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Tax Planning

Exploring the Early Effects of the 2017 Tax Overhaul

White House
April 20, 2018

Apr 20, 2018

1:20 PM America/Chicago

In December 2017, the White House signed into effect the most significant tax overhaul in decades. Promising major cuts and benefits for both businesses and individuals, the Tax Cuts and Jobs Act of 2017 presented a polarizing moment for the country. Some rallied behind it, some didn’t, and many others didn’t (and still don’t) know what to think about it.

Whatever your own view, it’s important to understand the bill’s impact. Now, nearly five months since its signing, it’s a good time to walk through a few of the most important first-wave changes.

New Income Tax Brackets

Updated income tax tables took effect at the start of 2018. The plan takes the same 7-bracket approach as before, but restructures the bracket ranges and reduces overall rates.

Reduced income tax rates mean many Americans started this year with a larger paycheck. Exactly how much larger depends on a range of factors, but the Department of the Treasury estimates 90 percent of US wage earners saw a change. Nonetheless, this change was the first interaction many Americans had with the tax plan, and is the most visible change the average American has seen so far.

A Familiar Retirement Landscape

In the lead-up to the new tax plan, it seemed that everyone, from Wall Street to the small business sector, was anxious about how retirement plans would be affected. Rumors surrounding limits on 401(k) contributions fueled the anxiety, and the proposed “Rothification” of retirement funds left savers unsure of how their financial futures would play out.

Three months in, however, and changes to retirement accounts have been subtle. 401(k) limits weren’t affected by the new plan, and plans for Rothification were removed from the bill in November. So, for most people saving with a retirement fund, things have continued relatively normally.

Of the subtle changes, the most relevant to the average saver has to do with the recharacterization of converted Roth IRAs into standard IRA accounts. With the previous tax plan, individuals could convert their IRAs into Roth IRAs, and then later revert them back to a standard IRA — a process called recharacterization. This technique offered some tax advantages that made it an attractive approach for financial planners.

Under the new tax bill, converted Roth IRAs will no longer be eligible for recharacterization. So, for individuals considering the conversion, choose wisely or talk to your advisor — there’s no going back once the change is made. 

Changes for retirees have also come from businesses themselves. Large companies the likes of Visa, Aflac, MetLife, and others have announced plans to increase contributions and company match for 401(k) accounts. For investors anticipating dividend hikes and more stock buybacks because of the bill, the last few months haven’t delivered as much as was hoped. Some companies, one example being Pepsi, plan to raise their dividends, and the financial media seems optimistic that dividend investors have a good year ahead of them. Corporate stock buybacks have arguably seen a more significant increase — data firm TrimTabs clocks 2018’s buyback pace as nearly double that of 2017.

Businesses Already Making Out

The bill permanently reduced taxes for corporations from 35 percent to 21 percent, the lowest they have been since 1939, repealing the Corporate Alternative Minimum Tax (AMT) at the same time. These changes have and will continue to have positive effects on business. With such significant cuts, that shouldn’t be surprising.

For the oil and gas industry, there have been a few notable positive developments. First and foremost, this bill retains the option to expense Intangible Drilling Costs, a condition lobbied intensely for by the industry and considered essential for the sector. It also introduces a provision that lets businesses expense the cost of new equipment investments for the next five years. Experts believe this could have serious positive benefits for the entire oil and gas supply chain.

Looking Forward

We are still in the early months of a financial overhaul, and the next few years promise big changes in our financial landscape. New standard deductions, which will double for both individuals and joint filers, take effect in 2019. This alone could change how everyone plans for tax season.

Keeping up with and understanding these changes can be difficult, but no one wants to be uncertain about their financial future. In times of great change like this, it helps to have a financial advisor by your side. Here at Baird Retirement Management, we know and understand taxes. Our experts have been helping members of the oil, gas, and chemical industries plan their futures for years. We’re ready to help you.

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