Market Beat: Proposed changes in tax law
We’ll probably see some changes in tax law in the near future. Some of the details still remain to be seen, but we do have some new information on the basic proposal now.
One thing that will have an impact on Californians is the proposed elimination of federal tax deductibility of state and local taxes. That means that the amount you pay in state income tax will no longer be deductible from your federal taxes, which will have an impact on California tax-free municipal bond returns.
There will only be three income tax brackets: 12 percent, 25 percent and 35 percent. The income levels for the three proposed brackets haven’t been determined yet. The standard deduction will be raised to $12,000 for individuals and $24,000 for couples. Itemized deductions could be limited to mortgage interest and charitable contributions.
California municipal bond investors will have to wait for the details to be able to determine their taxable equivalent yield (TEY) on their bonds. Your federal bracket could be lower, but you won’t be able to deduct your state income taxes any longer.
The TEY is calculated by dividing the municipal bond’s yield by your income tax rate. For example, if you’re considering a bond that pays 4 percent and your total tax rate is 35 percent, the taxable equivalent yield would be 6.15 percent.
The corporate tax rate is supposed to be dropped to 20 percent. There may also be an additional incentive for companies to repatriate funds that are currently invested overseas. Many CEOs have indicated that if these funds are repatriated they will be used primarily for stock dividends, buybacks and merger and acquisition activities, all of which will be good for investors.
Employees who participate in their employers 401k or other retirement plan will benefit from this proposed change as it will affect most large cap multi national stocks, which make up a large part of the major indexes. Right now about $2.6 trillion dollars is held overseas.
Small business owners will see the pass through tax rate dropped to 25 percent, which will be a benefit to the self employed who use a pass through entity, like an limited liability company.
The estate tax may be eliminated entirely, so it may be necessary to review your estate plan once the new law is out.
We’ll have to wait and see what the final details are, but now might be a good time to consult with your tax advisor.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.