Advertisement
investing

What Do Potential Tax Changes Mean for Your Investments?

To get an idea of where our tax rates could be going (and the opportunities that could be coming), compare and contrast the tax proposals floated by President Trump and the House GOP.

Whether it’s tax cuts or a fundamental rewrite of the tax code, the tax system is incredibly complex, and changes to it can dramatically impact investments. Even though President Trump and the House GOP recently announced tax proposals, investors still don’t have a clear picture of how any proposal would affect their cash flow and investment strategy — because negotiations have yet to begin.

What investors can do to prepare for tax reform is to compare the House GOP tax plan to President Trump’s plan, and look at where the plans align or diverge. While any tax proposal carries far-reaching implications, and additional intricacies beyond the headline issues, I’ve taken a look at what some elements of the plans could mean for investors. We’ve identified two specific areas of an individual’s investment future that will likely be affected by any change to the tax code.

Investing in Large-Cap Businesses

One of the bigger differences in the tax proposal out of the House is the tax rate investors would pay on capital gains and dividends. It’s lower than both the current rate, and the rate in President Trump’s proposal — both of which feature a 20% maximum capital gains and qualified dividend tax rate. In the House plan, the tax rate is equal to half the ordinary income tax rate. For the top bracket, that would be 16.5%.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

As a result, the House plan shapes up to be a stimulus-oriented tax cut that would spur more investment in stocks, bonds and other alternatives. If that comes to pass, investor appetite may shift toward assets that pay consistent dividends that have lower chances of being reduced, such as large-cap stocks. Investors may also see an additional benefit from a lower capital gains tax rate if they’ve been reluctant to sell assets at the current capital gains tax rate. Under the House proposal, the capital gains rate is much more favorable.

Investing in Your Business

Entrepreneurship has declined since the financial crisis of 2007-2008. The most recent U.S. Census data shows that new business creation has hit 40-year lows. People aren’t investing in themselves to start and run businesses. In the current environment, some large corporations are taxed at a lower rate than pass-through entities, more commonly referred to as small-business owners, but that could change.

Advertisement - Article continues below

The House plan calls for a 20% corporate tax and a top rate of 25% that would apply to pass-through entities (essentially, small businesses) such as sole proprietorships, partnerships and S corporations. The Trump tax plan calls for a reduction in corporate tax rates beyond even what the House has proposed. Regardless of business structure, each corporate entity would be taxed at 15%. That’s a major cut for C corporations — currently taxed at 35% — and pass-through entities — taxed at the owner’s individual tax rate, as high as 39.6%.

Both the plans seem to be intended to create a more pro-business, particularly pro-small business, environment. They figure to encourage more people to focus on their professional lives and start or continue to run, and invest in, their own businesses. Beyond that, they would also level the playing field between large corporations and small businesses.

Tax Changes and the Stock Market

The merits of each of these potential plans — or a combination of the two — will be heavily debated in the coming months, but chances are high that some changes are on the way. The tax plans of both the House and President Trump impact investors in different ways, and it’s important to understand those differences.

It’s also important to understand that nothing happens in a vacuum. The stock markets tend to be anticipatory and to price in any policy changes in advance of them actually happening. That throws a monkey wrench into investing for those trying to find the right opportunities today or develop a strategy for the future.

Capitalizing on areas where tax reforms may benefit investors shouldn’t be attempted without the help of a professional who understands how to navigate this landscape. So, while elected officials work to rewrite tax rules, the best thing investors can do is examine what’s currently out there, speak to their financial adviser and develop a plan of attack in the event that these changes come to fruition. That’s the path toward a pleasant investment outlook.

Advertisement

About the Author

Phil Simonides, CFP®

Senior Vice President, McAdam Financial

Phil Simonides, CFP®, is Senior Vice President at www.mcadamfa.com, where he oversees the firm's Washington, D.C. metro, Chicago, Boston and central New Jersey offices. As a member of the executive team, Simonides serves as the Chair of Advanced Planning at the firm, specializing in strategies for high net worth individuals and families, and business owners. He joined McAdam in 2011 after having spent the majority of his 29-year career at Ameriprise Financial.
Advertisement

Most Popular

How To Buy a Roth IRA When You Make Too Much To Qualify For One
Roth IRAs

How To Buy a Roth IRA When You Make Too Much To Qualify For One

With their tax-free growth and tax-free withdrawals, Roth IRAs are a great deal — if you qualify. If you don’t, well, there’s still a way to get into …
September 23, 2020
Social Security Recipients, Veterans Must Act Now to Get Extra $500 Stimulus Check
Coronavirus and Your Money

Social Security Recipients, Veterans Must Act Now to Get Extra $500 Stimulus Check

The deadline for seniors and veterans to request an additional $500 stimulus check for a dependent child is approaching fast. See how you can claim yo…
September 25, 2020
High-Tech Aids for Aging in Place
Caregiving

High-Tech Aids for Aging in Place

Apple Watch and other technology provides fast feedback, comfort for older users, and a powerful assist for caregivers.
September 23, 2020

Recommended

With Estate Taxes on Sale Now, You Snooze, You Lose!
tax planning

With Estate Taxes on Sale Now, You Snooze, You Lose!

You may want to consider gifting your home — or maybe a fractional interest in it — as well as using an irrevocable trust before it’s too late.
September 25, 2020
Check Your Financial Adviser Now (and Every Year) or Regret It Later
wealth management

Check Your Financial Adviser Now (and Every Year) or Regret It Later

Fewer than 10% of investors use such free background checks as Investor.gov, BrokerCheck or IAPD to check their financial advisers’ backgrounds. These…
September 21, 2020
The Annuity With a Tax-Planning Twist
Financial Planning

The Annuity With a Tax-Planning Twist

A qualified life annuity contract helps retirees with guaranteed payments to last their entire lives.
September 21, 2020
HSA Limits and Minimums
health savings accounts

HSA Limits and Minimums

Annually adjusted contribution limits and other requirements must be met if you're covering health care costs with a Health Savings Account.
September 21, 2020