Tax reform - what does it mean for investors?

November 5, 2017

The White House has released a framework for tax reform, and although it is far from certain what the final product will look like, or even if any such reform will be passed, it's not too early to contemplate what this might mean for investors.

There are four primary changes to the individual code being proposed: 

• Simplify tax bracket structure by shrinking the current seven tax brackets into three (12 percent, 25 percent and 35 percent). Currently, the top bracket for those with annual incomes in excess of $418,400 (or $470,400 for a married couple) is 39.6 percent. However, the proposal does not indicate what level of incomes apply to which brackets.

• Essentially, double the standard deduction. For a married couple, the proposal calls for a standard deduction of $24,000. Effectively, this means if your taxable income is under $24,000, you would owe no federal income tax.

• Eliminate many itemized deductions, but retain some deductibility for mortgage interest and charitable contributions.

• Repeal the estate tax (aka "death tax") and eliminate the alternative minimum tax. This is a politically popular proposal, but under current tax law, it impacts only those with estates in excess of $5.49 million ($10.98 million for married couples).

The proposal also calls for tax cuts for businesses. For small business which utilize a pass-through structure, the maximum tax rate would be 25 percent, and for corporations, the top tax would be 20 percent. There are also provisions for allowing the immediate expensing of capital investments (as opposed to amortizing over many years), and a one-time incentive for corporations to bring home profits currently held overseas. The full proposal can be viewed at

Implication for investors?

Assuming that any legislation passed will look somewhat similar to the White House proposal, there are several important implications for investors.

You may want to rethink the type of income your investments produce and where investments are held (qualified vs. non-qualified account). For example, dividend income is generally taxed at a lower rate than interest income. However, depending on the final brackets created in the tax package, many retired investors may find themselves in a zero effective tax bracket.

Distribution strategies should be refined. If you are drawing income from a retirement account as well as a non-retirement account, you may want to change the allocation of income to maximize your after-tax income.

Some investors with qualified IRAs may find opportunities under the new brackets to convert a portion of their traditional IRA to a Roth IRA. Roth IRAs are not subject to the Required Minimum Distribution rules and allow for eventual tax-free distributions.

Homeowners may find, given the proposed higher standard deduction, that the interest on their home mortgage does not have any tangible tax benefits. Without the mortgage interest deductibility, some investors might decide to pay off their mortgage.

Also, there could be several interesting investing twists that derive from any tax reform. The White House proposal calls for a one-time incentive for corporations to repatriate profits that are locked up overseas. It is estimated that U.S. companies are holding over $2 trillion in profits overseas. A significant amount of this cash might be used for dividends, share repurchases and reinvestment. Investors in those companies that have the largest hoard of overseas cash would be the obvious potential beneficiaries.

If tax reform does indeed eliminate many corporate loopholes in favor of a new, lower 20 percent tax rate, there will be winners and losers. For example, companies within certain industries, such as utilities and telecommunications, have been paying less than 20 percent federal tax for some time. Any tax reform and reduction of corporate loopholes will likely mean some of these companies actually pay more taxes, which may, in turn, strain their ability to pay dividends.

You can expect intense behind-the-scenes lobbying by certain industries to retain their preferential treatment, and this is obviously a fluid policy discussion in Washington. However, it's not too soon to begin thinking about how any change in the tax code will impact your investment decisions.

Jonathan Lokken, CIMA, is managing principal of Lokken Investment Group LLC in Lewes. He has been professionally managing client investments since 1997. Visit for details or call Lokken Investment Group LLC at 302-645-6650 for more information.