After months of debating and revising, Congress closed out 2017 by passing the new Tax Cuts and Jobs Act on Wednesday, December 20, 2017, which was subsequently signed into law by President Trump. Since the campaign trail, President Trump has promised tax reform, and this bill entails a number of changes to the U.S. tax code that will impact both corporations and individuals.
Many economists and experts believe this tax bill will provide a boost to the economy and stock market, and it looks like we experienced that at the beginning of the year. The Joint Committee on Taxation believes the bill will boost growth the total size of the US GDP by 0.8 percentage points over the first decade, while Goldman Sachs is estimating GDP growth will increase 0.3 percentage points above their baseline over the next two years.
The big question is, what exactly does the tax bill mean for you and your financial plan? In a nutshell, it lowers tax rates for individuals and corporations, increases the child tax credit, doubles the standard deduction, and caps or eliminates several deductions. Here’s what we can expect from this bill.
It’s estimated that around 80% of people will see a tax cut in the first year of the legislation, and the Tax Policy Center estimates that the average person will see a tax cut of $1,610 in 2018. (1) However, the amount will vary based on income bracket. Increased after-tax income may boost consumer confidence and spending.
Big businesses will significantly benefit from the tax bill, namely with the federal corporate tax rate dropping from 35% to 21%. Companies will likely see a serious boost in their profits, with JPMorgan estimating that this bill could boost the earnings per share of S&P 500 companies by $10 per share in 2018. (2)
Additionally, some experts estimate that giant companies like Google will save several billion dollars in 2018 due to the new tax code. With these tax cuts, businesses could use savings to increase wages, pay down debt, invest, or pay for capital expenditures. Many companies have already announced plans to increase wages, bonuses, or benefits for employees, including Walmart, Boeing, Apple, Chipotle, AT&T, CVS, Home Depot, Starbucks, and many more.
Since companies stand to benefit from reduced taxes, investors have been optimistic about the bill, and share prices have been pushed higher. The market was up in anticipation of the passage of the bill and immediately following. Market volatility has returned in recent weeks. We will have to wait to find out what the longer-term impact of tax reform will be.
Where Does This Leave You?
This tax bill is brand new, so there is still much to learn and understand to see how it will impact households and businesses in the near and far future. No one is sure exactly how the economy will behave in the coming months or years, but many experts expect a positive impact.
If you have any questions, or would like a detailed report on tax changes, call or email our office.
If you are concerned so many potential swings in the markets, now is a good time to review your financial plan to see how your strategies may be impacted by this tax bill and whether or not it’s appropriate to make adjustments. Call us at (410) 863-1040 to schedule a complimentary consultation.
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Prostatis Group LLC is a registered investment adviser.
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