Tax Cuts and Jobs Act (TCJA): What’s Going On?
For all of the hoopla surrounding the Tax Cuts and Jobs Act (TCJA), it is hard to determine whether the end result has been a net positive or a net negative. Take, for example, some of the related headlines critical of the TCJA in December 2017, prior to its passage:
- Wages for typical Americans will not benefit
- Least-favored tax bill in at least 36 years
- 2017 tax reform discriminates against blue state voters
- We can certainly do better for America’s workers
As the dust settles on the 2018 tax filing season, it seems that TCJA offered a somewhat mixed bag of benefits. The expectation of higher wages as a result of revenue growth based on lower taxes has not been realized. Disposable income is higher for the average American household, but that might be a result of the lower taxes, not necessarily growth in wages. While nominal revenues (including workers' wages) increased from FY2017 to FY2018, some of the increase can be attributed to inflation and economic growth. In fact, Brookings Institute notes that the actual amount of revenue collected in FY2018 was lower than the original projections before TCJA was signed into law. Much of the difference resulted from significantly lower corporate income tax revenues, which were lower by almost 41%, relative to GDP.
At the Fidelity Executive Forum that I attended in May, Gary Cohn was the keynote speaker. Cohn is the former White House chief economic advisor, who served from the beginning of the Trump administration until April 2, 2018. Despite not being a fan of the Trump administration, Cohn believes that his chief achievement in the administration was the passage of the biggest tax cut in U.S. history, which slashed corporate rates, lowered individual tax brackets and increased the standard deduction. He expects the tax cut to enhance corporate earnings for at least another three to five years.
As support for the TCJA, Cohn noted the recent H&R Block analysis of federal tax returns filed through its offices and online. According to that data, the average size of its clients’ tax refunds is up 1.4 percent, while overall tax liability is down 24.9 percent. H&R Block data also suggests that all states benefitted. “When looking at average tax liability, New Jersey had the largest drop of 29.1 percent, while Washington, D.C., saw the smallest decrease of 18 percent.” Locally, the analysis showed that the average tax decrease in Maryland was (21.1%), for Virginia (24.9%) and for the District of Columbia (18.0%). The analysis can be viewed here. According to the Tax Foundation, only 5 percent of taxpayers were estimated to have paid more in taxes in 2018 than they did in 2017.
While average tax liability declined significantly, refund levels were stagnant. Tax professionals had warned that refunds could be smaller than expected if taxpayers didn't adjust their paycheck withholding after the tax law changes. Based on the data, it appears this is what occurred.
With the first year under the TCJA over, now is the time to plan for the 2019 tax year. As always, tax planning opportunities begin with a review of your 2018 filing and with the basics: opportunities to reduce taxable income, to increase deductions and to take advantage of tax credits.
Determine effective tax rate - The effective tax rate for individuals is the average rate at which your earned and unearned income are taxed. For many clients, we have found that the effective tax rate has declined, which can impact investment selection and other portfolio decisions.
Investment selection – The income from qualified dividends, long-term capital gains and municipal bond income are taxed at lower income tax rates. Minimizing the amount you pay in taxes, as well as lowering investment expenses, is a prudent way to increase your net returns.
Charitable contributions – With the recent increase, many taxpayers who previously itemized will now take the standard deduction, which eliminates the impact of charitable contributions. This is where bunching deductions comes in to play (see our related newsletter article).
Tax-Loss Harvesting – Tax-loss harvesting is a strategy in which certain investments are sold at a loss to reduce your tax liability at the end of the year. An effective tax-loss harvesting strategy evaluates what you own, why the investment lost value, and the timing of expected future gains or income.
In addition to the ideas above, a review of your tax return may also highlight other areas of potential tax reduction, such as donating required minimum distributions to charity and investing in new tax-advantaged concepts, such as qualified opportunity zones. A review of your tax return requires time and attention to detail, but can be well worth the effort.
Referrals of family, friends and colleagues who may benefit from financial planning and investment management guidance are always welcome. Thank you for recommending our firm.
To view other articles in the August 2019 Financial Planning Focus newsletter, click here.
West Financial Services, Inc. is an SEC registered investment adviser. Registration with the SEC does not imply a certain level of skill or training.
Information contained herein was derived from third party sources including, but not limited to, Bloomberg, Standard & Poor’s, Dow Jones & Company, the Federal Reserve Bank of New York, and Morningstar, Inc. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any information presented. We have not and will not independently verify this information. Please contact us if you would like to obtain a copy of the third party sources.