What Tax Reform Means For Your Portfolio

A few days ago, Congress passed the Tax Cuts and Jobs Act which President Trump just signed before he retreats to his Mar-a-Lago estate for the holidays. I’m sure you’ve heard of this by now, this article will cover the main effects on the new tax plan on your investments (i.e. lowered corporate tax rates and tax treatment of investments).

Lower corporate taxes may improve earnings

Starting next year, corporate tax rates will be lowered from 35% to 21%. In a nut shell, a less aggressive tax man will enable large businesses especially to keep more of their earnings. Stronger earnings will act as a catalyst for even higher stock valuations and corporate dividend payouts. This tax move really good for tech, which has already shown very strong earnings this year. Additionally, companies that derive a majority of their revenue domestically from the US will benefit as they usually have had to pay more in taxes than companies with high concentrations of international sales, so expect to see banks outperform next year as well. I expect the party of rising stock prices to continue throughout the rest of next year due to the new tax reform.

Tax treat of investments remains favorable

Not much has changed here which may be a good thing. There were no changes to the treatment of capital gains and dividends for individual investors. So there’s no need to watch your holding period tax lots any differently than before, however, keep in mind that there have been changes in tax structures for individual wages such as new tax rates and deduction changes. Overall, I think it’s worthwhile to maintain aggressive exposure to US equities throughout 2018 and beyond while ramping up your cash allocation for the eventual downturn in public equities. When a downturn eventually comes and there’s good deals floating around, nobody has cash. Don’t be that guy.