The Two T's: Taxes and Tariffs

Based on our recent discussions with clients, tax reform and tariffs are two trends raising some questions. Either topic can sound ominous, but each can also come with opportunities.

Tax Planning Under Tax Reform

Tax reform rules impact each of us differently. In some cases, your tax advisor may already have estimated your potential 2018 tax owed under the new rules. In other cases, there will be more detail to come as the year progresses. But, beyond the basics of the new standard deduction & tax rates, there are tax planning opportunities. Last Tuesday, our team spent two educational hours with nationally-known tax educator, Bob Keebler, CPA, reviewing new and continuing strategies that may apply for our clients in various situations. We won’t go into all of the potential strategies here, but below you will find just a sampling of what we will consider on your behalf, as suitable, and, of course, with the guidance of your CPA.

  • Long-term capital gains continue to have special, lower federal tax treatment. Of special interest is the 0% federal tax rate for single folks with total income of approximately $50,000 or less and married folks with income of less than approximately $100,000.

  • A “bigger bang for the buck” in charitable giving through gifting required IRA distributions to charities and/or “bunching” charitable contributions in a single year for a bigger tax deduction. The latter is often facilitated through a donor-advised fund, essentially a charitable “holding pool” that allows you to obtain the tax deduction for charitable giving in one year, while making your gifts to your chosen charities in your preferred year.

  • Roth conversion planning to facilitate tax-free growth and avoid required distributions. Roth conversions can make sense when your tax rate is lower now than it will be in the future. Many factors may influence your current and future tax rate, but one is recent tax reform which generally decreased tax rates, but allows them to bounce up again in 2025 when this new tax law sunsets. Of course, Congress could act in 2025 to extend today’s lower rates, but, per Mr. Keebler, to accomplish that, a Republican House, Senate, and White House would likely be required. Of course, as we all know, one-party sweeps can happen, but they are fairly rare. Therefore, for certain situations, today’s lower tax rates, followed by likely higher rates, are also a consideration for Roth conversions.

Tariffs

The U.S. stock market has generally weathered the implementation of some tariffs, but international stocks have struggled modestly. For example, year-to-date as of June 30, 2018, the S&P 500 (U.S. stocks) posted a gain of 2.7%, but the MSCI EAFE (international stocks) posted -2.8%. Does this mean that investors should move their stock allocations in a U.S. direction?

At Laurel Wealth Planning, we currently recommend that investors hold, as suitable, approximately 30% to 35% of their stocks in international positions and 65% to 70% in U.S. positions. Yes, tariffs have recently impacted international stocks negatively, but, conversely, international stocks also may have more upside potential because they are selling at generally lower valuations than U.S. stocks. If good news arrives, they may have more room to “pop.” Stocks are like a spring. The U.S. stock “spring” is already pulled quite tight due to overvaluation. The international stock spring is more at a neutral point with potential room to expand. This article summarizes some current key factors for international stocks.

As always, we hope this update is helpful, and do let us know your thoughts and questions.