Trump tax plan to make Roth pipeline easier?

[Monkey Uncle]

I know, he's not president yet and we've got a long way to go before a tax plan is actually passed.  Lots of things could change.

But I can't help gaming out scenarios.  It looks like the change in the standard deductions and exemptions would make allow a married couple with no dependents to convert more money from their tIRAs to Roths without paying taxes.

(If you're unfamiliar with the Roth pipeline, see: http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/)

For a couple filing jointly, the current head space for tax free Roth conversion is the $12,500 standard deduction plus $8,100 for two personal exemptions, for a total of $20,600.  The Trump plan would eliminate the personal exemptions, but raise the standard deduction to $30,000.  So a married couple with no dependents could convert an extra $9,400 per year without incurring taxes.

Hey, I'm trying to find whatever silver lining I can. ;)

[ender]

It seems likely that Trump will be simplifying tax code (assuming he gets what he's stated). I suspect that you are correct though that it will become more advantageous to actually ER'ed people, because a lot of his ideas seem to involve simplifying and reducing actual tax burden to lower income people (potentially at the tradeoff of credits).

And luckily for FIRE'd people, the Roth conversion pipeline is a side effect of other policies with respect to 401ks that I would think are unlikely to change, too.

[Car Jack]

I'll believe it when I see it.  Back when Reagan got the 1986 tax simplification bill passed, my dad, who prepared taxes for a living saw the biggest increase in new customers because the implementation by the IRS made tax preparation significantly more difficult and complicated.

[Monkey Uncle]

And I guess I should point out that the math does not work out so well for couples with three or more dependents.  Their standard deduction would be less than what they're getting now through standard deduction plus exemptions.  Given the Republican propensity to extoll the virtues of large families, this outcome makes me skeptical that the proposal will pass in its current form.

[MustacheAndaHalf]

Not only 3+ dependents, but single parents as well.  The "head of household" status goes away and is simply "single" if the plan passes.

Reagan didn't start by simplifying - in 1981 he lowered taxes, just as George W Bush did in 2001.  Next year with Republican control (except filibuster) of Congress and a Republican President, history suggests taxes will be lowered.  Of course, while we rejoice $9,400 less in taxed income, companies will be celebrating their taxes getting cut in half (35% to 15%, per campaign promise).  It might be equally interesting not just to speculate about the tax situation next year, but how the massive reduction in government income will impact people's lives.

[money_bunny]

...how the massive reduction in government income will impact people's lives.

Could you elaborate?

[Pooplips]

...how the massive reduction in government income will impact people's lives.

Could you elaborate?

+1

[Metric Mouse]

...how the massive reduction in government income will impact people's lives.

Could you elaborate?

Well, the government will probably shut down some National parks, which won't actually save money but will be aimed at making people feel the pain as much as possible; at least, that is what happened last time.

[FINate]

Not only 3+ dependents, but single parents as well.  The "head of household" status goes away and is simply "single" if the plan passes.

Reagan didn't start by simplifying - in 1981 he lowered taxes, just as George W Bush did in 2001.  Next year with Republican control (except filibuster) of Congress and a Republican President, history suggests taxes will be lowered.  Of course, while we rejoice $9,400 less in taxed income, companies will be celebrating their taxes getting cut in half (35% to 15%, per campaign promise).  It might be equally interesting not just to speculate about the tax situation next year, but how the massive reduction in government income will impact people's lives.

Most big multinationals don't pay 35% - they spend a great deal of time and money on tax lawyers and accountants and structure their business to bring that number down to something more reasonable. Those that can't do this, either because the nature of their industry or simply because they are smaller, will celebrate. If we can get the nominal rate down while simplifying (read: eliminating exceptions/deductions to make this revenue neutral) then this will be great. I'm skeptical this will actually happen since those benefiting from the current regime (a competitive advantage) have a huge incentive to lobby and gum things up. One can still hope though.

Multinationals would celebrate most having the US end taxation of foreign-source income, something no other OECD government does, which is why so many US companies have huge wads of cash parked in foreign subsidiaries. IMO fixing this is the single most impactful thing the next administration can fix.

[sol]

What does the Trump tax plan say about the mortgage interest deduction?

Because I have three kids and three mortgages, and we get significantly more than $30k in tax free space under the current tax rules.  Simplifying sounds great in principle, but if it's going to cost me tens of thousands of dollars per year in higher taxes then suddenly I'm not such a fan.

That's kind of what I expect, though.  The poorest people already pay no income tax (household income < $40k typically has zero tax burden), and that is unlikely to change.  The richest people are likely to get some huge tax breaks (household income > $250k pays an extra 3.8% Medicare surtax as part of Obamacare), because that is what benefits trump and his family.  Everyone else in the middle, like me, seems likely to end up paying more.

[ender]

What does the Trump tax plan say about the mortgage interest deduction?

Trump explicitly says that the mortgage interest deduction "will remain unchanged for all taxpayers."

Now how that would interact with an increased standard deduction? No real explanation there, though it's plausible it would make it a pointless deduction.

[brooklynguy]

though it's plausible it would make it a pointless deduction.

Yes, the increased standard deduction under Trump's proposal would reduce or eliminate the tax benefit of any itemized deductions.

In addition, the elimination of personal exemptions under his plan would disproportionately hurt larger families, but the effect might be offset by new proposed deductions for the imputed costs of child care for those with young children.  Lots of moving parts involved.  Kitces did a good write-up a few weeks ago:  "Understanding the 2017 Income Tax Reform Proposals: President Trump vs House Republicans"

[ChpBstrd]

I'll believe it when I see it.  Back when Reagan got the 1986 tax simplification bill passed, my dad, who prepared taxes for a living saw the biggest increase in new customers because the implementation by the IRS made tax preparation significantly more difficult and complicated.

Much like how the "paperwork reduction act" added a quarter page to government forms.

We live in a fully Orwellian world now. Believe the opposite of what you hear.

[Monkey Uncle]

What does the Trump tax plan say about the mortgage interest deduction?

Trump explicitly says that the mortgage interest deduction "will remain unchanged for all taxpayers."

Now how that would interact with an increased standard deduction? No real explanation there, though it's plausible it would make it a pointless deduction.

It's already pointless for those of us who have modest mortgages.  We haven't itemized since the year our son was born (24 years ago), when we had a lot of medical expenses and the rules for how much of those we could deduct were different.

[Monkey Uncle]

...how the massive reduction in government income will impact people's lives.

Could you elaborate?

Well, the government will probably shut down some National parks, which won't actually save money but will be aimed at making people feel the pain as much as possible; at least, that is what happened last time.

I think you're confusing tax cuts with the last government shutdown.  The shutdown occurred because no spending bill had been passed and the agencies that are funded through annual appropriations (the vast majority of agencies) were legally required to close their doors.

But it's interesting you bring up the Park Service, which has a ridiculous deferred maintenance backlog due to decades of underfunding.  If revenue shrinks further, they, and many other non-defense agencies, will see further budget cuts (in real dollar terms, budgets have gone down for most of these agencies for years).  Of course that will result in reduced services by these agencies.  We could argue for days about whether these services actually should be provided, but the fact is that current laws mandate that the agencies provide those services, and to keep underfunding them while expecting the services to continue borders on criminal malfeasance.

But the biggest impact of the reduction in revenue will be even greater ballooning of the national debt.  Republicans whine about the debt when it is increased due to stimulus spending, but they seem to forget about the debt when it increases due to shrinking revenue.

[teen persuasion]

though it's plausible it would make it a pointless deduction.

Yes, the increased standard deduction under Trump's proposal would reduce or eliminate the tax benefit of any itemized deductions.

In addition, the elimination of personal exemptions under his plan would disproportionately hurt larger families, but the effect might be offset by new proposed deductions for the imputed costs of child care for those with young children.  Lots of moving parts involved.  Kitces did a good write-up a few weeks ago:  "Understanding the 2017 Income Tax Reform Proposals: President Trump vs House Republicans"

Thanks for the link.  I hadn't heard about the above-the-line deductions for imputed costs of childcare with a SAHM.  Very interesting.  Of course it cuts off at age 13.

[Monkey Uncle]

though it's plausible it would make it a pointless deduction.

Yes, the increased standard deduction under Trump's proposal would reduce or eliminate the tax benefit of any itemized deductions.

In addition, the elimination of personal exemptions under his plan would disproportionately hurt larger families, but the effect might be offset by new proposed deductions for the imputed costs of child care for those with young children.  Lots of moving parts involved.  Kitces did a good write-up a few weeks ago:  "Understanding the 2017 Income Tax Reform Proposals: President Trump vs House Republicans"

Thanks for the link.  Looks like the House GOP version of tax reform would replace the 0% bracket for qualified capital gains and dividends with a 6% rate, while reducing the rate of the upper bracket.  Raise taxes on the poor, cut taxes on the rich.  Nice; thanks, Paul.  One more blow to my FIRE plans.

[Metric Mouse]

I think you're confusing tax cuts with the last government shutdown.  The shutdown occurred because no spending bill had been passed and the agencies that are funded through annual appropriations (the vast majority of agencies) were legally required to close their doors.

But it's interesting you bring up the Park Service, which has a ridiculous deferred maintenance backlog due to decades of underfunding.  If revenue shrinks further, they, and many other non-defense agencies, will see further budget cuts (in real dollar terms, budgets have gone down for most of these agencies for years).  Of course that will result in reduced services by these agencies.  We could argue for days about whether these services actually should be provided, but the fact is that current laws mandate that the agencies provide those services, and to keep underfunding them while expecting the services to continue borders on criminal malfeasance.

But the biggest impact of the reduction in revenue will be even greater ballooning of the national debt.  Republicans whine about the debt when it is increased due to stimulus spending, but they seem to forget about the debt when it increases due to shrinking revenue.

Agreed. One side likes to increase debt by spending more, and the other likes to increased debt by earning less. Compromise has been hard to come by in the past few years, and agencies that provide real services are placed in hardship because of it.

[Metric Mouse]

In addition, the elimination of personal exemptions under his plan would disproportionately hurt larger families, but the effect might be offset by new proposed deductions for the imputed costs of child care for those with young children. 

Well, if people are inclined to have fewer children due to higher taxes, that may very well be the most environmentally friendly policy of the Trump administration.

[ChpBstrd]

Would any of the changes being considered actually affect our behavior?

I mean, regardless of whether the winds blow favorably or unfavorably, we're still saving and investing all we can, right?

Perhaps there is a case for asset diversification, speculation about probable winners/losers due to govt policy, or retiring outside the US. But we're not talking about that, are we?

[Monkey Uncle]

Would any of the changes being considered actually affect our behavior?

I mean, regardless of whether the winds blow favorably or unfavorably, we're still saving and investing all we can, right?

Perhaps there is a case for asset diversification, speculation about probable winners/losers due to govt policy, or retiring outside the US. But we're not talking about that, are we?

The changes could affect the timing of FIRE or likelihood of success by changing the drag due to taxes on capital gains and dividends.  That could affect our behavior by encouraging us to quit sooner or work longer.  Looks like the Trump plan would reduce drag by increasing tax-free head space, whereas the Ryan plan would increase drag by increasing taxes on qualified capital gains and dividends (for people who would otherwise be in the zero % cap gains/dividends bracket).