It will be the biggest tax overhaul in 31 years.
Congress just passed the tax reform bill this week and is now sending it to President Trump’s desk for his signature.
The final version of the bill cuts the corporate tax rate from 35% to 21%, and one of the biggest beneficiaries of the corporate tax rate cut could be the Russell 2000 and small-cap stocks. At the moment, small cap companies pay an average tax rate of 32%, as compared to 26% for S&P 500 companies because they have less exposure to international tax havens.
Individual and families will benefit from a doubling of the standard deductions and child tax credits. Unfortunately, there is no hope of collapsing the seven current tax brackets to just three or four.
- With the current version, the bottom tax rate of 10% stays, as is. We’ll also see tax rate of 12%, 22%, 24%, 32%, 35% and 37% on income above $500,000 for individuals and $600,000 for couples. For comparison, we’ve had tax rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
- Standard deductions will rise from $6,500 to $12,000 for individuals. They’ll increase from $13,000 to $24,000 for families.
- The child care tax credit will double from $1,000 to $2,000, as well.
- As for state and local tax (SALT) deductions, taxpayers can deduct up to $10,000 in state and local property, sales, or income taxes from their federal bill.
- Interest on mortgages up to $750,000 will also be deductible, which is lower than the current cap of $1 million.
- The current bill will also keep deductions for student loan interest and medical expenses.
Even more interesting, U.S. companies that hold cash overseas are being granted a one-time repatriation tax rate of 15.5%, which is higher than the 10% initially argued for.
The hope is that this low repatriation rate will stimulate greater economic growth by encouraging businesses to invest some of the money currently being held overseas
From the way the market continues to move upward, it’s quite clear that it expects the new tax bill to spur growth in the economy and jobs.
While not every one will see a tax cut (almost 47% of Americans don’t pay federal taxes), most Americans will still benefit from an explosively thriving economy and stock market.