It was the Senate’s turn Thursday to unveil their plan to redo the U.S. tax code, and that led to more confusion and questions for Main Street savers and investors trying to figure out what all the proposed changes could mean.
For Americans too busy to keep their own tax-proposal scorecard, here’s a CliffsNote’s version of how the Senate’s “Tax Cuts & Jobs Act” plan compares with the GOP House plan — and what it might mean for your stock investments, real estate holdings and other money matters.
Impact on stock holdings
401(k) investors have reason to smile. Under both the Senate and House bills, the current Internal Revenue Service rules that allow investors to deduct as much as $18,500 from their paychecks before taxes are calculated in 2018 will remain the same. Workers 50 or older will be able to stash away an additional $6,000 in pre-tax dollars.
But the Senate bill delays what Wall Street has been hoping for most: an immediate cut in the tax corporate rate to 20%, down from 35%. The Senate bill puts this permanent tax cut on hold for an extra year, or until 2019.
Wall Street gave that delay a chilly reception Thursday, as the news sent the Dow Jones industrial average tumbling more than 100 points, although the blue-chip average was down as much as 250 when the news first leaked out.
Lower corporate tax rates are seen as a boon, as more of a company’s revenue turns into profit. A lower tax rate on businesses was also seen as a key to making them more competitive, as foreign tax rates on businesses are lower.
Stocks could suffer from fears that the hoped-for tax relief may be a long way off.
“I sense some fatigue out there as investors tire of playing this waiting game on seeing some actual results from the Trump administration,” says Chris Rupkey, chief financial economist at MUFG, a global financial firm. “The tax cuts will take longer to gain financial passage, and there might be less confidence that fiscal stimulus will lead to stronger economic growth.”
Impact on real estate
There’s good news and bad news when it comes to real estate.
The good news for homeowners and potential home buyers is the Senate plan not only protects the current $1 million interest deduction on home mortgages, but also maintains that cap for loans taken out on new home purchases. The House plan had cut the maximum amount of interest a homeowner could deduct to $500,000 on new purchases.
The Senate plan means someone who wants to buy an expensive home or lives in a part of the country, such as the East and West coasts where real estate is pricier, can reap a decent size deduction at tax time.
For example, a $1 million dollar home bought with a 20% down payment would result in a mortgage of $800,000. Under the Senate plan, the homeowner could deduct all of the $35,736 in interest via itemized deductions on their federal taxes, while they could only deduct $22,335 under the House plan. The $13,401 bigger tax deduction under the Senate plan adds up to a tax savings of roughly $3,350, assuming a 25% tax bracket.
The bad news is the Senate plan eliminates deductions for state and local taxes. In contrast the House plan allows up to $10,000 in deductions. Under the Senate plan, a homeowner would pay roughly $2,500 more in taxes than under the House plan.