Whether by passing new legislation or allowing old rules to expire, the first three administrations of the 20th century instituted some form of tax rate change—and the current administration is looking to be the fourth. As an investor responsible for your wealth’s future, you should always be aware of potential changes in taxation laws. As financial advisors (and I happen to also be a CPA), we always welcome client calls to discuss how tax codes may affect your financial decisions.
The new tax code is currently a proposal and nothing more. As is always the case, it is likely they will change substantially before being signed into law, if they are passed at all. Also, because the proposed capital gains threshold concerns income of more than $1 million—not net worth—the possible implications could vary greatly for individual investors. So, we want to emphasize that, at this point, it is important to understand the proposed tax changes and discuss with your financial advisor how they could potentially affect your wealth.
We will break down the proposed changes into two primary categories: ordinary rates and capital gains rates.
The current tax proposal would change ordinary income tax rates equally for all filing status types (single, head of household, married filing jointly, and married filing separate) by raising the highest rate from 37% to 39.6%. For example, if filing as “married filing jointly,” every dollar of the couple’s income from $622,001 and above would be taxed at 39.6%.
Capital Gains Rates
Capital gains rates must be separated first into two groups: short term and long term. Short-term gains (gains on assets held for less than a year) are taxed at ordinary rates, and there is no change proposed to these rules. Long-term capital gains (gains on assets held for longer than one year) are taxed at different rates depending on taxable income and each filer’s filing status. For those who file their returns as married filing jointly, those rates are currently as follows: 0% if income is $80,800 or lower; 15% if between $80,801-$501,600; and 20% if over $501,600.
In the current tax proposal, if income were to cross $1 million, there would be no difference between the capital gains tax rate and the ordinary income tax rate. So, since there is no proposal to change the 3.8% Medicare surtax on net investment income (applies to joint filers with income greater than $250,000), the highest effective long-term federal capital gains rate would be 43.4% for those with income greater than $1 million annually.
For most Americans, this change in tax code—even if it passed as written—would have little impact. According to studies by TaxFoundation.org on 2017 income tax data, the average tax rate of all income tax filers was 14.6%, and the bottom 50% of earners paid an average tax rate of only 4%. Having said that, it is important to talk with your financial advisor, discuss any potential changes to the status quo of your tax situation, and develop a solid plan. Changes like this could have a large impact, for example, on when and how you proceed with a transaction such as selling a home or investment property. We are paying close attention to the tax proposal and its implications for personal taxes, as well as any potential second-order impacts such changes might have on markets in general.
Tax Disclosure: This material is intended for educational and informational purposes only. It is not intended to provide specific advice or recommendations for any individual, nor should it be construed as tax advice. Additionally, you should consult with your Financial Advisor, Tax Advisor or Attorney on your specific situation. The views expressed in the material are that of the author and do not necessarily reflect those of any market, regulatory body, State or Federal Agency, or Association. All efforts have been made to report or share true and accurate information. However, J.L. Bainbridge & Company, Inc., is unable to verify the content, and the content is subject to change and become materially inaccurate without notice. For additional information about J.L. Bainbridge & Company, Inc., (CRD#108058) please visit the SEC Website at www.adviserinfo.sec.gov. For a copy of the firm’s ADV Part 2 Brochure and/or Form CRS, please contact us at 941-365-3435.
Disclosure: A complete list of the holdings in our equity model from the last 12 months is available upon request from J.L. Bainbridge & Co., Inc. This information is for educational and informative purposes and shall not be considered a specific recommendation. The material being provided is thought to be accurate. However, the information is compiled from multiple resources and may become outdated or otherwise rendered incorrect by new research or corrections without notice. Adjusted EPS estimates are sourced from the companies’ quarterly reports and conference calls, as well as from other sources. The holdings listed in our equity portfolio may not correspond to the holdings in your accounts. The holdings are in the equity growth model used by the firm. J.L. Bainbridge & Company seeks to manage our clients’ individual portfolios to our models; however, there are different facts and circumstances and objectives for each client; therefore, please refer to your individual statement to understand specifically how your portfolio has performed.
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