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Is Trump's Tax Cut Far from Real? Buy 3 Tax Managed Funds

Gourab Das

Republican presidential hopeful Donald Trump has come up with a controversial set of tax proposals. In his book Time to Get Tough: Making America #1 Again, Trump shared his bold ideas to restructure America’s tax code. He proposed tax levy of 1% for those earning up to $30,000, flat 5% for the $30,000–$100,000 income group, 10% for $100,000 to $1 million earners and 15% for income above $1 million.

Promising sweeping reforms, Trump plans to cut taxes for all income brackets. The proposal also seeks to remove inheritance taxes and would do away with several deductions.

But controversies are accompanying Donald Trump, who has already crossed swords with opponents, media, varied firms and NASCAR in the three months of his campaigning. As expected, even his tax proposals have sparked off a debate, with experts questioning their feasibility. Then again, many would welcome any proposal that would shave the maximum corporate tax rate by a whopping 20%, bringing it down from 35% to 15%.

Read: A Peek into Donald Trump's Mutual Funds

Trump’s Tax Plan

Trump proposes huge reductions in personal taxation as well. Per his plan, the number of tax brackets should be collapsed from seven to four. Married couples with a combined income of less than $50,000 would pay no taxes. Trump’s plan also calls for the elimination of the alternative minimum tax.

The plan also eliminates estate tax and reduces the maximum capital gains tax rate from 23.5% to 20%. At the same time, Trump’s proposals promise elimination of the loophole for carried interest. This would primarily benefit a section of hedge fund managers and the private equity sector.

Relocation Abroad

But his reform proposals for corporate taxes would be hugely beneficial for industries. In the past, high taxes had led U.S. companies to adopt radical measures such as tax inversion. At 35%, the U.S. corporate tax rate is one of the highest in the world. Essentially, this means that domestic companies are often moving abroad in an attempt to reduce tax payments.

Ultimately, in late 2014 the U.S. Treasury Department outlined new rules to stop domestic companies from moving abroad for reduced taxes. Now, President Obama’s 2016 budget is planning to mop up $238 billion by levying a one-time 14% tax on the estimated $2 trillion cash stockpile that companies have built up abroad.

The large cash pile abroad has been built up on prohibitive tax rates. Trump has proposed that a 10% one-time tax be levied on the money that companies repatriate to the U.S. At the same, U.S. companies will no longer be able to defer taxation on overseas income per Trump’s proposals.

Tax on Capital Gains

Investment returns will be sweeter if an investor knows how to cut down on capital gain taxes. Though paying taxes is the responsibility of a citizen, an investor would seek the maximum return from the invested amount which is tax exempted. Tax on net investment income along with taxes on capital gains take a portion out of profit – something that an investor definitely does not like.

Long-term capital gains carry lower tax than short-term capital gains. The American Taxpayer Relief Act of 2012 included qualified dividends as a permanent part of the tax code. Taxes can go up to 35% in case of short-term capital gains.

Tax Managed Mutual Funds

Trump himself is a prolific investor who also seeks to earn millions from dividends. We’re not sure if Trump will make it all the way to the White House. We’re also not sure if the tax reforms will be implemented. However, for investors seeking maximum tax-exempted return, nothing would be better than investing in tax-managed or tax-exempt funds.

Tax-managed funds are designed to curtail the tax burden of an investor. The funds may avoid dividend-paying stocks, or may hold securities for a longer term to reduce the tax burden (as long-term capital gains carry lower tax).

Tax-managed funds may add municipal bonds, thus enjoying interest free from federal income taxes. Moreover, tax-managed funds allow investors to decide when to realize capital gains. This makes these funds excellent additions for retirement purposes.

Below we highlight 3 mutual funds that offer tax advantages. The funds carry a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy). Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

Also, the funds have encouraging 3- and 5-year annualized returns and carry no sales load. The minimum initial investment is within $5,000.

Ivy Tax-Managed Equity C (IYECX) aims to provide capital appreciation while minimizing taxable gains and income. IYECX invests mostly in a portfolio of common stocks of firms that the fund’s investment manager deems as high quality and an attractive investment prospect over the long term.

Ivy Tax-Managed Equity C carries a Zacks Mutual Fund Rank #1. While the year-to-date and 1-year returns are 3.9% and 7.5%, respectively, the respective 3- and 5-year annualized returns are 14.8% and 13.1%.

T. Rowe Price Tax-Efficient Equity (PREFX) seeks maximum after-tax capital appreciation. PREFX uses a growth-oriented approach to invest in high quality companies that are believed to have impressive fundamentals, revenue growth, earnings and strong management. Though PREFX invests primarily in domestic companies, it may also invest in non-US companies.

T. Rowe Price Tax-Efficient Equity carries a Zacks Mutual Fund Rank #1. While the year-to-date and 1-year returns are 3.5% and 10.1%, respectively, the respective 3- and 5-year annualized returns are 15.1% and 14.4%.

Waddell & Reed Tax Managed Equity C (WCTMX) aims to provide capital appreciation while minimizing taxable gains and income. WCTMX invests in a basket of high-quality common stocks of companies that show attractive investment prospects over the long term.

Waddell & Reed Tax Managed Equity C carries a Zacks Mutual Fund Rank #1. While the year-to-date and 1-year returns are 3.9% and 7.6%, respectively, the respective 3- and 5-year annualized returns are 15.2% and 13.4%.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the Zacks Rank.


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