Let’s be honest – most people were surprised by the results of the US presidential election. Regardless of where your support lies, most polling data indicated a comfortable road to the presidency for Hillary Clinton. Obviously, that didn’t happen. Instead, Donald Trump is getting ready to move into the White House – and investors are panicking. Hours after the race was called, major financial indexes were plummeting. And although they’ve since adjusted, that dip belies a high level of anxiety in the investment community. Everyone is asking themselves – what lies ahead? While only a crystal ball could answer that question, it’s time to take a real look at the president-elect’s tax plan. Here are the main takeaways, and what they mean for you:
- Higher interest rates are a possibility
- Simplified tax brackets
- Higher standard deductions
- No estate tax
- Fewer corporate taxes
- Bigger national debt
How Interest Rates Will Change
New York-based investment manager, Arden Rodgers CFA of Arbus Capital Management looked at the yield curve to see how election results have affected current interest rates. The curve steepened, he says – meaning interest rates for US bonds are going up. Most Americans don’t keep track of these figures, but Rodgers says this trend could be a sign of what Trump’s presidency will mean for the economy. A growing yield curve could cause inflation and interest rate increases. “It can hurt people trying to get a mortgage, because mortgages are going to be more expensive today than yesterday,” says Rodgers. “That’s the worry from what his tax policies may end up being.”
More Tax Cuts
Anyone around during the second Bush administration remembers the tax cuts between 2001 and 2010. Trump also hopes to simplify the tax code to cut or reduce taxes. Currently there are seven tax brackets in the federal tax code. Trump’s campaign promises to reduce those to three brackets – 12%, 25% and 33%. Those in the 12% bracket would pay 0% in capital gains tax, with 15% and 20% rates for the other two brackets, respectively. The current tax brackets are 10%, 15%, 25%, 28%, 33% and 35%. “His proposal would cut taxes at all income levels, although the largest benefits, in dollar and percentage terms, would go to the highest-income households,” according to a report from the Tax Policy Center. Trump would increase the standard deduction from $6,300 to $15,000 for single filers, and from $12,600 for married couples filing jointly to $30,000. Carried interest rate would now be taxed at ordinary income tax rates, instead of at the capital gains rate. Trump would also eliminate the 3.8% Net Investment Income Tax that helps pay for the Affordable Care Act. This tax applies to single filers earning more than $200,000 and married couples filing jointly with earnings over $250,000. The same report from the Tax Policy Center shows that Trump’s policies will decrease tax revenue by $6.2 trillion and swell the national debt by $7 trillion over 10 years. When you cut revenue and expand spending, Rodgers said, “You’re going to run up the deficit and create inflation.”
Estate Tax Changes
One of the major Trump campaign promises was a repeal of the estate tax. Commonly called the “death tax” by conservative voters, the estate tax has long been a battle ground for politicians. Hillary Clinton’s plan included increasing the estate tax rate to boost revenue. Trump’s plan would allow wealthy parents to bequeath assets and estate to their children tax-free, says Rodgers.. This is something Americans have briefly seen before. The estate tax lapsed in 2010 because of Congress inaction, allowing Yankees owner George Steinbrenner to leave the $1.6 billion team to his children without paying any taxes. The current estate tax rate is 45% and applies to those with $5 million in assets or more. Careful estate planning can reduce this amount, but not eliminate it entirely.
What You Can Do
What does this mean for your finances? Speaking with a financial advisor or tax accountant can address your worries and give you a clearer picture of where your investments are headed. Rodgers says he was calling clients the day after the election and instructing them not to change their investment strategy. Also know that the tax code is a piece of legislation and changes must be approved by both houses of Congress.. A planner won’t be able to predict the future (which Trump policies will pass?), but they can develop a pragmatic, sensible road map to follow. By having an expert on your side, you can face the future worry-free. In the meantime, hold tight! Your assets are a long term game, and the most successful players know when to sit back and wait for things to play out, like right now. Be ready for the Trump Tax Plan. Get prepared now with a Financial Advisor from GuideVine.com and book a Concierge Appointment today!