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US tax reform: key points to consider

Charlie Reinhard

By Charlie Reinhard

Head - NAM Investment Strategy

December 14, 2017Posted InInvestments and Investment Strategy

1.  The most important feature is the reduction of the corporate tax rate which is likely to go into effect in 2019 (Tax Reform Enters the Final Stretch). By contrast, lower tax rates on individuals  should go into effect January 1, 2018. At a total cost near $1.5 trillion over ten years, we expect very modest direct tax cut stimulus.

2.  The second most important feature is the doubling of the standard deduction which opens up opportunities for tax planning and simplifies the process for most filers.

3.  Markets are largely discounting a completed tax bill at this time. Within the US stock market, tax reform winners have outperformed tax reform losers by more than 20% since the election. In fixed income, tax reform should improve the competitive position of many US firms, supporting corporate bond spreads. US municipals will also likely face net supply constraints, as certain types of securities lose their tax-exempt status.

4.  In the home stretch, lawmakers are trying to reduce the potential burden on high earners in high tax states resulting from the loss or reduction of key itemized deductions. There is talk of allowing filers to deduct up to $10,000 in state and local taxes versus limiting that deduction to property taxes. There is also talk of reducing the top income tax rate to 37%, establishing a 20% deduction on pass-through income and moving to a 21% corporate rate. Stay tuned!

5. In the home stretch, lawmakers are trying to reduce the potential burden on high earners in high tax states resulting from the loss or reduction of key itemized deductions. There is talk of allowing filers to deduct up to $10,000 in state and local taxes versus limiting that deduction to property taxes. There is also talk of reducing the top income tax rate to 37%, establishing a 20% deduction on pass-through income and moving to a 21% corporate rate. Stay tuned!