The Cliff Notes Version of the New Proposed Tax Code
While many of us will defer holiday shopping until after Thanksgiving, it’s never too early to start making your list and checking it twice. Got your eye on a certain something? Add it to the list. Think of a great gift idea for a relative? Add it to the list. The Trump Administration has been doing the same. A couple of weeks ago, the Administration and Republican leadership jointly released their tax reform wish list, the Unified Framework for Fixing Our Broken Tax Code.
Given the complexity of the proposal and the breadth of possible impact, we believe a cliff notes version is in order.
1. Reduction in the number of tax brackets
Think of tax brackets like steps on a ladder. All income is not taxed at the same rate, rather, it gets to ride through each bracket and is taxed along the way. The amount of income that falls in each bracket depends on your filing status (i.e., single or married). The current proposal would reduce the number of tax brackets from seven (10%, 15%, 25%, 28%, 33%, 35%, 39.6%) to three (12%, 25% and 35%) and leaves the door open to a fourth top rate to ensure wealthy taxpayers don’t pay a lesser share of income tax than paid today.
2. Elimination of exemptions with increase in the standard deduction
Exemptions are like gifts from the IRS, allowing most taxpayers to avoid tax on a small amount of income each year. Deductions are essentially approved expenses that the IRS allows you to subtract from income. Taxpayers may elect to take the greater of the minimum, standard deduction or itemized deductions. In 2017, as long as you file a return, you will get an exemption for you and your dependents of up to $4,050 per person. For example, if you are married with two children, your exemption amount would be $16,200 ($4,050 x 4). The 2017 standard deduction amount is $6,350 for single filers and $12,700 for married joint filers. The current proposal would eliminate the use of personal exemptions but roughly double the standard deduction amounts to $12,000 for single filers and $24,000 for joint filers.
3. Elimination of state and local tax deduction
In 2017, taxpayers who itemize deductions may deduct state income, sales, real estate or property taxes from the amount of income subject to federal income tax. The tax proposal would disallow this deduction from income.
4. Increase in the Child Tax Credit and phase-out limits
Currently, parents can get a tax credit of up to $1,000 per child under the age of 17, provided certain qualifications are met, but the amount may be reduced or eliminated if income is above a certain threshold ($75,000 for single filers and $110,000 for joint filers). The tax plan proposes an increase to both the credit amount and the income level at which the credit starts to phase-out, meaning that higher-income families could get more benefit from the credit.
5. Repeal of the estate tax
Currently, an individual may transfer up to $5,490,000 of wealth during his or her lifetime, or at death, without incurring a transfer tax. If approved, the tax proposal would eliminate tax on transfers, regardless of the size of an individual’s estate at death.
6. Elimination of the alternative minimum tax (AMT)
Simply put, AMT is an alternative way to calculate tax liability. If this second equation results in a larger liability, then you will pay more. The proposal calls for an elimination of this second calculation.
There are also a handful of proposals directed at small business and corporate tax, including the reduction of the top corporate tax rate from 35% to 20% and the top rate on small businesses and family-owned businesses (conducted as sole proprietorships, partnerships and S corporations) to 25%. Much will be debated in the coming weeks as the proposal makes its way through Congress. The process is a bit like making sausage – how it starts and how it looks in the end may be very different. So, as with all legislative reform, we must wait and see.
Making $ense of Economics Indicators
A data point that can be used to predict the future of or the current position of the economy. Leading indicators such as stock prices and housing starts are used to predict the future direction of the economy. Lagging indicators, such as unemployment and inflation, tend to change after an event, making them useful for confirming where the economy is. For example, unemployment typically doesn’t rise until after the economy weakens so rising unemployment can confirm that the economy has, in fact, weakened.
Here’s Why Bitcoin Won’t Replace Gold So Easily
What a week it was.
First and foremost, I’d like to acknowledge the horrific mass shooting that occurred in Las Vegas, the deadliest in modern American history. On behalf of everyone at U.S. Global Investors, I extend my sincerest and most heartfelt condolences to the victims and their families.
The memory of the shooting was still fresh in people’s minds during last Tuesday’s Hollywood premiere of Blade Runner 2049, which nixed the usual red carpet and other glitz in light of the tragedy. Before the film, producers shared poignant words, saying that in times such as these, the arts are crucial now more than ever.
I had the distinct privilege to attend the premiere. My good friend Frank Giustra, whose production company Thunderbird Entertainment owns a stake in the Blade Runner franchise, was kind enough to invite me along. Despite the somber mood—a pivotal scene in the film even takes place in an irradiated Las Vegas—I thought Blade Runner 2049 was spectacular. Even if you’re not a fan of the original 1982 film, it’s still worth experiencing in theaters. Hans Zimmer and Benjamin Wallfisch’s synth-heavy score is especially haunting.
CNET recently published an interesting piece examining the accuracy of future tech as depicted in the original Blade Runner, from androids to flying cars to off-world travel read the article here.
Still in the Early Innings of Cryptocurrencies
Speaking of the future, I spoke on the topic of the blockchain last week at the Subscriber Investment Summit in Vancouver. My presentation focused on the future of mining—not just of gold and precious metals but also cryptocurrencies.
Believe it or not, there are upwards of 2,100 digital currencies being traded in the world right now, with a combined market cap of nearly $150 billion, according to Coinranking.com.
Obviously not all of these cryptos will survive. We’re still in the early innings. Last month I compared this exciting new digital world to the earliest days of the dotcom era, and just as there were winners and losers then, so too will there be winners and losers today. Although bitcoin and Ethereum appear to be the frontrunners right now, recall that only 20 years ago AOL and Yahoo! were poised to dominate the internet. How times have changed!
It will be interesting to see which coins emerge as the “Amazon” and “Google” of cryptocurrencies.
For now, Ethereum has some huge backers. The Enterprise Ethereum Alliance (EEA), according to its website, seeks to “learn from and build upon the only smart contract supporting blockchain currently running in real-world production—Ethereum.” The EEA includes several big-name financial and tech firms such as Credit Suisse, Intel, Microsoft and JPMorgan Chase, whose own CEO, Jamie Dimon, knocked cryptos a couple of weeks ago.
To learn more about the blockchain and cryptocurrencies, watch this engaging two-minute video.
Will Bitcoin Replace Gold?
Lately I’ve been seeing more and more headlines asking whether cryptos are “killing” gold. Would the gold price be higher today if massive amounts of money weren’t flowing into bitcoin? Both assets, after all, are sometimes favored as safe havens. They’re decentralized and accepted all over the world, 24 hours a day. Transactions are anonymous. Supply is limited.
But I don’t think for a second that cryptocurrencies will ever replace gold, for a number of reasons. For one, cryptos are strictly forms of currency, whereas gold has many other time-tested applications, from jewelry to dentistry to electronics.
Unlike cryptos, gold doesn’t require electricity to trade. This makes it especially useful in situations such as hurricane-ravished Puerto Rico, where 95 percent of people are reportedly still without power. Right now the island’s economy is cash-only. If you have gold jewelry or coins, they can be converted into cash—all without electricity or WiFi.
Finally, gold remains one of the most liquid assets, traded daily in well-established exchanges all around the globe. Every day, some £13.8 billion, or $18 billion, worth of physical gold are traded in London alone, according to the London Bullion Market Association (LBMA). The cryptocurrency market, although expanding rapidly, is not quite there yet.
I will admit, though, that bitcoin is energizing some investors, especially millennials, in ways that gold might have a hard time doing. The proof is all over the internet. You can find a number of TED Talks on bitcoin, cryptocurrencies and the blockchain, but to my knowledge, none is available on gold investing. YouTube is likewise bursting at the seams with videos on cryptos.
Bitcoin is up 350 percent for the year, Ethereum an unbelievable 3,600 percent. Gold, meanwhile, is up around 10 percent. Producers, as measured by the NYSE Arca Gold Miners Index, have gained 11.5 percent in 2017, 23 percent since its 52-week low in December 2016.
Look Past the Negativity to Find the Good News
The news is filled with negative headlines, and sometimes it’s challenging to stay positive. Take Friday’s jobs report. It showed that the U.S. lost 33,000 jobs in September, the first month in seven years that this happened. A weak report was expected because of Hurricane Irma, but no one could have guessed the losses would be this deep.
The jobs report wasn’t all bad news, however. For one, the decline is very likely temporary. Beyond that, a record 4.88 million Americans who were previously sitting out of the labor force found work last month. This helped the unemployment rate fall to 4.2 percent, a 16-year low.
There’s more that supports a stronger U.S. economy. As I shared with you last week, the Manufacturing ISM Purchasing Managers’ Index (PMI) rose to a 13-year high in September, indicating rapid expansion in the manufacturing industry. Factory orders were up during the month. Auto sales were up. Oil has stayed in the relatively low $50-a-barrel range, which is good for transportation and industrials, especially airlines. Small-cap stocks, as measured by the Russell 2000 Index, continue to climb above their 50-day and 200-day moving averages as excitement over tax reform intensifies.
These are among the reasons why I remain bullish.
One final note: Speaking on tax reform, Warren Buffett told CNBC last week that he’s waiting to sell assets until he knows the plan will go through. “I would feel kind of silly if I realized $1 billion worth of gains and paid $350 million in tax on it if I just waited a few months and would have paid $250 million,” he said.
It’s a fair comment, and I imagine other like-minded, forward-thinking investors, buyers and sellers will also wait to make huge transactions if they can help it. Tax reform isn’t a done deal, but I think it has a much better chance of being signed into law than a health care overhaul.
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