Since President Trump’s election, the markets have climbed to record heights, partially thanks to investor enthusiasm for Trump’s policies.
One of those policies is tax reform. After months of behind-the-scenes talks between the White House and Capitol Hill, Republicans have at last released their plan to update the tax code.
Tax law is murky, and rarely much fun to read about. But because taxes have such a big impact on your finances, I think it’s important to look at the Republicans’ plan so that we can do some planning of our own.
First, a word of warning. The Republican tax plan is just that – a plan. It’s not yet a bill, and certainly not a law. The overarching goal seems to be to cut and simplify the tax code, and while that sounds great on paper, it’s proven extremely difficult to do in the past. A lot may change as Congress labors to get an actual bill onto the president’s desk.
Now, without further ado, some particulars:
The plan makes these changes for individuals1
- Currently, there are seven tax brackets. The plan changes that number to three, with rates of 12%, 25%, and 35%. (The current top rate is 39.6%, while the lowest is 10.)
- Standard deductions for individuals and families increase to $12,000 and $24,000 respectively.
- The current child tax credit of $1,000 increases as well, though no specific number has been released.
- Introduces a new $500 tax credit for non-child dependents, like an elderly parent.
- Removes the estate tax, as well as many common itemized deductions. However, the plan reserves deductions for mortgage interest, charitable giving, and retirement savings plans.
The plan makes these changes for businesses2
- The current corporate tax rate is 35%. The Republicans’ plan would lower this to 20%. Small businesses, meanwhile, would pay 25%.
- Companies can write off business investment expenses, though only for five years.
- A company’s overseas earnings will no longer be taxed, although a new foreign minimum tax would be introduced to “prevent businesses from moving abroad to avoid U.S. taxes altogether.”1
There are some clear winners from this plan. On the surface, it appears many Americans will enjoy a tax cut, and the abolition of the estate tax would be welcome news to many investors.
Corporations, meanwhile, would also pay less tax, which could have a significant effect on their bottom lines. This, in turn, may drive the markets up even higher.
But there are still many things we don’t know…and that could cause major headaches for Republicans down the road as they try to hammer out an actual bill.
What We Don’t Know
First, we don’t know how much these cuts will cost, as neither the White House nor Republican leadership have released any estimates. It’s worth noting, however, that previous studies of similar plans estimated costs stretching into the trillions. In fact, “a preliminary estimate from the nonpartisan Committee for a Responsible Federal Budget found that the policies in [the plan] would cost between $2 trillion to $2.5 trillion over a decade.”1
And that leads to the second thing we don’t know: how will all these tax cuts be paid for? As it stands, these cuts would lead to a dramatic increase in an already sky-high deficit, something neither party wants. But Republicans have not released any details about the payment question yet, though President Trump claims that economic growth stemming from lower taxes will do the job.1
For these reasons, it’s an open question how much of this plan will actually make it into the final bill (assuming there is one). However, if Congress truly can pass significant tax reform, it will be the first since 1986…and it will undoubtedly have a major effect on investors and retirees.
I don’t believe there are any actions to take right now. I just want to make sure you understand some of these potential changes. The secret to healthy finances is good planning, which is exactly what I’m here for.
In the meantime, rest assured that we’ll continue to keep an eye on Washington.
