“Reform” | Change

An Analysis of the U.S. Tax Bill

While many effects of the recently passed tax bill are still unknown, there are several key changes to highlight. An expansion of 529 plans, continuance of existing policy on Education Savings Accounts, reduction of multinational corporation taxes and improved tax rates for long-term capital gains, dividends and pass-through entities seem to favor shareholders through deductions and ease of access.

As noted by Investor’s Business Daily, “historically, investors take bigger risks and realize bigger gains when the penalty on investment is eased.” Improved rates for capital gains and dividends could potentially benefit investors. “Tax rules for capital gains and dividends differ depending not just on your other earnings but how long you have held an asset.” Assets held over one year qualify for long term capital gains rates. Long term capital gains are taxed at one of three potential rates—a 0%, 15% or 20% rate. Which rate applies depends on your taxable income. Certain high-income taxpayers pay an additional 3.8% net investment income tax.

Investopedia also cites tax adjustments for multinational corporations that allow “multinational stocks [to] rise in value,” meaning that “Americans who own stocks, mutual funds or exchange-traded funds in their retirement and investment accounts will also profit from these changes.”

According to U.S. News & World Report, “Certain industries will also benefit from lower tax rates, most notably retailers, financial services companies, health insurers, telecommunications providers and energy refiners.” In addition, the deduction for pass-through businesses offers incentives for real estate investors as “pass-through business owners may be able to deduct 20% of their business income, which will lower their tax liability if they are in a higher individual tax bracket.” Independent contractors and small business owners will benefit from the pass-through deduction, as will some large businesses that are structured as pass-through entities.

Finally, the tax reform brings changes to saving for education with a shift in contribution limits and qualified use. In addition to using them to fund college expenses, parents may now use $10,000 per year from 529 accounts tax free to pay for K-12 education tuition. To cover pre-college non-tuition expenses, investors may want to consider establishing an Education Savings Account in addition to the 529 plan.

To better understand how the recent tax reform may impact you, consult your tax advisor. After discussing with your tax advisor, contact Commonwealth at 888.345.1898 and to learn about investment opportunities with our various funds. View fund holdings.

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