Hello everyone! I have received many questions about the new “Tax Cuts and Jobs Act of 2017”. In case you haven’t heard – this past week was a big deal in the world of taxation. Congress approved new tax laws set to take effect as of tax year 2018 (i.e:. when you file your taxes in April 2019).
While it is probably very possible to write an entire book about this including pros, cons, and everything in between; I’ve decided to share some of the parts I consider the most important and what they mean for investors and businesses.
Friendly reminder I am not a tax accountant and all the information below can be found in the official document released by congress.
Here we go …
The Corporate Tax Rate Reduced from 35% to 21% – This is HUGE!
Companies that generate millions or billions of dollars per year and have billions in the “bank” – Alphabet (NASDAQ: GOOGL), Apple (NASDAQ: AAPL), Microsoft (NYSE: MSFT) among many others – have their money stashed away overseas in a way to protect themselves from the U.S tax rate on businesses. For many years, under current tax laws, corporations had been assigned a corporate tax rate of 35% or sometimes higher depending on different factors.
The tax rate did not sit well with most corporations to the point that these companies would rather take out loans in the U.S as oppose to bringing in that money and get taxed at a massive rate.
Apple’s CEO’s Tim Cook is one executive that has been VERY vocal about this over the years. He strongly feels that paying 35%-40% taxes in profits is disadvantageous to Apple shareholders (people that own the stock) and the company as a whole.
In a 2016 press conference he stated the following:
“The money that’s in Ireland … is money that is subject to U.S. taxes. The tax law right now says we can keep that in Ireland or we can bring it back. And when we bring it back, we will pay 35 percent federal tax and then a weighted average across the states that we’re in, which is about 5 percent, so think of it as 40 percent. We’ve said at 40 percent, we’re not going to bring it back until there’s a fair rate. There’s no debate about it.”
The fact that the tax rate has been reduced by well over 10% is meant to incentivize more businesses to keep their money right here in the U.S, encourage job creation, boost domestic capital spending, and ultimately boost the economy as a whole.
These benefits should also trickle down to shareholders if the boost increases profits and allows businesses to have more cash at hand to invest in strategies that will make them even more successful over time.
Whether or not corporations will also use all the extra money to “create jobs” only time will tell. Like many, I am not totally convinced job creation will be a bonus of the corporate tax reform but we shall see what happens with that.
Capital Gains Laws To Remain Pretty Much The Same
When it comes to investing – capital gains refers to the income we make when we sell a stock for a profit and/or when we get dividends from our stock or fund investments. if you buy a stock for $50 and it goes to $150; the capital gain is $100.
With that said, to the surprise of many, capital gains taxes are not changing much.
A long-term investor is still defined as someone who owns an investment for longer than one year and thus will pay less taxes. A short-term investor is someone that owns their investments for less than a year and thus will pay more in taxes. Short term investors pay taxes equal to ordinary income – whatever their tax bracket is.
As always, capital gains taxes will boil down to what tax bracket you fall into, whether you held an investment for less or longer than a year, and how much money is made. Here is the break down of taxes for long-term investors:
FIFO Rule will not apply – Yay!!!!
This might sound a bit confusing to my beginner investors but I will explain.
Stay with me here.
Let’s say you buy stock in Company ABC in January of 2012 at $50 per share. The company did really well and by May of 2015 the stock had gone up to $150 per share. You decide to add to your position and bought more shares of the company at this higher price because you have concluded based on your research that this stock will continue to be profitable.
Now, lets say that by September of 2016 the stock is at $200 per share and you decide you want to sell some of it.
Under current tax laws, you have the option of selling the stocks you bought more recently at $150 per share as oppose to selling the ones you bought at $50 per share way back when!
Why would you care?
Well, if you sold the ones you bought for $50 your profits would be a lot more and thus, you’d pay a lot more in taxes. However, by having the option to sell the ones you bought more recently, at $150, your capital gains won’t be as much and thus, you’d pay less taxes.
In accounting terms this is referred to as FIFO (first in first out) or LIFO (last in first out).
One part of the tax laws was threatening to take away the choice to use FIFO or LIFO. So happy this didn’t happen and we still have a choice!
And this is all for the run-down on how this affects (or not) the average stock investor.
TELL ME – What are your thoughts in these new tax laws? I’d also be interested in knowing what your thoughts are when it comes to businesses paying less in taxes? Do you think this move will benefit our economy as a whole?
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Cheers to profits!
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