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The weakening case for low capital-gains taxes: Tax Strategy Scan

Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.

The case for low capital-gains taxes grows weaker
Contrary to what some experts think, capital-gains taxes should not be reduced to boost business investments, a Bloomberg expert writes. An economist found that the dividend tax rate cuts in 2003 had no impact on the capital spending of C-corporations, which are subject to these taxes, and S-corporations, which are not, the expert writes. "[I]n other words, companies ignored tax rates when making their investment plans."

"The tax cut for small business pass-through income is a hard-to-understand, convoluted mess that CPAs will be trying to figure out for their clients for months, maybe even years, to come,” according to an expert.
various blank USA tax forms

Why taxable money in active funds is a bad idea: Morningstar
Allocating taxable money in active equity funds can be a wrong investing move, a Morningstar CFA writes. "Most active stock funds won’t beat a comparable index fund or exchange-traded fund after taxes," the expert writes. "Why? Competition (that is, it's tough to beat the index even before fees), costs, and taxes."

Tax overhaul is a tonic for the muni bond market
Despite the tax law changes, long-term municipal bonds remain attractive to investors, as these bonds can provide better after-tax returns compared with corporate bonds and other investments, according to this article on Barron's. Because of the capping of state and local tax deductions under the new tax law, demand for muni bonds in high-tax states has increased, as muni yields are not subject to state and local taxes. "An in-state, fully tax-free 3% muni is equivalent to a fully taxable one yielding 6.19% for a high-income New York City married couple facing an overall 51.53% marginal tax rate," according to the article.

How entrepreneurs can significantly reduce 2018 taxes
Entrepreneurs are advised to consult their tax advisor to explore the possibility of assuming a self-employed entity, S-corp, C-corp or partnership, an expert on Entrepreneur writes. That's because having the right entity setup could mean significant tax savings under the new law, explains the expert. "The biggest tax changes in the new law for small business owners are the lower corporate tax rate of 21% and a potential 20% pass-through deduction that starts in 2018 for self-employed, sole proprietors, partnerships and S corporations."

A majority of affluent Americans are likely to adjust their financial plans under the new law, according to the AICPA. Here's how advisors can help.
April 19

How to retire overseas and avoid IRS penalties
Retirees should consider hiring a tax specialist if they live overseas and hold a foreign bank account, according to this article on CNBC. That's because failure to report all income, including funds held in a foreign bank account, could trigger hefty penalties from the IRS. "In people's heads, they want to keep it secret," an expert says. However, "when you're a U.S. citizen, you pay tax on your worldwide income. It's all about disclosure."

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