1/25/17

President Trump and his administration have proposed several changes to tax law, including reductions to income tax, capital gains tax (for some tax brackets), and business taxes. Amidst these impending tax law changes, it is important to adapt your investment strategy accordingly.

What changes are in store?

President Trump’s tax plan proposes the following changes:

  • A lower marginal income tax rate

  • Removal of the 3.8% investment income tax

  • Lowering the effective tax for long-term capital gains from 23.8% to 20% for taxpayers in the top tax brackets

Despite taxes lowering for most Americans, tax efficient strategies will continue to play an important role in investors’ portfolios. Historically, even over periods when tax rates were lower, tax-managed equity strategies remained an important tool in one’s investment portfolio.

Take advantage of market volatility and lower tax rates to refine your portfolio

Capitalize on market dips: Tax-managed accounts typically benefit in markets with lower returns and higher volatility. With change being a fundamental talking point in Trump’s campaign, uncertainty and market volatility may be in store. A short-lived market dip may be advantageous if a tax loss-harvesting strategy is used.

Restructure your portfolio: Also, with lower capital gains tax rates for higher tax brackets, there may be opportunities to recalibrate your portfolio in order to benefit your long-term investment strategy.  For example, investors with high concentrations of a single stock or asset class can take advantage of lower tax rates to diversify their portfolio at a lower cost. Similarly, investors holding appreciated securities that no longer support their overall plan can take advantage of the lower tax cost to transition to more appropriate investments. There are several financial calculations your financial advisor can help you with to determine the cost-benefit of such a transition.

Customize your picks: Lower tax rates on stock market gains may also provide you with the opportunity to align your portfolio with your values. The rapid advancements in Environmental, Social & Governance (ESG) investing has delivered a number of new investment vehicles for folks who are so inclined.

Impending changes in tax law and the market environment as a whole provides investors with a perfect window to reevaluate and reassess their long-term investment plan by taking advantage of short-term shifts. If you are unsure about how these new tax law and market changes will affect you, work with your financial advisor to reset your goals, recalibrate your portfolio, if needed, and align your investments to meet your values or interests.

 

The FMB Advisors Blog

The Impact of Inflation

6/21/18 When the prices of goods and services increase over time, consumers can buy fewer of them with every dollar they have saved. This erosion of the real purchasing power of wealth is called inflation. Inflation is an important element of...

It’s Time to Get Serious About Your Happiness

5/24/18 There’s a great quote by Jean-Paul Sartre: “We are our choices.” When it comes to our happiness and our overall success in life, that’s truer than you might have realized. Taking time to examine the choices you make in your life and work...

Sailing with the Tides

4/17/18 Embarking on a financial plan is like sailing around the world. The voyage won’t always go to plan, and there’ll be rough seas. But the odds of reaching your destination increase greatly if you are prepared, flexible, patient, and well-...

10 Things To Do Right Now While Markets Are (Not Really) Tanking

  4/02/18 “This is a test; this is only a test. Had this been an actual emergency …” The truth is, the markets are not tanking as we write this piece. In fact, overall market temperatures have been so mild for so long, many newer investors have...

Charitable Giving Under New Tax Laws: Understanding the Donor-Advised Fund (DAF)

2/28/18 No matter how the 2017 Tax Cuts and Jobs Act (TCJA) may alter your tax planning, we’d like to believe one thing will remain the same: With or without a tax write-off, many Americans will still want to give generously to the charities of...