Tax Reform and Your Investments

It may be time to rethink your investment approach in light of the Tax Cuts and Jobs Act. Here are four areas to consider.

by Teri Cettina - July 16, 2018

For many individuals and businesses, the tax reform enacted in the Tax Cuts and Jobs Act is creating significant changes—and possibly significant savings. How could these changes impact today’s investors? Here are four key considerations to keep in mind.

1. Lower taxes = prime opportunity to invest more

Many people have less money in investments and their retirement funds than they should, says Scott Wren, Senior Global Equity Strategist for the Wells Fargo Investment Institute. Wren suggests considering investing newfound tax savings.

Note that the tax law did change the rules around miscellaneous itemized deductions so that items like tax preparation expenses and investment fees and expenses no longer qualify. Your tax advisor can help you determine the impact of this change.

2. Companies that previously paid high taxes might be good investments

Businesses in some sectors—such as Industrials, Consumer Discretionary, and Financials—paid heavy corporate taxes before tax reform was enacted. Wren says that the new tax breaks may lead these companies to hire additional workers, invest in new equipment, and increase their financing business. The end result could be higher profits and more generous returns.

3. Tax-loss harvesting could still prove profitable

Tax-loss harvesting involves strategically selling taxable investments that lost money, and claiming a tax loss. This can balance out the sale of investments that increased in value, which triggers capital gains taxes.

While the Tax Cuts and Jobs Act didn’t change capital gains tax rates, it did change ordinary income tax brackets—which is why tax loss harvesting could be especially beneficial this year. “A bit of math could prove profitable here,” says Mark J. Kohler, attorney and certified public accountant with Kohler & Eyre CPAs, and author of  The Business Owner’s Guide to Financial Freedom. “Investors could see a benefit if they harvest just the right amount of losses putting them in a lower tax bracket for capital gains taxes.”

4. A federal estate tax exemption increase could affect inheritance planning

The Tax Cuts and Jobs Act temporarily (through 2025) doubles the federal exemption amount for estate, gift, and generation-skipping taxes. You could be able to shelter $11.2 million per person (or $22.4 million for a married couple) from your federal taxes.

For that reason, it may be worthwhile to revisit your estate plans this year with your tax, legal, and financial advisors to think through how you’re gifting vs. investing those assets. However, keep in mind that 14 states and the District of Columbia impose their own state estate taxes—and not all of them match the generous federal exemption. Your estate planning advisors can help you determine whether this is the case for you.

Teri Cettina is a personal finance writer based in Portland, Oregon, and a frequent contributor to Lifescapes.

Image created from iStock

Additional Resources

For more information on tax planning and tax reform, visit the Wells Fargo Advisors Tax Center.

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