Tax Reform Impact – Capital Gains and Investment Income

Recently I was at Powell’s bookstore In Oregon when I came across this book which attempts to be an introduction to the complexities of taxation. I thought that this was in the spirit of what I was going to try to do as I start to review the 2017 Tax Reform act and its’ myriad impacts on the economy and individual incentives.







As an individual investor, I started with looking at capital gains and investment income. Some thoughts:


1. The same general split applies; long term gains are taxed at favorable (lower) rates, and short term gains are taxed as ordinary income. The ordinary income tax brackets are always higher than the capital gains brackets

2. The tax rates for capital gains are 0, 15% and 20%. These are the same as under the previous tax laws.
Here is a brief article from the Motley Fool

3. The rates on ordinary income have gone down a bit, so the average person would pay less on gains, all else being equal (but this gets into your state and the standard deduction, a different topic). Thus there is no significant impact on investments here, it should be slightly favorable

4. Although there was talk of changing the way stock sales are accounted for to limit “tax loss harvesting”, these changes did not occur. I believe that you can still deduct up to $3000 in losses against ordinary income, but I haven’t been able to find that yet to confirm either

5. The 3.8% surtax on gains if your income is above $250,000 remains the same; this does not seem to be impacted by the law

6. While there were changes throughout the code that impacted REITS (real estate limited trusts) and MLP’s (Master Limited Partnerships), these changes didn’t fundamentally impact their value to classes of high income investors (they still have favorable tax characteristics)

7. There was some discussion of eliminating the Federal tax free nature of municipal bonds, but that deduction remained intact

8. There also was some discussion of changing the 401(k) deductions; this too, remained intact


Thus for investors, the basics of investing for individual investors (not the super wealthy) and the impact of taxation did not see significant changes under the new tax law. The types of tactics you would use under the prior tax law mostly moved into the new environment intact.




Cross Posted at LITGM

Some Thoughts on Trump, Free Trade, and Horses

A friend sent a link to a leaked, recorded conversation between Trump and Wilbur Ross, his nominee for Commerce Secretary. There is nothing particularly troubling in the conversation. Trump is talking like Trump. He is the same person in public and in private, which is nice.

I responded:

Sounds good to me.   A tariff is a consumption tax collected at the port of entry.   The American founders expected to fund the operations of the national government with revenue from a tariff, and it worked.   He is also right that the Japanese and other countries use safety regulations as non-tariff import barriers.   There is nothing bad on here at all.  

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Trump and Conflicts of Interest.

Trump is organizing his administration but he is facing another crisis.

The Wall Street Journal is giving him painful and unwelcome but good advice.

He must liquidate the family business.

One reason 60 million voters elected Donald Trump is because he promised to change Washington’s culture of self-dealing, and if he wants to succeed he’s going to have to make a sacrifice and lead by example. Mr. Trump has so far indicated that he will keep his business empire but turn over management to his children, and therein lies political danger.

Mr. Trump has for decades run the Trump Organization and during the campaign said if he won the Presidency he’d turn over the keys to Donald Jr., Eric and Ivanka, all of whom are now serving on the Trump transition. A company spokesperson says the family business is “in the process of vetting various structures” and that the ultimate arrangement “will comply with all applicable rules and regulations.”

Some of Mr. Trump’s lawyers have called the plan a “blind trust,” which past Presidents have used to protect their assets from the appearance of conflicts-of-interest. But that set-up typically involves liquid assets like bonds and stocks, not buildings or a branding empire. Mr. Trump will know how any given decision will affect, say, the old post office property in Washington, D.C. that he’s leasing from the federal government (another conflict). By law blind trusts are overseen by an independent manager, not family members.

The Journal is correct. I don’t know how Trump is going to do this but he has to.

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Paying Higher Taxes Can be Very Profitable (rerun)

(originally published in 2010 and now an April perennial)

Chevy Chase, MD, is an affluent suburb of Washington DC. Median household income is over $200K, and a significant percentage of households have incomes that are much, much higher. Stores located in Chevy Chase include Tiffany & Co, Ralph Lauren, Christian Dior, Versace, Jimmy Choo, Nieman Marcus, Saks Fifth Avenue, and Saks-Jandel.

PowerLine  observed that during the 2008 election season, yards in Chevy Chase were thick with Obama signsand wondered (in 2009) how these people were  now  feeling about the prospect of sharp tax increases for people in their income brackets.

The PowerLine guys are very astute, but I think they missed a key point on this one. There are substantial groups of people who stand to benefit financially from the policies of the Obama and company, and these benefits can greatly  outweigh  the costs of any additional taxes that these policies require them to pay. Many of the residents of Chevy Chasea very high percentage of whom get their income directly or indirectly from government activitiesfall into this category.

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