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How the Likely Tax Cuts Affect Your Gains and Losses

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How the Likely Tax Cuts Affect Your Gains and Losses

Written by: Ross Levin | Accredited Investors Wealth Management

What do we know will happen in 2017? Actually, very little. We know that there is going to be a new U.S. president. We know that there is a Supreme Court opening. We know that there are going to be several elections taking place in Europe.

There are many more things that we expect but don’t know. When evaluating what decisions to make, though, we are better off looking at scenarios that are more likely than not and appropriately weighing them rather than assuming changes will occur based on expectations from candidate statements.

Will there be a large infrastructure bill? There could be, but even an undivided Congress won’t easily agree what that will look like.

Repeal of the Affordable Care Act? This certainly is on the majority’s wish list, but there are far too many variables to make this more likely than not.

So let’s look at some things that are most likely to occur and decide how we can act on them.

It’s likely that corporate, individual and estate tax rates will fall. While there will be rumblings about how to make tax cuts and spending neutral, tax breaks are almost certainly happening. I would also suggest that tax cuts we receive in the near-term will more likely than not disappear again.

Here are some strategies in a falling tax environment. Roth IRAs and 401(k)s are more attractive in lower tax brackets for two reasons. One, the value of the tax deduction for regular IRAs and 401(k)s is diminished. Second, the key to a Roth being a good decision is tax rates upon withdrawal. Remember, a Roth is nondeductible going in but tax free coming out. So if tax rates are the higher when you pull your money out, you came out ahead. If they are lower, then you don’t benefit.

Also, look at your debt. The interest write-off is less useful in lower tax brackets, so this may make nondeductible debt more attractive. Those low interest loans for a car may be better than a deductible home equity loan (especially if interest rates are more likely than not rising). Although consumer debt generally is a bad thing, if you have to have it, at least make it as productive as possible.

Hold off a bit on your estate plan. While it is important to have a will in place so you can be sure that your assets pass in the manner you desire, don’t do more complex planning until we know what changes will pass. In complicated estates, you may actually be more aggressive in your transference strategies once the rules have been determined, since it is more likely than not that they won’t stay that way forever.

Housing is an area where you want to pay close attention to the more likely than not outcomes. If taxes fall and interest rates rise, this makes carrying a mortgage more expensive and the benefits of write-offs less valuable. While this would unlikely cause a housing market correction, it will make renting a more viable option and cause home price appreciation to be less robust. Inflation may cause house prices to increase, but this will not be a near-term effect.

It is more likely than not that international investments will be more attractive. I know that there is political uncertainty in many parts of the world, but there are other factors that will most likely override these concerns. As U.S. interest rates rise, the dollar tends to get stronger. A stronger dollar makes foreign goods cheaper. A strong dollar also diminishes U.S. profits overseas that get repatriated here because you get fewer dollars when you convert your euros. This bodes well for international companies, although the currency risk may also affect the value of those businesses on their relative exchanges.

It is more likely than not that international travel will become less expensive. The peso has become quite weak, so you should be prepared to pay less to lay out on the beach in Cabo than Miami. Weakness in the pound and euro makes it a 20 or 30 percent off sale compared with travel a few years ago.

It is more likely than not that you will finally begin to get rewarded for saving, rather than just investing, money. A likely increase in interest rates means that your money markets will pay more. This also means, though, that if you were looking at buying an immediate annuity (not something that I normally support), you should delay this as well. Annuity payouts are based on two things — life expectancy and interest rates. Waiting to buy may increase your payments because you will be a bit older and the insurance companies will use a higher crediting rate.

There are many things about which hazarding a guess is not very helpful. When Barack Obama was elected, many of our conservative clients wanted to be out of stocks, certain that the market would fall. With Trump’s election, our progressive clients are reacting the same way. Look for areas that are less expensive, but don’t be all in or all out. This strategy will more likely than not benefit you.

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