Author Topic: Future Federal Tax Rates - opinions?  (Read 929 times)

dcunitedfan

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Future Federal Tax Rates - opinions?
« on: September 07, 2019, 03:12:32 PM »
Does anyone have an opinion on where future federal tax rates are headed?  It's kind of safe to say that they will be higher in the future than they are now based on the debt/deficit, but exactly when and by how much is the real question.  I figure there are probably some in the FIRE camp who have tried to guess at this, since it impacts future budgeting.

Not looking to debate pros and cons of what I believe should happen, just looking for opinions on what others feel is likely to happen, and what that will mean for future taxes.

My own opinion is that two events might trigger this.  One is if the Democrats gain control of government (could be as soon as 2021, or a few elections later, too soon to tell), there will be a somewhat modest increase to personal income tax brackets.  Higher if this coincides with some sort of enlargement of entitlements - several possibilities have been proposed by current candidates.  New tax brackets would be in line with 90s era taxes (or more if entitlements are expanded).  The other trigger would be if long term interest rates rise dramatically, raising federal debt financing costs.  This could mean a more severe tax increase.  This would be more painful, more in the neighborhood of 50% increase.  This might take 10+ years to come about, if nothing is done to change the current trajectory.

I expect the brackets will remain progressive either way.

MDM

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Re: Future Federal Tax Rates - opinions?
« Reply #1 on: September 07, 2019, 04:18:45 PM »
It's kind of safe to say that they will be higher in the future than they are now based on the debt/deficit....
One could have said the same five years ago. ;)

Both parties scream about how terrible the debt/deficit situation - when they are not the party in power.

Inertia can be a powerful thing, so I'd put my roulette bet on "no change."  But whether "no change" will mean "no change to current brackets and rates (other than inflation adjustments)" or "no change to the law on the books, which has us reverting to 2017 laws in 2026"...?

dcunitedfan

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Re: Future Federal Tax Rates - opinions?
« Reply #2 on: September 07, 2019, 04:21:29 PM »
"One could have said the same five years ago. ;)"
Very true - however, I am concerned that eventually this won't be a viable choice.  That's where my second trigger comes into play - if long term rates rise and borrowing costs rise.  Easy to see inertia preventing any more moderate fixes being achieved.

secondcor521

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Re: Future Federal Tax Rates - opinions?
« Reply #3 on: September 07, 2019, 05:15:40 PM »
I have no idea.

I would say, though, that in the second half of your scenario, I would expect the government to attempt to print their way out of debt instead of raise taxes.  First, some people think that will work.  Second, moderate to high inflation is a stealth way of taxing people so it would be more popular among politicians.

Another alternative that has been floated is a VAT.  It may be initially proposed at a low rate, and may come with promises to reduce income taxes.  If implemented, I would expect the VAT to grow over time and the promises not to be kept.

ender

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Re: Future Federal Tax Rates - opinions?
« Reply #4 on: September 07, 2019, 08:49:59 PM »
I don't know that any reasonable tax changes would make any impact on my current planning.

I suppose the biggest possible change I could act upon would be undoing the standard deduction increase and adding back exemptions.

dcunitedfan

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Re: Future Federal Tax Rates - opinions?
« Reply #5 on: September 08, 2019, 05:29:49 PM »
I know someone who I believe some years back, when he was in his early 30s, converted his entire IRA to Roth, out of fear of future (substantially) higher future taxes by the time he would be taking distributions.  I think he overreacted, but am looking for other perspectives.

BECABECA

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Re: Future Federal Tax Rates - opinions?
« Reply #6 on: September 08, 2019, 10:52:34 PM »
As mustachians, we likely will be living on much smaller budgets than average Americans and so will always fall into the lower tax brackets in retirement if they stay tied to income. Now if the US tax system changes to start taxing wealth as opposed to income, then I could see us needing to adjust our planning. But until that happens, I知 happy to continue to take the current tax brackets as a given and spend my planning time on more likely influences.

ender

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Re: Future Federal Tax Rates - opinions?
« Reply #7 on: September 09, 2019, 06:00:24 AM »
As mustachians, we likely will be living on much smaller budgets than average Americans and so will always fall into the lower tax brackets in retirement if they stay tied to income. Now if the US tax system changes to start taxing wealth as opposed to income, then I could see us needing to adjust our planning. But until that happens, I知 happy to continue to take the current tax brackets as a given and spend my planning time on more likely influences.

This.

People talking about tax brackets going up almost never refer to normal mustachian spend levels. Now, if you want to spend $100k/year in retirement? Yes, taxes will impact you significantly. But if you are planning on $40k or $50k spend it's very unlikely that your effective/marginal tax rates will be meaningfully higher than they are now. Just think of all the people who actually make that much and how hard it would be on them.


DadJokes

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Re: Future Federal Tax Rates - opinions?
« Reply #8 on: September 09, 2019, 06:16:38 AM »
As mustachians, we likely will be living on much smaller budgets than average Americans and so will always fall into the lower tax brackets in retirement if they stay tied to income. Now if the US tax system changes to start taxing wealth as opposed to income, then I could see us needing to adjust our planning. But until that happens, I知 happy to continue to take the current tax brackets as a given and spend my planning time on more likely influences.

This.

People talking about tax brackets going up almost never refer to normal mustachian spend levels. Now, if you want to spend $100k/year in retirement? Yes, taxes will impact you significantly. But if you are planning on $40k or $50k spend it's very unlikely that your effective/marginal tax rates will be meaningfully higher than they are now. Just think of all the people who actually make that much and how hard it would be on them.

I'll third that.

I think tax rates will increase for upper middle class and higher incomes at some point. Since the typical mustachian lives on a lower middle class income or lower, I'm guessing that most of us would not be impacted by income tax increases. Politicians can't survive raising taxes on the middle class.

I might be more concerned about implementation of a wealth tax, but I'm sure it would have a floor of $3-5 million, which I'm guessing is less than most of us plan to keep around.

ender

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Re: Future Federal Tax Rates - opinions?
« Reply #9 on: September 09, 2019, 06:28:59 AM »
As mustachians, we likely will be living on much smaller budgets than average Americans and so will always fall into the lower tax brackets in retirement if they stay tied to income. Now if the US tax system changes to start taxing wealth as opposed to income, then I could see us needing to adjust our planning. But until that happens, I知 happy to continue to take the current tax brackets as a given and spend my planning time on more likely influences.

This.

People talking about tax brackets going up almost never refer to normal mustachian spend levels. Now, if you want to spend $100k/year in retirement? Yes, taxes will impact you significantly. But if you are planning on $40k or $50k spend it's very unlikely that your effective/marginal tax rates will be meaningfully higher than they are now. Just think of all the people who actually make that much and how hard it would be on them.

I'll third that.

I think tax rates will increase for upper middle class and higher incomes at some point. Since the typical mustachian lives on a lower middle class income or lower, I'm guessing that most of us would not be impacted by income tax increases. Politicians can't survive raising taxes on the middle class.

I might be more concerned about implementation of a wealth tax, but I'm sure it would have a floor of $3-5 million, which I'm guessing is less than most of us plan to keep around.

I'd also be surprised if any wealth taxes include retirement accounts.

I would think the primary tax increase that would affect most FIRE folks would be if a VAT is added, as that would impact all spending.

zoro

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Re: Future Federal Tax Rates - opinions?
« Reply #10 on: September 09, 2019, 06:47:09 AM »
I think a VAT or National sales tax is a likely outcome if deficits continue to rise. This is obviously not a good thing for people with ROTH iras - which is why im guessing you are asking the question. The problem with VAT is that democrats will support it when they realize how much money it will raise, and republicans will support it when they realize how regressive it is.

The way to avoid a  VAT is spending less money, so we are a couple of steps ahead here already. lol

BECABECA

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Re: Future Federal Tax Rates - opinions?
« Reply #11 on: September 09, 2019, 09:34:06 AM »
As mustachians, we likely will be living on much smaller budgets than average Americans and so will always fall into the lower tax brackets in retirement if they stay tied to income. Now if the US tax system changes to start taxing wealth as opposed to income, then I could see us needing to adjust our planning. But until that happens, I知 happy to continue to take the current tax brackets as a given and spend my planning time on more likely influences.

This.

People talking about tax brackets going up almost never refer to normal mustachian spend levels. Now, if you want to spend $100k/year in retirement? Yes, taxes will impact you significantly. But if you are planning on $40k or $50k spend it's very unlikely that your effective/marginal tax rates will be meaningfully higher than they are now. Just think of all the people who actually make that much and how hard it would be on them.

I'll third that.

I think tax rates will increase for upper middle class and higher incomes at some point. Since the typical mustachian lives on a lower middle class income or lower, I'm guessing that most of us would not be impacted by income tax increases. Politicians can't survive raising taxes on the middle class.

I might be more concerned about implementation of a wealth tax, but I'm sure it would have a floor of $3-5 million, which I'm guessing is less than most of us plan to keep around.

I'd also be surprised if any wealth taxes include retirement accounts.

I would think the primary tax increase that would affect most FIRE folks would be if a VAT is added, as that would impact all spending.

I don稚 see a VAT as meaningfully affecting my retirement either, since most of my expenditures would typically be exempt from it: food, utilities, insurance, property tax. And the physical goods I spend money on are typically used so no value has been added to tax. I wonder how thrift stores would be handled... by definition it seems they should be exempt from VAT.

dcunitedfan

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Re: Future Federal Tax Rates - opinions?
« Reply #12 on: September 10, 2019, 04:13:44 AM »
Basically the reason for asking is trying to decide whether taxes will go up enough in the future that I'd be better off accelerating IRA withdrawal in shorter term (and thus paying higher ETR) to avoid that hypothetical future higher ETR.  At a minimum, this thought experiment is helpful as it made me put together yet another spreadsheet with different withdrawal rates, so even if rates don't change, it helps me to ponder the alternatives.

DadJokes

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Re: Future Federal Tax Rates - opinions?
« Reply #13 on: September 10, 2019, 05:42:30 AM »
Basically the reason for asking is trying to decide whether taxes will go up enough in the future that I'd be better off accelerating IRA withdrawal in shorter term (and thus paying higher ETR) to avoid that hypothetical future higher ETR.  At a minimum, this thought experiment is helpful as it made me put together yet another spreadsheet with different withdrawal rates, so even if rates don't change, it helps me to ponder the alternatives.

If I were in a withdrawal phase right now, I would withdraw up to the top of the 12% bracket (~$103k as MFJ) and transfer whatever I don't need into a Roth. While I don't think that bracket will ever go back to 15% (or higher), I also don't think it will get lower.

Of course, I say that, but my income puts me in the 12% bracket right now, and I still put most of my investments (~80%) in pre-tax accounts, because I am short-sighted and more willing to take the tax break now over the promised future tax break.

BECABECA

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Re: Future Federal Tax Rates - opinions?
« Reply #14 on: September 10, 2019, 09:24:34 AM »
If I were in a withdrawal phase right now, I would withdraw up to the top of the 12% bracket (~$103k as MFJ) and transfer whatever I don't need into a Roth. While I don't think that bracket will ever go back to 15% (or higher), I also don't think it will get lower.
...

That痴 my plan as well, although I thought the 12% MFJ tax bracket limit for this year is $78,950 how are you arriving at $103k? I don稚 want to miss out on an extra $25k of Roth conversions every year if I can take them.

secondcor521

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Re: Future Federal Tax Rates - opinions?
« Reply #15 on: September 10, 2019, 09:31:04 AM »
If I were in a withdrawal phase right now, I would withdraw up to the top of the 12% bracket (~$103k as MFJ) and transfer whatever I don't need into a Roth. While I don't think that bracket will ever go back to 15% (or higher), I also don't think it will get lower.
...

That痴 my plan as well, although I thought the 12% MFJ tax bracket limit for this year is $78,950 how are you arriving at $103k? I don稚 want to miss out on an extra $25k of Roth conversions every year if I can take them.

You're talking about after the standard deduction, which is taxable income.  @DadJokes is talking about before the standard deduction, which is adjusted gross income.  The difference between the two is the standard deduction, which, for MFJ for 2019, is around $25K.

BECABECA

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Re: Future Federal Tax Rates - opinions?
« Reply #16 on: September 10, 2019, 09:59:48 AM »
If I were in a withdrawal phase right now, I would withdraw up to the top of the 12% bracket (~$103k as MFJ) and transfer whatever I don't need into a Roth. While I don't think that bracket will ever go back to 15% (or higher), I also don't think it will get lower.
...

That痴 my plan as well, although I thought the 12% MFJ tax bracket limit for this year is $78,950 how are you arriving at $103k? I don稚 want to miss out on an extra $25k of Roth conversions every year if I can take them.

You're talking about after the standard deduction, which is taxable income.  @DadJokes is talking about before the standard deduction, which is adjusted gross income.  The difference between the two is the standard deduction, which, for MFJ for 2019, is around $25K.

Awesome, thanks for the clarification! Looks like I need to adjust my equations for planning out my Roth conversions, and I値l be more likely to clear out my 401k before mandatory minimum distributions kick in!

dcunitedfan

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Re: Future Federal Tax Rates - opinions?
« Reply #17 on: September 10, 2019, 04:29:54 PM »
I had come to the conclusion that if possible I want to stay within the 12/15% bracket for withdrawals.  22/25% isn't the end of the world, but not much better than how most of the money originally went in.  Also I'll seek to eventually get everything distributed out of the pretax accounts, but probably on a longish time frame (concerns about rising tax rates being a potential force to bring the time in).

Paul der Krake

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Re: Future Federal Tax Rates - opinions?
« Reply #18 on: September 10, 2019, 05:26:59 PM »
I think that federal income tax rates are unlikely to change much. I expect things to be tweaked at the margins, like expanding this or that credit/deduction, or creating new surcharges on payroll taxes, etc.

ender

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Re: Future Federal Tax Rates - opinions?
« Reply #19 on: September 11, 2019, 05:23:42 AM »
I think that federal income tax rates are unlikely to change much. I expect things to be tweaked at the margins, like expanding this or that credit/deduction, or creating new surcharges on payroll taxes, etc.

My personal feeling is they will just raise the FICA income cap. That solves a lot of problems.

Sugaree

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Re: Future Federal Tax Rates - opinions?
« Reply #20 on: September 11, 2019, 05:52:36 AM »
Basically the reason for asking is trying to decide whether taxes will go up enough in the future that I'd be better off accelerating IRA withdrawal in shorter term (and thus paying higher ETR) to avoid that hypothetical future higher ETR.  At a minimum, this thought experiment is helpful as it made me put together yet another spreadsheet with different withdrawal rates, so even if rates don't change, it helps me to ponder the alternatives.

If I were in a withdrawal phase right now, I would withdraw up to the top of the 12% bracket (~$103k as MFJ) and transfer whatever I don't need into a Roth. While I don't think that bracket will ever go back to 15% (or higher), I also don't think it will get lower.

Of course, I say that, but my income puts me in the 12% bracket right now, and I still put most of my investments (~80%) in pre-tax accounts, because I am short-sighted and more willing to take the tax break now over the promised future tax break.


This is where I'm at right now too.  Logically, I know that I'm paying a lower effective tax rate now, especially taking into account the deductions and credits I'm getting for being married and having a kid.  But, at this point, I can either max out my traditional contributions or contribute 20% less into Roth.  Back of the envelope calculations tell me that I'm probably better off saving more and paying taxes on it later.  As I'm able, I'll start shifting some of the contributions into Roth, while maintaining full contributions.

BTDretire

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Re: Future Federal Tax Rates - opinions?
« Reply #21 on: September 13, 2019, 12:40:40 PM »
I know someone who I believe some years back, when he was in his early 30s, converted his entire IRA to Roth, out of fear of future (substantially) higher future taxes by the time he would be taking distributions.  I think he overreacted, but am looking for other perspectives.

 I'm considering doing Roth conversions, because rates are so low now. I wouldn't expect them to go lower. But, then I heard this morning Trump is looking at a middle class tax cut by the end of the year. So, as is said "predictions are difficult, especially about the future".
  I just can't see them going much lower, but it is easy for me to think they could rise in the next 6 to 20 years. If Trump is not reelected and we get a  Warren or Bernie, I'm sure they will raise taxes, and I think Biden would also raise taxes.
 The growing debt is something that sooner or later is going to surface to the point it cannot be ignored.


dcunitedfan

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Re: Future Federal Tax Rates - opinions?
« Reply #22 on: September 14, 2019, 11:09:14 AM »
I'm considering doing Roth conversions, because rates are so low now. I wouldn't expect them to go lower. But, then I heard this morning Trump is looking at a middle class tax cut by the end of the year. So, as is said "predictions are difficult, especially about the future".

I doubt the House is going to vote for any tax cuts before the next election.  Supposedly the Administration feels they can tinker with capital gains tax without Congressional approval, but even that isn't clear.