It’s little wonder that the markets finally had a losing week as both the House and Senate released their respective (Republican) versions of the new tax plan(s). While there are items to both loathe and like in each plan, as is normal, the devil will be in the details. I spent the better part of last week parsing through the little we know to figure out the personal impact of the proposals.
Bottom line it depends on how a few things will be applied. I am assuming a worst case scenario in that the new standard deduction will be high enough to prevent itemization in my situation (this blows away property tax, mortgage interest and sales tax). I’m also assuming foreign dividends will receive no offset. In this scenario, my tax rate would more than double from last years 9.32%. Being retired, if necessary I could probably pursue one of two paths to reduce my liability. The first is to take a one year hit on taxes by accelerating my RMD to reduce subsequent years tax rates to either 0% or 12%. The other is to create a corporation for my investments as this could (potentially) protect foreign dividends from dual taxation. One has to decide if the time, effort and cost is beneficial – and which is ultimately best.
I’m sure this thought process will be playing out in the minds of many. Probably others will be caught unaware. The unfortunate reality is the impact will be felt differently by everyone – and the rules of the game are still changing. 401Ks, state and local tax offsets and elder care benefits are among the areas at risk. I would suggest keeping one ear tuned to the debate that will be taking place in Congress. At a high level, if you’re a trickle-down theorist, you’ll be happy.
In my opinion, what worked – to a degree – in the Reagan years will not work today. There are two things allied against success – and one of them is not the Democrats. First the tax rate was significantly higher and the debt (and servicing load) much smaller. These two factors will result in this effort ending in failure but not, perhaps, before being passed into law. The Tax Policy Center has stated that Trump’s 2017 plan would reduce GDP after 2024 (thanks to debt service).
Over the years I’ve found that where turmoil and uncertainty exist, opportunity is also resident. From a business viewpoint I fail to see a benefit to home builders. I see some clouds over the nursing home industry dependent on tax breaks through their clients. If we make it through the clouds, there is also some hope – if only there is not too much damage inflicted in the meantime. Stay tuned and keep your seat belts fastened and over the next few weeks I’ll consider themes that could have some legs if the taxing scheme changes.