How Tax Reform May Impact the Investment Industry
The Senate recently passed its version of the GOP’s tax reform legislation.
The legislation isn’t final, however, as the House and the Senate must hammer out a final version of the bill that reconciles their differences.
Until that happens, you should be aware of the major changes proposed, and how they may impact your clients.
Exemptions and deductions
Under both proposals, personal exemptions would be eliminated. Both proposals would also eliminate the state and local income tax or sales tax deduction for individual taxpayers, though the standard deduction will nearly double.
The deduction for property taxes will now be capped at $10,000 (as there was no federal cap before).
While the impact on individuals will vary by situation, this could result in many investors having less cash flow to invest in their 401(k) plans and elsewhere.
No changes to 401(k) deferrals
One provision that was discussed early on in the process was limiting employee pre-tax contributions to 401(k) retirement plans.
This ultimately was not part of the package, and the IRS has increased 401(k) contribution limits to $18,500 (with $24,500 for those 50 and over) in 2018.
For those who lose the ability to itemize deductions via the changes in the tax bill, such as the increase in the standard deduction, the ability to make pre-tax retirement contributions becomes even more valuable.
It is important to remind your clients and prospects to max out their contributions if they aren’t already doing so, if this is an appropriate strategy for their situation.
For small business owners who were on the fence about starting a small business retirement plan, the ability to contribute to one for themselves might be an even better incentive under the new tax rules.
Impact on the markets
While trying to predict the direction of the stock market is always a fool’s errand at best, part of the premise of the plan is to lower corporate tax rates in an effort to spur growth.
This could well be a stimulus for the markets, but of course there are many factors that come into play here.
Be a resource
Even if you aren’t a tax expert, become knowledgeable about the features of these new rules that will impact your clients and prospects. Incorporate more knowledge into your advice to existing clients and your marketing to prospects.
Vestwell does not offer tax advice, please consult your tax professional, as necessary, related to any tax-related topics.