Market Update October 2017 – Canary in a coal mine
Canary in a Coal Mine
The White House recently released an outline to reform personal and corporate income taxes . The overarching goal of the plan is to reduce the number of tax brackets, increase the standard deduction, and mitigate the need for taxpayers to itemize deductions. Deduction for retirement account contributions, mortgage interest, and charitable would remain. Other deductions such as those for state income and property tax would be eliminated. Residents of states with no or relatively low-income tax rates such as Texas may benefit. Californians who currently itemize may see their tax bills increase as California has the highest marginal income tax rate of any state .
How may the proposed ideas impact investors? Under the proposal, capital gains and qualified dividends would be taxed at 20%1. The Alternative Minimum Tax (“AMT”), which can allow for municipal bond interest to be taxed, would be eliminated. The net investment tax of 3.8% for filers who meet certain income thresholds would likely remain. I suspect that Congress may explore additional strategies to try raising revenue from the investing community which may include increased taxation of dividends, taxing municipal bond interest, and limiting tax deductible contributions into certain types of retirement plans.
Also noted in the proposal was the elimination of the estate tax and reduced corporate tax rates . Eliminating the estate tax may create a short or long-term window for families to execute advanced wealth transfer strategies without taxation. The reduction of the corporate tax rate is more controversial, with multiple parties expressing a wide array of opinions.
The impact of a tax code rewrite may be profound. Personal income tax represents the single largest source of revenue for federal government. It is estimated that the personal income tax will provide approximately 49% of all federal revenue in 2017 . Even a temporary disruption in tax revenue generation may result in higher fiscal deficits.
The end of the year is fast approaching. If reform is passed there may be strategies to execute in order to optimize your tax plan before December31,2017. For example, it may make sense to accelerate your deductions such as property taxes into 2017. Of course, each situation is unique and you should consult with your tax advisor.
Play it smart.
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