Recent Tax Changes: How They Impact Your Investment Taxes

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  • Generally speaking, the Tax Cuts and Jobs Act of 2017 reduced income tax rates for nearly all income brackets.
  • The act did not change capital gains tax rates.
  • Tax changes may have short-term effects, but we don’t believe they affect the stock market much over the longer term.

The contents of this webpage should not be construed as tax advice. Please contact your tax professional.

The passage of the Tax Cuts and Jobs Act (TCJA) of 2017 affects most Americans, regardless of what their taxable incomes are. Although tax jargon may be difficult to decipher, knowing some of the basic changes may help you prepare for filing your income tax returns. This article provides an overview of the important details in the new tax law.  

What You Need to Know

2018 marks the first full year these changes are in effect. As you prepare to file your income tax returns, you likely have many questions.

  • Based on my ordinary income and tax bracket, what amount of money might I have to pay Uncle Sam come tax time?
  • Does the new tax law change any tax-advantaged scenarios for the self-employed?
  • Might this have any implications on my stock portfolio?
  • Will there be any changes to how capital gains (short-term capital gains or long-term capital gains) are taxed?
  • What about taxes on investment income, such as fixed income coupon payments or dividend income from dividend-paying stocks?
  • What might this mean for my investment property?

Most companies (including corporations) and individuals are subject to income taxes. We won’t go into every detail regarding the new law; rather we will look at it from a big-picture perspective. If you want information specific to your situation, please talk with your tax advisor.

Individual Tax Changes

  • Tax rates were reduced for nearly all ordinary income brackets. However, even though the number of total tax brackets hasn’t changed, thresholds have been reduced for some higher tax brackets. (See Exhibit 1.)
  • Some itemized deductions have been limited, such as home mortgage and state and local income, sales and property taxes. Some itemized deductions such as job-related expenses, safe deposit box fees and investment management fees may no longer be available to you.[i]
  • Personal exemptions—specific amounts of income that some taxpayers could exclude from their adjusted gross income—have been eliminated.
  • Most of the individual income tax cuts start in 2018, though they are set to expire in 2025.

Exhibit 1: Individual Income Tax-Bracket Changes

Source: Internal Revenue Service, Tax Foundation, as of 01/08/2018. The Tax Foundations an independent, nonprofit organization that collects tax policy data and publishes the findings in various research studies.

Personal Income Tax Deductions. The standard deduction may reduce your income tax and could vary depending on your filing status. The standard deduction under the new law has almost doubled, to $12,000 for single filers and $24,000 for joint filers.[ii]

Estate and Gift Tax Changes. The exemption for estate tax, or tax on inherited money, has increased. The new tax rules nearly double the previous federal estate tax exclusion.[iii]

Individual Alternative Minimum Tax (AMT) Changes. The AMT is an additional tax for people with deductions that are considered preferential and it was designed for high-income taxpayers. It still exists under the new tax law but the exemption has increased.

Some things haven’t changed. For example, long-term capital gains rates weren’t touched by the TCJA, and short-term capital gains continue to be taxed at your ordinary income tax rate.

Should the Tax Changes Impact Your Investment Strategy? 

People often dislike change. Some investors may look for ways to take advantage of the new laws by moving to a new state or making some other large changes. But given that the tax changes are set to expire and Congress has the ability to enact a new tax reform, it may not make sense to make any big life changes based on the new tax law.

We don’t see the tax changes having much or any impact on long-term stock returns. Stocks move primarily on the difference between expectations and reality. Given the time it takes to roll out a new tax plan and markets price in all widely known information, you are likely better off sticking with a retirement portfolio best suited to meet your long-term financial goals.

You may be best off consulting with a tax advisor to understand how the changes may affect your specific situation. A tax advisor can help you plan and pinpoint potential ways to optimize your filing when it comes to your tax rate, capital gains tax and overall investment income taxation.

Questions to Ask Your Tax Advisor

Consulting with a tax advisor is the first step to understanding how the changes will impact you. However, it can be difficult to know the right questions to ask, here are some questions to ask:

  • How will the new tax law impact my current tax rate and how much money I have to pay? Think of any additional income you have made during the tax year. This could include investment income such as interest, dividends, and capital gains. Do you own any funds that generated any taxable income?
  • Should I take the standard deduction or itemize deductions? When filing income tax returns, taxpayers could potentially either take a standard deduction or itemize their deductions.
  • Are any of the miscellaneous itemized deductions I usually take being eliminated? These could include tax preparation fees and investment expenses.
  • How will the $10,000 state and local tax deductions cap affect me? That depends on the location of your primary residence. If your primary residence’s state has high-income tax rates it could have a negative impact.

How We Can Help

Building an optimal investment strategy is no easy task. Finding a strategy where your tax and investment goals work together is key for reaching your long-term financial goals. If you would like to learn more about how Fisher Investments can help out, call to speak with one of our qualified professionals today.

[i] Source: Internal Revenue Service (IRS), as of 03/08/2019.

[ii] Source: Internal Revenue Service (IRS), Tax Foundation, as of 01/08/2018

[iii] Source: Internal Revenue Service (IRS), as of 01/08/2018

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