The White House recently outlined its tax reform plan the administration hopes to officially roll out later this year. According to the outline[i], the reform plan provides “the biggest individual and business tax cut in American history,” but what exactly does that mean for you?
In this post, we’re breaking it down and explaining how it could potentially impact your investment strategy.
Tax Reform Goals
The current administration has identified tax reform as a tactic to grow our domestic economy amidst heavy reliance on economic globalization. By simplifying the tax code, the rationale is that middle-income Americans will be able to keep more money in their pocket, thus spending more, and businesses will be enticed with lower tax rates to keep operations stateside rather than overseas.
Individual Tax Reform
Middle-income families, those with an annual household income that is two-thirds to double the national median after incomes have been adjusted for household size[ii], may benefit from tax reform more than any other group. The proposed plan seeks to get this group of Americans to increase domestic spending by reducing tax brackets from seven to only three, and doubling current standard deductions of $6,300 for individuals and $12,600 for married couples[iii]. The proposed reform also provides for additional tax relief for child care expenses, a growing expense for many families.
Additional tax simplifications listed in the outline include protecting homeownership and charitable gift tax deductions, and repealing the so-called “death tax,” which can be more of a burden than a blessing for heirs by shrinking the size of an inheritance.
Tax reform could benefit individuals in this group by providing additional finances for savings and investment accounts. As people are living longer, retirement savings are being stretched further[iv], so extra money being invested can go a long way.
Business Tax Reform
As previously stated, the aim for business tax reform is to entice companies to bring operations back to the United States and keep them stateside. The proposed outline includes lowering the corporate tax rate from 35 percent to 15 percent, and establishing a one-time tax on trillions of dollars held overseas.
The cost savings companies experience from the proposed tax breaks could benefit stockholders of public companies from the short-term savings. However, there are still many unknowns, as attempting to separate from a globalized economic system such as factories and systems that are in place overseas and moving domestically, and hiring a new workforce takes time and could be costly.
What is Next?
It is difficult to predict if the proposed tax reform will pass through Congress later this year, but it is good to be mindful of how it has potential to impact your financial savings and investing plan.
[i] “2017 Tax reform for Economic Growth and American Jobs.” White House Tax Plan Handout. 26 April 2017.
[ii] America’s Shrinking Middle Class: A Close Look at Changes within Metropolitan Areas. Pew Research Center. 11 May 2016.
[iii] “In 2016, Some Tax Benefits Increase Slightly Due to Inflation Adjustments, Others Are Unchanged.” Internal Revenue Service. 21 October 2015.
[iv] Thoele, Chuck. Bulls, Bears & Basketball. 2014.