Intellectual Capital

U.S. Tax Reform

Financial Planning Implications of the U.S. Tax Reform Measure

Judith Ward, CFP®, Senior Financial Planner
Roger Young, CFP®, Senior Financial Planner
Stuart Ritter, CFP®, CFP®, Senior Financial Planner

Executive Summary

The U.S. tax reform measure will have wide-reaching effects on investors. While the biggest changes relate to business taxation, the measure also reduces individual tax rates. Investors could take the opportunity to increase savings rates, reevaluate whether Roth or pretax savings are preferable, and rebalance portfolios.

The U.S. tax reform measure could have wide-reaching effects on financial planning decisions for millions of Americans. We believe that a strategy based on fundamental planning principles offers the best path to success for investors as they respond to these changes.

Among the biggest changes in the tax measure is a dramatic reduction in tax rates for corporations and closely held businesses. This means that business owners, including corporate shareholders, will be able to keep more of their businesses’ profits. While the effects of the new taxation structure will vary widely by sector and among companies, overall it should be positive for owners and equity holders.

The tax overhaul reduces marginal tax rates for individuals at most income levels (see Figure 1). As a result, many people can expect to see lower tax bills over the next eight years. At the same time, individual tax deductions will be impacted. Changes include elimination of the personal exemption, increases in the standard deduction, and the reduction or elimination of certain itemized deductions. Perhaps the biggest change to itemized deductions is that deductibility of state and local taxes (including property taxes) will be capped at $10,000.These changes make it more likely that many individuals will use the standard deduction instead of itemizing.

Source: U.S. tax reform measure.
Notes: Yellow lines represent the new tax bracket boundaries. For single filers, those bracket boundaries are $9,525; $38,700; $82,500; $157,500; $200,000; and $500,000. For married filing jointly, those bracket boundaries are $19,050; $77,400; $165,000; $315,000; $400,000; and $600,000.

Be Prepared for Changes

One lesson from this process is that rules can change. The 2016 election and tax reform process highlight how uncertain the political landscape can be. The long-term impact of the measure is uncertain, as many of its provisions for individuals automatically expire after 2025 and would require approval from a future Congress and president to extend them. This means lower tax rates in the near term could be followed by rate increases down the road.

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U.S. Tax Reform

Overall, the U.S. tax reform measure highlights the importance of a planning strategy that can adapt to change.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of December 2017 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance cannot guarantee future results. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc., Distributor.

T. ROWE PRICE, INVEST WITH CONFIDENCE and the Bighorn Sheep design are collectively and/or apart, trademarks of T. Rowe Price Group, Inc. © 2017 T. Rowe Price. All rights reserved.

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