How Could Tax Changes Affect Your Financial Plan?
Whenever there is talk of tax reform, our first thought is usually, “How will this affect me?” Because we work so hard for our money, it’s concerning when changes outside of our control threaten our personal finances. When President Trump’s Tax Cuts and Job Acts was passed by Congress on December 20, 2017, it included a number of changes to the U.S. tax code that will impact both corporations and individuals. With tax season in full swing right now, many of us are are wondering how these changes will affect our personal finances once the bill goes into effect. Here’s what we can expect.
How Will It Impact My Personal Finances?
Although taxes are anything but simple, the nutshell explanation of the new tax bill is that it lowers tax rates for individuals and corporations, increases the child tax credit, doubles the standard deduction, and caps or eliminates several deductions.
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 high-income earners, 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.
Some economists believe that the increased after-tax income could boost consumer confidence and spending, but in reality, it may not be enough to see a true economic change.
How Will It Benefit Big Businesses?
Big businesses will significantly profit from the tax bill, namely with the federal corporate tax rate dropping from 35% to 21%. Companies will likely see a serious boost in their profits, with JPMorgan estimating that this bill could 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 could use these savings to increase wages, pay down debt, invest, or pay for capital expenditures. In fact, Apple has already pledged to bring billions of overseas dollars back to the U.S., pay taxes on it and invest it back into the economy. (3) They are planning to create 20,000 new jobs and issue stock grants of $2,500 to most of their employees, all thanks to the tax changes. (4)
How Will It Affect The Markets?
The announcement of this tax bill provided a short-term boost to the economy, but the long-term market effects are yet to be seen. 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.
Since large companies benefit from reduced taxes, their value may be pushed 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, values of these companies could go up in the short term.
Where Does This Leave You?
This tax bill is brand new, so there is still much to learn and understand before we will know how it will impact households and businesses in the near and far future. No one is sure exactly how the economy will behave in the coming months or years, but many experts expect a positive impact.
At The Rosamond Financial Group, we are dedicated to professionally supporting, educating, and providing informed direction to each and every client. One of the ways we do this is by coordinating and collaborating with the rest of your financial team, including your tax expert. If you are 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 with so many potential swings in the markets, 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 our office. Book a meeting with us today by calling us at 830-798-9400 or emailing email@example.com.
Preston Rosamond is a financial advisor and the founder of The Rosamond Financial Group with nearly two decades of industry experience. He provides comprehensive wealth management and financial services to individuals, professionals, and families who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch and a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing firstname.lastname@example.org.
All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. Therefore, no current or prospective client should assume that future performance or any specific investment, investment strategy or product will be profitable. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Summit Brokerage Inc., nor any of its representatives may give legal or tax advice.