The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party, nor should the analysis be considered tax advice.
Congress has just passed the most sweeping tax overhaul effort in decades, and investors have many questions: How will this affect me? What should I do now?
Here are some things to consider, based on the questions I’m hearing most frequently about the changes to the tax code:
What should I do today to prepare for the new tax rules?
In general, investors should not make significant changes to their investments or financial plans right now. We believe investors should not overreact to changes in tax law or market movements, especially if they have a long-term investment strategy and financial plan.
What effect will the new tax plan have on my 2017 or future tax liability?
Most of the provisions in the plan will phase in starting in 2018, with many of the changes expiring after 2025. It’s unlikely that anything within the new tax plan will have an effect on your 2017 tax return.
The new tax code has seven brackets for individuals including 10%, 12%, 22%, 24%, 32%, 35% and 37%. The new 37% top rate would apply to taxable income in excess of $500,000 for single filers and $600,000 for joint filers.
Independent think tanks, including the Tax Foundation and the Tax Policy Center, have projected that the main provisions in the new tax plan would provide a net benefit to most taxpayers. Our conclusion is similar, but it’s important to remember that details will vary by individual, depending on each taxpayer’s situation.
Should I push medical expenses into 2017?
Medical decisions should be based on a conversation between you and your doctor. So don’t let tax issues cloud your decision-making process, especially when it comes to your health. The new tax plan continues to allow the deduction for medical expenses, and would temporarily allow taxpayers to deduct qualified medical expenses that exceed 7.5% of their adjusted gross income in 2017 and 2018, from 10% currently, after which the limit changes back to 10%.
Should I make additional charitable contributions this year, in case I’m not able to itemize my deductions next year?
If you have enough to meet your needs, giving to others is always a good thing. The new tax plan retains the deduction for charitable giving—but with the potential loss of many itemized deductions, some people may decide to use the standard deduction, instead of itemizing.
If you think you may be on the borderline between using the standard deduction or itemizing, it’s a good idea to talk to your tax advisor to see if you could benefit from some additional giving this year versus waiting until next year. Of course, getting a tax deduction is only a side benefit of charitable giving, so it’s better to base your charitable-giving decision on other factors, such as the satisfaction of helping worthy causes.
Should I wait to sell assets until 2018, when my tax rate may be lower?
Under the new tax plan, the long-term capital gains tax rates remain essentially unchanged and short-term capital gains would be taxed at the ordinary income tax rates.
It could make sense for some people to postpone selling a short-term asset until next year, when the new income tax brackets take effect. However, if you currently have plans to sell some assets before year end, market conditions or your financial needs should be the primary factors in that decision—not taxes. If you have plans to sell a significant amount of investments in the next few weeks, it may be worth meeting with a tax professional or financial advisor to determine the best course of action for your particular situation.
Should I meet with my tax professional before year end to prepare for these changes?
It’s always a good idea to meet with your tax and financial advisor—not just to talk about the potential impact of the new tax plan, but (more importantly) to review any changes in your current financial situation and to discuss your plans for the coming year.
I itemize my deductions every year and live in a state with high taxes. How will the tax changes affect me? Should I do anything in 2017 to keep from paying more taxes next year?
Although the new tax plan appears to benefit most taxpayers, most does not mean all. Some taxpayers who itemize their deductions could be negatively affected, including those who pay a significant amount in state or local taxes, have large mortgage interest deductions, or have high real estate taxes.
The taxpayers who tend to take itemized deductions generally have annual incomes of $100,000 or more. Even assuming the loss of some itemized deductions, many taxpayers in this group may still see a reduction in their taxes, due to the changes in the tax brackets, which overall would shift income to lower tax rates.
Most people will not be able to make significant changes in 2017 to mitigate the effect of these new rules. In fact, the tax plan includes a provision that prevents people from deducting pre-paid 2018 state and local income taxes on their 2017 tax return.
I heard that the tax overhaul will require me to use the “first-in, first-out” (FIFO) method when I sell an investment, which could cause me to recognize a larger taxable gain. Should I sell my investments before year end to avoid this rule?
No. Although the Senate tax bill contained a provision that would have required investors to use the FIFO method to account for investment sales, the new tax plan does not include this requirement.
What you can do next
- If you’ve already created a financial plan to achieve your goals, ignore the political noise and wait until conditions are clear before considering any changes.
- But now might be a good time to check in with a financial consultant to make sure your plan is up to date. Call Schwab at 800-355-2162, visit a branch, or find a consultant.
- If you haven’t yet created a financial plan, Schwab can help. Learn more about investment advice at Schwab.