By Scott Ford, CEO, Founder & Wealth Advisor of Cornerstone Wealth Management Group
On Wednesday, December 20, 2017, the House passed a tax bill, which will be signed into law by President Trump. Since the campaign trail, President Trump has promised tax reform and this bill entails a number of changes to the U.S. tax code that will impact both corporations and individuals. Company spending and stocks were already up on news of the bill passing.
Prominent economists and experts believe this tax bill may provide a boost to the economy, but by how much we don’t know. The Joint Committee on Taxation believes the bill will boost growth the total size of the US GDP by 0.8 percentage points over the first decade, while Goldman Sachs is estimating GDP growth will increase 0.3 percentage points above their baseline over the next two years.
No matter how much economic growth we can expect in the coming years, the big question is, what exactly does this bill mean for you? In a nutshell, it lowers tax rates for individuals and corporations, increases the child tax credit, doubles the standard deduction, and caps or eliminates several deductions. Here’s what we can expect from this bill.
What Does it Mean for Households?
One of the biggest changes is the adjustment to tax brackets, which you can see in these charts:
|Taxable Income:||Tax Rate:|
|$500,000 and up||37%|
Married, Filing Jointly
|Taxable Income:||Tax Rate:|
|$600,000 and up||37%|
Married, Filing Separately
|Taxable Income:||Tax Rate:|
|$300,000 and up||37%|
It’s estimated that around 80% of people will see a tax cut in the first year of the legislation, and the Tax Policy Center estimates that the average person will see a tax cut of $1,610 in 2018.1
However, the amount will vary based on income bracket. In general, the tax bill favors wealthier Americans, offering more tax breaks the more you earn, with fewer benefits to lower and middle class Americans. The TPC estimates that 65.8% of the total federal tax benefit will go to the top 20% of earners.
As a result of an increased after-tax income, some economists believe this may boost consumer confidence. However, the after-tax income increase may not be enough to see an economic change.
Along with a change to tax brackets, changes were made to the standard deduction and personal exemptions. Through 2025, the standard deduction has increased to $24,000 for married taxpayers filing jointly, $18,000 for heads of household, and $12,000 for all other individuals. All personal exemptions are repealed through 2025, as are the overall limitation on itemized deductions.
What About Big Businesses?
Big businesses will significantly benefit from the tax bill, namely with the federal corporate tax rate dropping from 35% to 21%. Additionally, the act repeals the corporate AMT and adjusts depreciation limits. For example, the bonus depreciation under Section 168(k) was extended and modified, now allowing businesses to deduct 100% of the cost of eligible property in the same year it’s placed in service through 2022. Additionally, taxpayers averaging annual gross receipts of $25 million or less in the three prior tax years can now use the cash method.
Companies will likely see a serious boost in their profits, with JPMorgan estimating that this bill will boost the earnings per share of S&P 500 companies by $10 per share in 2018.2 Additionally, some experts estimate that giant companies like Google will save several billion dollars in 2018 due to the new tax code.
With these tax cuts, businesses may use these savings to increase wages, pay down debt, invest, or pay for capital expenditures, which could benefit their long-term value.
Will the Market Go Up?
Large companies benefit from reduced taxes, which is pushing their values higher on Wall Street. The market was up in early trading after news of the bill. Many experts believe that gains are not already priced into the market and that it could continue to go up significantly through 2018.
Small and mid-cap stocks, consumer staples, telecoms, financials, and industrials pay the highest tax rate, so with the new tax cuts, these stand to benefit the most. Stocks are expected to rise, with the markets already seeing much activity. Experts at JPMorgan believe stocks could rise up to 5% after the bill officially passes.3
Steps to Take
We are all happy about market gains, but since this tax bill is so new, there is still much to understand about how it will impact households and businesses in the near and far future. No one is sure exactly how the economy will behave, but many experts expect a positive impact.
With so many potential changes, now is a good time to speak with your financial advisor to review your financial plan and retirement plan to see how your strategies may be impacted by this tax bill and whether or not it’s appropriate to make adjustments.
If you are already one of our clients, your portfolio has been built with tax reform in mind and we are continually monitoring the markets so we can make appropriate changes if needed. If you have any questions, call or email our office.
If your friends or family are concerned or have questions, now is a good time for them to review their financial plan to see how their strategies may be impacted by this tax bill and whether or not it’s appropriate to make adjustments. We’re never too busy to help someone you care about, so feel free to put them in touch with us by phone at (301) 739-8505 or by email at firstname.lastname@example.org.
Scott Ford is CEO, Founder and Wealth Advisor of Cornerstone Wealth Management Group, serving entrepreneurs, business owners, executives, and their families. The firm specializes in business liquidity strategies and SBA financing strategies. It is Scott’s mission to help his clients pursue financial freedom and live a balanced and fulfilled life.
Scott is a Wealth Advisor and Registered Financial Consultant (RFC). He was recognized as one of the 20 Rising Stars of Wealth Management by Private Asset Management Magazine in 2008 based upon assets managed of $1 million or more per client. Since 2005, Scott has been an active financial technical analyst.
Clients often choose to work with Scott because of his experience with the challenges business owners and executives face as well as his firm’s disciplined process. His personal and proactive approach is designed to bring clarity and simplicity to the complex issues of financial management. For over 20 years, he has been helping his clients define and pursue their own unique version of “True Wealth.”
Scott is the author of three books: Financial Jiu-Jitsu: A Fighter’s Guide to Conquering Your Finances, The Widow’s Wealth Map: Six Steps to Beginning Again, and the New York Times Bestseller, The Sustainable Edge: Fifteen Minutes a Week to a Richer Entrepreneurial Life.
He and his wife, Angie, reside in Hedgesville, WV and have two wonderful children as well as a dog and a cat. In addition to spending time with his family, Scott is a voracious reader and enjoys woodworking, Brazilian Jiu-Jitsu, golf, hunting, permaculture and beekeeping; basically anything outdoors.
The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.