As the new Trump administration and a new Congress take control in Washington, advisors can expect widespread easing of the regulatory reins around such areas as retirement, tax and investing policies.
Debates are in full swing regarding the fate of the Department of Labor's fiduciary rule on retirement accounts, who would become the new chair of the Securities and Exchange Commission as well as the anticipated full-frontal focus by the Trump administration and Congress on tax reform – both individual and corporate.
Even ways to reform entitlement programs like Social Security were being floated by lawmakers before year-end, with House Ways and Means Social Security Subcommittee Chairman Sam Johnson, R-Texas, introducing legislation that he argued will permanently save Social Security – by cutting benefits.
In introducing his bill in early December, Johnson said that his "common-sense plan is the start of a fact-based conversation" about how to save Social Security, and he urged other lawmakers "to also put pen to paper and offer their ideas about how they would save Social Security for generations to come."
As for tax cuts, Trump and the Republican-led Congress have vowed to pass tax reform in 2017. As Andy Friedman of The Washington Update points out, Trump's campaign materials call for a top individual tax rate of 33% on ordinary income (down from close to 40%) and a top tax rate of 20% for capital gains and dividends (down from close to 24%). Both Trump and Congress "would repeal the 3.8% surtax on investment income instituted under Obamacare," he adds.
While the effective date of tax reform is uncertain, Friedman, a former tax attorney, believes lower tax rates would apply retroactively to the beginning of 2017. "Rates early next year could reflect the full rate reduction, or a reduction to somewhere between the old and new rates," he said.
Either way, "investors would be well advised to plan for lower taxes next year," Friedman counsels, and investors should "redouble their efforts to defer income into 2017 and accelerate deductions into 2016."
For instance, he continues, "investors could defer the exercise of employee stock options until January, and prepay 2017 state taxes and charitable contributions in December."
But lower tax rates won't last forever, Friedman warns, as congressional procedural rules are likely to require that the lower rates "sunset" in 10 years. "Before then, a Democratic Congress – or any Congress concerned about outsize deficits in future years – could raise tax rates again. Thus, investors must plan for 'tax volatility' – the concept that over time tax rates ebb and flow," Friedman said.
Investors, therefore, "should maintain liquidity in both taxable and tax-deferred accounts and in taxable and tax-free investments. That way they can withdraw funds from one or the other depending on whether it makes sense to pay taxes that year (and if so whether to pay at ordinary income or capital gains rates)," Friedman adds. "Preparing for tax volatility allows an investor to take advantage of tax changes, whichever way they might go."
As for corporate tax reform: "It's coming," said Greg Valliere, chief global investment strategist for Horizon Investments. The top corporate rate will plummet from 35% to about 20%, he said in a recent commentary, "but there are lots of close calls on specific provisions. There's already fierce lobbying over issues like 'border adjustability,' which would reward U.S. exporters and punish importers."
Any business tax reform will put the U.S. tax code in sync with codes in "most of the developed world," Valliere said, as a reform bill "will adopt a 'territorial' system that would only tax the profits of U.S. firms' business in this country, a dramatic reform that should eliminate tax inversion deals that have seen U.S. companies relocate around the globe."
