While next year’s tax season may seem far off, that doesn’t mean you should put all thought of taxes out of your head! The passing of President Trump’s Tax Cuts and Jobs Act could make some changes to your personal financial situation. Unfortunately, whenever there is a lot of media attention about a financial topic, it can be difficult to cut through the noise and figure out what exactly you need to do to prepare your finances. Here’s a rundown of the impact these changes will have on multiple areas of the economy.
How Will It Impact Your Personal Finances?
Although taxes are anything but simple, the nutshell explanation of the new tax bill is that it lowers tax rates for individuals and corporations, increases the child tax credit, doubles the standard deduction, and caps or eliminates several deductions.
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 (TPC) estimates that the average person will see a tax cut of $1,610 in 2018. (1) However, the amount will vary based on your income bracket. In general, the tax bill favors high-income earners, offering more tax breaks the more you earn, with fewer benefits to lower and middle-class Americans. The TPC estimates that 65.8% of the total federal tax benefit will go to the top 20% of earners.
In our early estimates, our average client will see a tax savings of $4,000 to $6,000 per year. Because of these savings and the potential large tax refund coming your way, we recommend that you take a look at your withholding.
For reference, here are the new income tax brackets for married couples. (2)
For reference, this is the Percentage Method table for Tax Withholding (biweekly pay pd):
The wage amount shown in the table above (Percentage Method Table for Income Tax Withholding) are net wage after the deduction for total withholding allowances. The withholding allowance amounts by payroll period have changed. For 2018, they are:
How Will It Affect Businesses?
This tax reform will make a difference to big and small businesses alike, but big businesses will significantly profit 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. (3)
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 these savings to increase wages, pay down debt, invest, or pay for capital expenditures. In fact, Apple has already pledged to bring billions of overseas dollars back to the U.S., pay taxes on it and invest it back into the economy. (4) They are planning to create 20,000 new jobs and issue stock grants of $2,500 to most of their employees, all thanks to the tax changes. (5)
How Will It Impact The Market?
The announcement of this tax bill provided a short-term boost to the economy, but the long-term market effects are yet to be seen. The Joint Committee on Taxation believes the bill will have around 0.08 percentage points added to the GDP growth rate per year, while Goldman Sachs is estimating GDP growth will increase 0.3 percentage points above their baseline over the next two years. (6)
Small and mid-cap stocks, consumer staples, telecoms, financials, and industrials pay the highest tax rate, so with the new tax cuts, values of these companies could go up in the short term.
Some economists believe that the increased after-tax income could boost consumer confidence and spending, but in reality, it may not be enough to see a true economic change.
What Does This Mean for You?
This tax bill is new, so there is still much to learn and understand before we will know 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.
At Newbridge Wealth Management, we are dedicated to helping you manage and organize your financial affairs so you can pursue your financial goals. We know how difficult it can be to find the time and energy to devote to necessary but overwhelming tasks, such as understanding tax law. If you are one of our clients, your financial plan is built with tax considerations in mind and we are continually monitoring the markets so we can make appropriate changes if needed. If you have any questions, call or email our office.
If your friends or family are concerned with so many potential swings in the markets, now is a good time for them to review their financial plan to see how their strategies may be impacted by this tax bill and whether or not it’s appropriate to make adjustments. We’re never too busy to help someone you care about, so feel free to put them in touch with our office. Book a meeting with us today by email us at firstname.lastname@example.org or calling 610.727.3960. You can also schedule a free 15-minute introductory phone call now!
Vincent R. Barbera, CFP®, MSFS is a managing partner and co-founder of Newbridge Wealth Management, a private financial counseling firm located in Berwyn, Pennsylvania. Believing in a patient, disciplined approach to investment management that delivers value and peace of mind, he utilizes a process-driven approach to financial planning that provides comfort and clarity to his client’s long-term goals. Along with a bachelor’s in psychology and business, he has a master’s in business and financial planning and Certified Financial Planner™ designation. Learn more by connecting with Vincent on LinkedIn or send him questions at email@example.com.