Much has transpired over the past week in regards to tax reform. With the Alabama Senatorial special election now being too close to call, Congress is kicking into high gear to try to get it passed while the Republicans hold a slim majority in the Senate. This past week saw the House passing their version with no debate although appearances were that many were unaware of the full impact. Case in point is the CNBC interview with Diane Black (R-TN) where she had the wrong definition of carried interest (she thought it was applicable to car dealers not hedge funds).
If it passes the Senate in something close to its current form, the result will be a reduction in the number of people qualifying for tax deduction itemization from the current 29% to an estimated 6%. This is the “gotcha” for many filers including myself. The proposed increase in the standard deduction is large enough to wipe out itemization yet too small to prevent an overall tax increase. The only viable course of action (for me) is to front load deductions into the current tax year and hope it is not a retroactive change. I’ve eliminated one alternative from consideration (establishing a corporation) as it would only be a wash in my current bracket and would choose accelerate my 2018 income up to the 25% tax level while reducing subsequent years to fall below the 0% rate.
This plan also has some potential ‘unintended consequences’ which may impact both Trump’s agenda as well as 2018 (and beyond) investment strategies. Last week I identified home builders as a potential casualty, this week I’ll present a few more that I’m looking at .
This will impact retirees first and wage earners later. Essentially this modifies cost of living increases to a lesser increase than regular CPI. Social Security and Veterans benefits will have lower increases than before reducing disposable income. Wage earners will see tax brackets expand more slowly potentially (eventually) putting them in a higher bracket faster than the current structure. End result is (my opinion) a positive for Staples and Utilities with Discretionary taking it on the chin.
The plan would eliminate – or curtail – issuance of private activity bonds (hospitals, nonprofit colleges and universities, and airports) or Municipal Bonds for stadiums. These types of bonds are often used for rehabilitating cities – think infrastructure. If one tool is eliminated what is the chance of Trump’s Public/Private partnerships getting off the ground? I see this as a negative for some Industrials.
In the midst of GE’s dividend cut and restructuring I had to hit the pause button. Their game plan going forward is to focus on three segments; Aviation, Healthcare and Power. All fine and well – at least it’s a plan. The remaining business lines will be sold or spun off – which is why I remain interested (although prior spins haven’t been shareholder friendly). Now the tax plan injects an additional wildcard. The Power division is the most troubled. The Renewable Energy segment may be a spin candidate especially as the tax plan targets the Wind Energy production tax credit. Retroactively. Talk about throwing a monkey wrench into the thought process.
With all the unknowns, I believe my 2018 strategy will be to prioritize growth over yield. The rationale being to delay taxable events as much as possible. Next year is certainly on tap to be full of uncertainty and surprises.
Are you considering alterations to your strategy?