A new administration, a strengthening economy, a shift in interest rates and other factors could bring plenty of changes in 2017. Here are five trends that might affect the financial landscape and your pocketbook:
If president-elect Trump and the Republican-controlled Congress get their way, a lot of Americans could pay less in taxes next year. But more than just cutting rates, the new powers in Washington also could reshape the role of deductions and simplify tax planning.
Trump wants to compress the current seven individual brackets to three rates of 12 percent, 25 percent and 33 percent. He also has vowed to eliminate personal exemptions and repeal the Alternative Minimum Tax and the 3.8-percent tax on net investment income for high-income taxpayers. A plan advanced by House Republicans would do much the same. Trump also would more than double the standard deduction to $15,000 (singles) and $30,000 (married filing jointly), with the standard deduction also going up under the House Republican plan. For people who continue to itemize, deductions would be capped at $100,000 (singles) or $200,000 (married filing jointly) under Trump. House Republicans have discussed eliminating all deductions, except for the mortgage-interest and charitable-deduction tax breaks.
With deductions de-emphasized, tax-return preparation and planning could become simpler. Most Americans don't itemize anyway, instead opting for the standard deduction. Under either GOP plan, the percentage of non-itemizers could rise further.
Trump and House Republicans also want to lower corporate income-tax rates, in part to encourage multinational companies to repatriate or bring back cash and other assets held by overseas subsidiaries. That might spark a resurgence of corporate investments domestically, including new factories, broader operations and more hiring.
Lower corporate tax rates could translate into higher profits and rising stock prices. Lower tax rates for individuals also could help businesses by putting more money in consumers' pockets. Yardeni Research estimates earnings for companies in the Standard & Poor's 500 index will jump 20 percent in 2017 from a meager expected gain of 1 percent for 2016. That assumes the corporate tax rate will be cut from a top 35 percent to 15 percent next year (the effective rate is around 27.5 percent, according to Yardeni).
The recent stock-market rally "reflects the realization by investors that earnings will get a big and permanent boost from lower corporate tax rates," stated Yardeni in a commentary. "A reduction in the regulatory burden promised by Trump also will boost earnings, though that’s harder to estimate."
Less regulation, more infrastructure
Trump has promised to scale back federal oversight for certain industries and boost spending in ways that could benefit others. As those pledges translate into legislative proposals, it will alter the outlook for various businesses. The potential repeal of parts of the Dodd-Frank Act, which imposed greater regulations on banks, is a prime example. That effort could spur more lending, including by smaller community banks, but at a potential cost of less transparency and protections for consumers.
Mining companies, oil drillers and utilities also could benefit under Trump, and so might aerospace and defense corporations if military expenditures rise. Trump's vow to spend more on the nation's infrastructure could help transportation, heavy-equipment and engineering companies, but those in health care sector could be hurt by fewer covered patients if Trump dismantles parts of the Affordable Care Act.
There has been conjecture that a Trump Administration might roll back the Department of Labor's fiduciary rule, designed to ensure that retirement-account advisers act in the best interests of their clients, but leading investment companies seem to be preparing for the rule's planned implementation in April.
Higher interest rates
The Federal Reserve's decision in December to boost short-term rates was the latest sign of rising borrowing costs. The central bank doesn't directly influence long-term rates, such as those on 30-year mortgages, but those loans have become a bit more expensive too, reflecting percolating economic growth and slightly higher inflationary expectations. Average rates on 30-year mortgages are running around 4.3 percent now, a two-year high. Some credit-card and auto rates also have pushed a bit higher.
Gross Domestic Product in the third quarter increased to 3.5 percent, a relatively robust level compared to recent years. While there remains slack in the economy, the broad trend points toward higher interest rates generally. The flip side of that — more attractive yields on bank deposit accounts and other short-term investments — hasn't yet materialized.
More consumer debt
Even with loans becoming more costly, Americans are in a mood to borrow. The jobless rate has declined while consumer sentiment has jumped — two factors that make borrowers, and lenders, more comfortable.
Consumer debt nationally will approximate $12.4 trillion by year-end and keep rising in 2017, predicts Money Management International. The mix of debt is changing somewhat. "While credit card debt is on pace to surpass pre-financial crisis levels within the next two years, the biggest debt drivers are mortgages and student loans," the group said.
Money Management International sees more consumers struggling, given that incomes still aren't increasing by much while financial discipline appears to be slipping. "This creates a scenario where expenses feel manageable week-to-week . . . until (debt) reaches a breaking point," the group said. Consumers aren't yet near a breaking point, however. Non-business bankruptcies nationally likely will come in below 800,000 for 2016 — about half the recent peak of 1.54 million filings in 2010.
Subprime auto loans represent one area of worry. "People are taking on more debt because of low interest rates and auto sales incentives," said Kevin Gallegos, a vice president at Freedom Financial Network in Tempe, Ariz. "We do have some concern about the pace of increasing debt."
Reach Wiles at [email protected] or 602-444-8616.