Wall Street Shrugs Off Shutdown Threat; Markets Close Higher
Lawmakers today in Washington, DC fought to keep the government open. Unless the Senate okays the bill passed by the House to fund operations, Uncle Sam closes shop at midnight.
At market close, deliberations continued. Wall Street watched the game of chicken and just shrugged. Many government agencies would grind to a halt, but financial markets would emerge relatively unscathed. The main indices closed higher on Friday.
Investors instead focused on the positives: Synchronized global growth. Solid earnings. Financial deregulation. And above all, tax cuts. These factors make everything else seem rosier, even dysfunction on Capitol Hill.
But the $1.5 trillion tax bill is widely misunderstood. Many assertions about the bill are simply untrue. Below, I explain what you need to know about the tax code overhaul. First, let’s do the numbers.
Friday Market Wrap
- DJIA: +0.21% or +53.91 points to close at 26,071.72
- S&P 500: +0.44% or +12.28 points to close at 2,810.31
- Nasdaq: +0.54% or +39.33 points to close at 7,335.38
Friday’s Big Gainers
- Nine Energy Service (NYSE: NINE) +15.74%
Oilfield services firm’s IPO is a hit.
- Americold Realty Trust (NYSE: COLD) +11.87%
Cold storage REIT another IPO winner.
- Clear Channel Outdoor Holdings (NYSE: CCO) +6.59%
Analysts bullish on outdoor ad agency.
Friday’s Big Decliners
- Netshoes (NYSE: NETS) -11.36%
Online retailer misses on earnings.
- GNC Holdings (NYSE: GNC) -9.13%
Nutrition retailer pulls back after big run-up.
- General Electric (NYSE: GE) -3.04%
Breakup rumors swirl.
The New Tax Bill Explained
If you drive a car, I’ll tax the street,
If you try to sit, I’ll tax your seat.
If you get too cold I’ll tax the heat,
If you take a walk, I’ll tax your feet.
Those lyrics are from the 1966 Beatles song “Tax Man.” (Don’t worry. The new tax bill isn’t that bad.)
Here’s some perspective for you: The top rate for British taxpayers in the mid-1960s reached 83%. The wealthiest paid a 15% super-tax on top of that, pushing taxes as high as 98%. Hence the Beatles’ protest song.
What about the U.S. tax bill passed last month? The majority of its provisions kicked in on January 1. Many of the changes will expire after 2025. You can relax for now. The changes should have no effect on your 2017 tax return.
But there’s been a lot of disinformation about the bill. Think you’ll be able to submit your income taxes on a postcard? Think again. That’s absurd. Think most of the benefits go to the middle class? Um, no. They don’t. In fact, the upper-middle class gets soaked.
Congress last month passed the most sweeping tax overhaul in 30 years. Wall Street loves the changes. Corporations get a windfall.
But the tax bill is regressive. It’s also unfunded. The deficit will explode. Average Americans will lose deductions that they’ve taken for granted. Voters in high-tax states get punished. If you live in an expensive neighborhood, brace yourself. Your mortgage deduction will shrink. Self-employed? Most of your deductions are gone.
But you don’t have to be a billionaire to make the tax code work for you. With tax season upon us, it’s time to get familiar with the new tax provisions. The most important changes:
The corporate tax rate has been slashed.
The new tax law reduces the corporate tax rate to a flat 21% from the highest 35% rate. Lowering the corporate tax rate will enhance bottom lines, which benefits shareholders. Analysts estimate that tax savings could boost corporate earnings by 10%. That’s manna for stocks.
Tax brackets have changed.
The new law keeps seven tax brackets but changes the tax rates. The long-term capital gains tax rates remain unchanged. Short-term capital gains will be taxed at the new ordinary income tax rates.
The standard deduction has increased.
The new law nearly doubles the standard deduction, to $12,000 from $6,350 for single filers, and to $24,000 from $12,700 for married filers. About 70% of taxpayers claim the standard deduction. Most taxpayers claiming this deduction will benefit from this change.
Many itemized deductions have been reduced or eliminated.
Here come the painful parts. The new law reduces or eliminates many itemized deductions in favor of a higher standard deduction. These include:
- Limiting the deduction for state and local income taxes, property taxes, and real estate taxes to $10,000. Live in an expensive state? Your taxes will go up.
- Limiting the mortgage interest deduction to $750,000 of indebtedness. Unfortunately, in many affluent middle-class communities, home values exceed that amount.
- Eliminating all miscellaneous itemized deductions. That hurts the self-employed.
These itemized deductions stay relatively unchanged:
- Medical expenses: The new law preserves the deduction for medical expenses and temporarily reduces the limitation from 10% to 7.5% of adjusted gross income for tax years 2017 and 2018. Beginning in 2019, only medical expenses that exceed 10% of adjusted gross income are deductible.
- Charitable donations: The new law preserves all the major charitable donation deductions.
The child tax credit has increased.
The new law increased the child tax credit to $2,000 from $1,000, and the income level of households eligible for the credit. The tax credit is fully refundable up to $1,400, and begins to phase out for married/joint filers at income of $400,000 and for single filers at $200,000.
The personal exemption and dependent deduction have been eliminated.
The new law eliminates the $4,050 personal exemption and dependent deduction. Higher-income taxpayers could see an increased tax bill from this proposal if they have large families and don’t qualify for the child tax credit, because of the income phase-outs within the tax bill.
The alternative minimum tax (AMT) was changed but not eliminated.
The new law boosts both the exemption and the exemption phase-out amount for the individual AMT. Beginning in 2018 and ending in 2025, the AMT exemption amount is raised to $109,400 for married taxpayers filing a joint return and $70,300 for all other taxpayers. The phase-out thresholds are increased to $1 million for married taxpayers filing a joint return, and $500,000 for all other taxpayers.
Changes to the taxation of income from pass-through entities.
The new law includes numerous changes to the taxation of income from pass-through entities such as S corporations, limited-liability corporations and partnerships. In general, the new law allows businesses to exclude 20% of their net income from taxation, subject to certain limitations. The deduction could also be limited or disallowed for specified service trades—such as lawyers, doctors and accountants—based on an income threshold.
Overall the changes to the taxation of pass-through entities will be beneficial to many business owners, but a lot of service businesses won’t reap all the benefits of these changes.
No changes to tax-deferred retirement accounts.
Here’s some really good news: There will be no changes to the deductions taxpayers receive for contributing to tax-deferred retirement accounts, such as IRAs or 401(k) plans. During tax bill negotiations, it was rumored that retirement plans would get hit. Didn’t happen. That’s reason to rejoice.
Got questions about the tax bill? I’m here to help: email@example.com
John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.