What should investors do in response to the recent release of information provided by the White House outlining proposed tax reforms? Absolutely nothing. The reasons are: (1) the information released contained very little that had not been previously proposed, and (2) the process of working out the details and obtaining Congressional approval has a long and uncertain future.
In the summer of 2016 Trump released a more detailed description of his plan to reform income taxes if elected. The outline released in late April was vague and had only one large change from the previous plan: the highest proposed individual tax rate was raised from 25% to 35%. Perhaps this signals Trump’s willingness to pursue more modest reform. Who knows what details will emerge (such as the income brackets) or what will change in the months ahead. So investors should wait and see rather than make large portfolio changes.
There are a few major things that could affect taxation of investment decisions if approved:
• Margin interest may no longer be deductible.
• Lower corporate income taxes could push stock prices even higher.
• Elimination of the current deduction of state and local income taxes could harm the after-tax income of taxable bonds and enhance the relative attractiveness of municipal bonds.
In some cases individuals could experience larger tax bills if approved:
• Loss of deductions other than mortgage interest and charitable gifts,
• Possible loss of stepped up bases on appreciated investments at death, and
• Repeal of special tax breaks for high-income earners.
On the other hand many investors could face reduced taxation if these changes are approved:
• Repeal of the estate tax,
• Doubling of the standard deductions,
• Repeal of the 3.8% Obamacare tax,
• Repeal of the alternative income tax,
• Slightly reduced income tax brackets, and
• Simplification of the brackets (permitting better planning)
But all of this is speculation given that the plan is likely to be substantially modified or even rejected completely. Almost all investors should take the following view: keep an eye on the overall direction and likelihood of major tax reform, and do not do anything rash before final approval unless you are in a very unique situation such as potentially having extremely high earned income or huge realized capital gains this year.
Most of the time, we would say, “Call us to discuss how we can position your portfolio and tax situation to take advantage of the changes”. But, unfortunately we have to wait until we get better direction and details on how the tax bill will look like before we can help our clients make any educated decisions.