The new Tax Cuts and Jobs Act has finally been released. Now, we can study the details without having to speculate on what the bill might contain. There still could be some changes, as the debate process begins to turn the bill into law.
We will see several changes that will have an impact on investors. One will be a reduction of the corporate tax rate, which should encourage companies to repatriate funds that are currently held overseas.
Presently, more than $2.6 trillion is being held in foreign jurisdictions. That’s larger than the economy of California, which is the ninth largest economy in the world. The corporate tax rate will be dropped to 20 percent.
Many chief executive officers have indicated that the funds will be used for stock buybacks and dividend increases. That will be a big benefit to shareholders of those stocks and shareholders of the mutual funds that own them. Even small investors with index funds in their 401k plans will benefit.
There will not be any changes to retirement plans. There had been some speculation that retirement plan contribution limits would be lowered dramatically, but that is not going to happen. Contribution limits will be increasing by $500 next year due to a new IRS ruling, so that’s good news.
Some of the rules could affect tax free municipal bond investors. One is that the alternative minimum tax (AMT) is going to be repealed, so municipal bond investors will no longer have to be concerned about whether their bonds are subject to the AMT or not.
State and local income taxes will no longer be deductible from federal income tax, so that will affect municipal bond investors tax equivalent yield. Now may be a good time to review those tax-free bond portfolios to see how your income will be affected.
It looks like the mortgage interest deduction will be preserved for existing mortgages, but will have a limit of $500,000 for new home purchases. The estate tax exemption will increase to $10 million and will be eliminated in six years.
We won’t have any changes to the long-term capital gains rate or the qualified dividend tax rate. There will be four tax brackets: 12 percent, 25 percent, 35 percent, and 39.6 percent.
The next step is to follow the debate and see what details the final version that gets passed into law contains.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065.