Tax Bill Finally Passed

Now We Can Make Tax Related Investment Decisions

After weeks of wrangling and a long year of uncertainty, at least we know now what tax rates are going to be over the next two years. The bill extended the tax regime we have been in for a number of years but added an estate tax on estates over $5 million.

There was no estate tax this year so when Yankees owner George Steinbrenner died last summer, it seemed his his heirs were lucky and their Dad's $1.5 billion estate would pass tax free. This bill addressed that loophole, however. His heirs now have a choice whether to pay 35% now or keep the much lower cost basis on the estate and pay capital gains taxes on it sometime in the future. I imagine the Steinbrenners will keep the Yankees for now and pay taxes on it some other day.

Fidelity Investments did a nice summary on the new law's tax rates and investment ramifications. If tax policies are important to you, I recommend giving it a close read.

Fidelity's Take on the Tax Bill

Investment Implication:

This tax law is stock market friendly because it will reduce uncertainty and isn’t going to trigger new year end selling as it taxes long term capital gains and dividend paying investments at the same rates as today.

The big questions about this law in a year or so will be did the low tax rates stimulate the economy and was the benefit enough to increase tax revenues down the road enough to reduce the budget deficit?

First observation this afternoon: Bond yields fell very sharply today which seems to indicate the market felt the tax bill will stimulate the economy substantially to help balance the government’s budget without creating an inflation problem.