How might President Trump’s tax reform plan affect your retirement? The question isn’t easily answered as the one page plan proposed last week was more about broad strokes than a serious, detailed policy document. But at least some of what he wants may come true and if that happens, you’ll be affected. Let’s break down provisions that you and your retirement planner should be watching. President Trump is looking to simplify tax rates by taking seven tax brackets and boiling them down to only three- 35%, 25% and 10%. We know that this lowers the top tax bracket for the wealthiest tax payers from nearly 40% to 35% which is a significant savings. For all others, we can’t be sure who will save and who may not since the document did not lay out the proposed income cutoffs that would trigger these rates. So if you’re reading this and have a typical middle class income, you could have no idea at this point if your income would put you in a 10% bracket or 25%. But one thing that has been mentioned by the Trump White House is a doubling of the standard deduction. What does this mean? Currently, before exemptions and deductions, a couple owes 10% in taxes on the first dollar they earn, assuming they are not one of the 44% of taxpayers who earn too little to pay federal income tax. But this tax reform proposal would see a couple filing jointly paying no tax on the first $24,000 in income they earn. Combine that with the current tax benefits of workplace retirement plans and it could be a major savings for some. To illustrate the point, think about this example: If a couple each contribute the maximum $18,000 annually to their workplace retirement plans while earning $75,000 per year total, they would only pay taxes on $15,000 of income. Why? Because the $36,000 they contributed as a couple would not be counted as taxable income, and either would that $24,000. So they would only pay tax on $15,000 in income. But of course, it may not be that simple. First, there have been conflicting comments out of the White House about whether contributions to workplace retirement plans like 401Ks would be treated as they are now. Currently, these contributions are treated as pre-tax contributions that are only taxed when withdrawn. But there could be changes that would result in those contributions being taxed the same year as they are made, like a Roth IRA. The same questions abound for traditional IRA contributions. If people are taxed the same year those contributions are made rather than when they expect to withdraw the money during retirement, it might change how people save for the future. And if taxes are paid when the contributions are made, would the penalties change for early withdrawal? Anything and everything could be on the table. Moreover, for couples that currently itemize and take deductions, all of their current deductions with the exception of charitable contributions and mortgage interest would go away in an effort to simplify the tax process. For some couples, they would come out ahead if even with itemized deductions, they don’t reach that $24,000 threshold. But for others, they might lose in this scenario. Health care costs for the sick along with health savings account contributions, home office deductions, and other big ticket deductions would be eliminated. Deductions for childcare are a question mark as is the standard deduction for dependents, deductions that can really add up for big families. The state and local income tax deduction would also be eliminated. If you currently live or are planning to move to a high tax state like New York, this change would be a potentially huge loss for you, especially if you earn a lot of money and pay a lot of local tax. Small business owners should be watching tax reform developments carefully. President Trump has proposed dropping the top tax rate for small business owners from 39.6% to 15%. Successful business owners would save big money under this proposal, money that could be used for expansion, capital improvements, and more. Finally, President Trump would like to eliminate the 40% estate tax. Unless you have an estate worth at least $11 million, you won’t have to think about this potential change. And if you’re expecting to inherit money, you should only consider this change if you’re expecting to inherit from the very wealthy. Either way, with the White House releasing a broad one-page plan and the tax reform process in its infancy, you might not see much change for 2017. Discuss these developments with your retirement planner. Make sure they’re watching Washington D.C. carefully. If they’re not focused on your taxes, give Michael Foguth and Foguth Financial a call and set up a free consultation. They’ll help you look for ways to not only save more of your earnings today, but show you how changes in Washington, with the right proactive action, might result in tax savings tomorrow when you’re ready to say goodbye to your office and hello to retirement. No matter what proposals actually become law, Foguth Financial is monitoring the changes every day, helping their clients strategize and plan for the future.
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