By now we should all have digested the surprising results from the most recent election on November 8th.
Some of us may be rejoicing and some of us may be despondent but whatever side of the political spectrum you’re on, it’s now time to deal with the reality of the situation: Donald Trump will be inaugurated as the 45th President on January 20th, 2017 and the Republican Party will hold majorities in both the House and the Senate for at least two years.
As we wrote in our most recent blog, the best way to deal with the results is to “control what we can control” as it relates to our financial lives. This means adding value in our careers, optimizing investment strategies & tax strategies, etc.
But now that we know the results of the election- what can we actually do in more tactical terms? How should we be thinking about 2017 and importantly- should we be doing anything before the close of 2016?
We believe the most immediately applicable policies to consider center on taxes. While there are many moving parts and multiple proposals from Trump and the Republican congress, at least we do have some hard numbers that could (we emphasize could) be implemented in 2017.
- Income Tax Rates: Rates on “ordinary income” could be flattened from seven brackets to three (12%, 25% and 33%). The 33% top rate would be lower than the current 39.6%.
- Deductions: Both Trump and Paul Ryan (Speaker of the House) have announced plans to limit deductions in size (i.e. put a cap on the total dollar amount that can be deducted) and type (i.e. eliminate what is considered deductible). This could partially offset the impact of lower rates.
- Capital Gains: Trump’s plan is to keep the current rates in place (0%, 15% and 20%) while Ryan’s plan raises them slightly.
- Alternative Minimum Tax: Both Trump and Ryan propose eliminating the dreaded AMT.
If these tax policies were to become reality, it has a few implications for near term tax planning.
First, for high earners (Married Filing Jointly, above $231,450 in taxable income) this means the value of any deductions could be higher in 2016 than it might be in 2017, all else being equal. So as you look at your tax projection before year-end, you should seriously consider “pulling forward” any itemized deductions such as charitable donations and real estate taxes as you could have lower rates in 2017.
Second self-employed individuals may want to consider deferring some income (in a legal manner) to 2017 and pulling forward (and deducting) some business expenses so as to reduce 2016 taxable income.
Aside from taxes- what else should we consider?
Trump and the Republicans firmly believe that lower tax rates do not necessarily mean lower tax revenue for the U.S. Treasury, as the lower rates applied to a faster growing economy have historically resulted in higher income for the federal government. This worked for Kennedy (a Democrat), Reagan and George W. Bush in recent decades.
A faster growing economy could also ignite inflation, which could also mean higher interest rates. In fact, the bond market seems to already be anticipating this scenario as yields on US Treasuries have ascended rapidly since the election. Unfortunately, the puts-and-takes around interest rates and investments is a whole other topic for another time.
Overall, we view the Trump/Republican agenda as generally pro-growth. But this could always be countered by some growth constraining policies from a President Trump like a potential trade war (with Trump’s much discussed tariffs) which could dampen growth. In addition, we are dealing with a truly unique President-elect (never been elected to any office) with a track record of unpredictable and sometimes outrageous behavior. So there is always the possibility of some out-of-left field action that can’t be blocked by Congress (like crazy treaty negotiations or cancellations) that could have a deleterious market reaction.
Bottom line: We view the near term political landscape with a positive bias given the pro-growth agenda, underscored by the aggressive tax reform. In this context, we should all be vigilant in our tax planning for 2016 and into 2017. Aside from this, we should maintain our focus on what we can control (factoring in the new information) while the politicians slug it out in D.C.