As our money managers and CPAs put the finishing touches on our 2017 tax returns, we are already pivoting and have the 2018 tax situation on our minds. What surprises will next year bring with the looming new Tax Cuts and Jobs Act? What will the near future spell in terms of our earnings, property ownership, and our exposure in the stock market? The Act may have been designed as an economic and job stimulus but those intended benefits may be outweighed by potential inflation.
First, let’s talk about the “middle class”, those earning $49,000 to $86,000. They will realize a tax cut of roughly $930. Those earning from $86,000 to $149,000 will see an average cut of $1,810. Additionally, the child tax credit is doubled to $2,000. A big positive to take from the changes is the simplification of tax filing since many middle class households will take advantage of the $24,000 standard deduction instead of having to itemize. But let’s keep in mind that while the tax cuts for businesses are permanent, the windfall party for individuals ends in 2025.
Now what about your job description? Will that affect your tax bill? It all comes down to the question, “are you your own boss?” Let’s take a look at an independent consultant who files as a sole proprietor, clearly her own boss. Assuming she makes $50,000 annually and has no kids, she will owe about $1,800 less under the new Act, or about $10,200. This tax savings is available through a new 20% deduction that may be applied to “pass-through” business income. It’s important to note that Congress excluded the 20% deduction to tax payers in “service fields” such as lawyers, doctors, accountants who earn more than $157,500 ($315,000 for couples).
For the decades beginning after WWII, Americans have felt confident that the government would provide incentives for home ownership, specifically the availability to deduct both mortgage interest and property taxes. While these deductions will still be available under the new Act, wealthier homeowners will be limited to a loan interest deduction of up to $750,000 (previously $1 million) and a $10,000 limit on deduction for property taxes. The $10,000 limit will certainly hurt those homeowners living in expensive communities in the Northeast and West Coast, most likely the intent of the legislation. What affect the new rules will have on the price of homes and whether or not we see more renters in the near future are something to keep an eye on.
And what about the up and down stock market? What does the new Act do for corporate America? Large corporations will be the big beneficiaries of significant tax reductions, from 35% down to 21% with further incentives to repatriate money from overseas back to the U-S. In theory, these moves should boost profits and allow corporations to hire more employees. But the stock market is a fickle institution that doesn’t like uncertainty. For example, the potential for rising interest rates as well as the President’s latest “trade war” with China have sent the markets tumbling regardless of the tax rate reductions. Just reminders to remain diversified and understand that stock market investments are long term. Just breathe and avoid a wave of panic.
Now is the time to collaborate with your money management team to come up with smart, low risk strategies to ride this wave of financial uncertainty.
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