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Final Version of Tax Bill Expected Soon

Stocks rallied early in the week on continued anticipation of corporate tax cuts in the United States. They reversed course Thursday when it appeared Senator Marco Rubio might oppose the bill without an increase in the child tax credit, but hit fresh highs on Friday as lawmakers reconciled most of their differences. Somewhat lost in the noise was another 0.25% rate hike by the Federal Reserve. Most major asset categories outside of commodities also ended the week higher, including foreign equities, bonds, gold, and real estate.

Weekly Returns:

S&P 500: 2,676 (+0.9)
FTSE All-World ex-US: (+0.2%)
US 10 Year Treasury Yield: 2.35% (-0.03%)
Gold: $1,256 (+0.6%)
EUR/USD: $1.175 (-0.1%)

Major Events

  • Monday – Bitcoin futures started trading on a Cboe exchange (officially starting Sunday), with trading being halted twice due to extreme price increases.
  • Monday – Comcast announced it is ending its pursuit of assets from 21st Century Fox.
  • Wednesday – The U.S. Federal Reserve raised rates for the third time in 2017, while reiterating their expectation of three more hikes in 2018.
  • Thursday – The FCC voted to end net-neutrality rules established in 2015 under the Obama administration.
  • Thursday – Senator Marco Rubio publicly stated he would oppose the GOP tax bill unless the child tax credit was increased.
  • Friday – GOP lawmakers scrambled to put finishing touches on their tax bill.

Our Take:

Congress took center stage this week, where Republicans continued their mad race to reconcile differences and push through tax legislation before the holidays. The news has completely dominated headlines, and even overshadowed the Fed raising rates on Wednesday. The final version of the bill is still up in the air (expected to be released in a matter of hours), but there have been a few notable last-minute changes.

The first is from the Senate’s bill, which attempted to eliminate the ability to select individual tax lots when selling shares. It would have subjected all share sales to FIFO accounting (first-in-first-out), which means the oldest and often most appreciated shares would have to be sold first. This would have significantly tied investors’ hands and impacted widespread practices such as tax loss harvesting. The good news is, at least at this point, the provision has been scrapped. +1 for investors.

In an effort to placate high income tax states like California and New York, the new compromised bill has also dropped the top marginal tax rate from 39.6% to 37%, and will now allow up to $10,000 of state and local taxes to be deducted. On the surface this seems appealing, but it will only really benefit the highest earners. The 10K maximum won’t be large enough to outweigh the standard deduction, meaning a large chunk of “upper middle class” earners will still see their tax bill increase. -1 for those in high income tax states.

Some other last minute changes include bumping the child tax credit to $1,400 from $1,100, and settling on a 21% corporate tax instead of 20% (which would begin the rate cut a year earlier). Of course all of this is still speculation as we await the final version. But overall it appears something will pass soon. As we’ve said in the past, the most impactful piece of this bill is the corporate tax cut, which is likely to provide a boost to economic growth. How long that boost lasts is anyone’s guess.

Contact a Financial Advisor

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Brendan Erne serves as the Director of Portfolio Management at Personal Capital. After several years as an equity analyst covering the technology and communication sectors, he joined Personal Capital in 2011, just before its official launch to the public. He helped create and manage the firm’s investment portfolios and build out the broader research team. He also co-authored Fisher Investments on Technology, published by John Wiley & Sons. Brendan is a CFA charterholder.
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