reform bills that look good for investors under tax reform.

1. Corporate taxes will drop to 21% from the current 35%, barely above the 20% corporate tax rate that was targeted. The reality is that America has had the highest corporate tax rate of the developed world. While a 21% rate is above the initial target of 20%, it is still far better for companies and makes them far more competitive with international jurisdictions. This will free 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, and many of the other tax brackets are lower as well. While adjusted gross income pertains to income, the reality is that this lower rate is still a notable 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 initial proposal of FIFO (first in, first out) sales rules to stocks and other investments no longer applies for individual investors. That rule had been proposed in a rather silly manner, but it is gone. 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 saving 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.

5. Some people do not view their home as an investment per se, but for many Americans their homes become the number one source of wealth accumulation over time. There are millions of Americans who have enjoyed 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 for the worse there.

6. The Alternative Minimum Tax (AMT) limits are being raised for individuals. The AMT will still exist, but the exemption levels will rise 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. Immediate expensing for businesses can drive up future profitability calculations. 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. That is good for investors, and it may bolster those stocks of companies that are deemed to be in the capital spending side of business. 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.

Again, there are some issues considered good and some that are considered not good under this tax reform. Investors and savers still need to plan for their future, and the Tax Cuts and Jobs Act offers some positive outcomes for investors and savers alike.