President-Elect Trump and Your Wallet
by Mario Yngerto on Oct 2, 2017
CORAL GABLES, FL – In January we will swear in a new president, Donald J. Trump. Many thought it could not happen, but with the reality here, that means those that care about their wallet must take heed.
In this piece we’ll briefly unpack a few of the major changes that a Trump presidency could bring and how that affects your financial planning. Here are the main highlights and what you need to know:
There have historically been seven federal marginal tax brackets, ranging from 10 % to 39.6%. Trump has proposed reducing these tax brackets to only three at 12, 25 and 33 percent. For bottom-wage earners this actually represents a slight increase from the 10 % bracket. For top wage earners in the highest bracket this will be a significant decrease. There has been some discussion about a zero percent tax bracket for low income individuals, we will see how this all plays out with Congress during his first 100 days.
For those with middle-level annual income it may represent an increase or decrease based on your final adjusted gross income.
The philosophy here is, a reduced tax bracket should allow for more income and therefore spending at the consumer level; thereby stimulating an economy that has grown at an anemic pace for the last 7-8 years.
A Reagan-era theory that says providing a tax break to those at the top (the so-called job creators) will trickle down economic benefit to lower wage earners in terms of both job creation and potentially higher wages.
President-Elect Trump’s proposal also increases to the standard deduction for individuals from $6,300 to $15,000 ($12,600 to $30,000 for married joint filers).
He has also proposed allowing tax filers with children to write-off the cost of their childcare. Previously this had only been a $600 tax credit. This plan is still a little unclear as to the specifics.
What this indicates in totality, however, is that Trump intends to reduce your tax rates, and also increase your deductions. A potential win-win!
Other Personal Tax Implications
Trump has also proposed eliminating the 3.8% surtax on net investment income for high earners, but has proposed dropping the personal exemption.
He has also indicated that he will maintain the current Capital Gains rate at 20% for top wage earners in the highest tax bracket.
For those with large inheritable wealth or high annual income, Trump’s proposals to eliminate the Estate Death Tax and Alternative Minimum Tax (or AMT) should be a welcome change.
Finally, he has proposed capping itemized deductions at $100,000 for single filers and $200,000 for married joint filers. At present there is a somewhat complicated formula to determine your maximum deduction limit, which is set at 3% of your adjusted gross income (AGI) based on your filing status and the upper-limit of your AGI.
Perhaps one of Trump’s most significant tax proposals is his reduction of corporate taxes from 35% to 15% across the board. He would also cap pass-through tax entities like LLCs and S-Corps (typically small businesses) at 15% as well.
While regulatory changes may not affect your personal wallet share, it is important to note that in a Trump Presidency, the Department of Labor’s recent “Fiduciary Rule” may come under scrutiny (and may even be repealed). This rule helped define what a fiduciary is under the law known as ERISA, and specifically defined how financial advisors can offer advice and product.
Dodd-Frank, a piece of legislation which controls certain bank operations may also see changes. We already know there will be a new head of the SEC and that certain government consumer protection boards may be altered or have their rule-making powers curbed.
In short, these are important changes to monitor in an interconnected financial system.
The Markets, International Economics & Trade Deals
It is uncertain if Trump will follow through on his campaign promises to renegotiate or remove the United States from the North American Free Trade Agreement (NAFTA) and to veto the Trans-Pacific Partnership (TPP).
If he does follow-through, the implications of doing one or both of these is unclear, as is any other protectionist legislation that may get passed in a Congress now fully controlled by Republicans. On the potential upside, it may create more American jobs and wealth. On the potential downside, it may raise prices and push America towards a trade war with countries such as China. Personally, I don’t think that will happen, all the media hype about a trade war is just that, hype! In my opinion, it’s all posturing. I don’t think any of it will materialize, in due time I think markets will reflect this.
Many of Trump’s proposals, from a financial advisors’ perspective, would seem to have a potential upside for clients. Reduction in tax rates and simplification of the tax code chief among them.
What remains to be seen is what actions Trump takes, what the Congress actually approves and what true effect this will have. Presidents, as they say, get too much of the credit and too much of the blame for the economy. While Presidents do have certain levers and controls, the economy’s trajectory is a function of a multi-variate equation involving a complex calculus of global politics and human behavior.
At Genesis Wealth we follow the impact of politics on markets and the economy closely, and welcome the opportunity to discuss the implications of the new political picture on your portfolio.