@PDXTabs, I could certainly be wrong, but I would guess that states that start their tax calculation with federal AGI would add an adjustment that accounts for 401(k) contributions no longer reducing federal AGI. Most states that start with federal AGI already have a number of additions/subtractions from that number to account for differences between state and federal tax laws. Or they could create their own credit.
I'll believe it when I see it. But along those lines your Federal MAGI matters for things like the American Opportunity Tax Credit and the Lifetime Learning Credit and the Biden proposal would take away the above-the-line deduction to reduce your MAGI to qualify for either of them.
That's a good point. It could definitely have "unintended" consequences. I would never qualify for the saver's tax credit, for example, but I'd still make out much better than I do now.
Speaking of MAGI . . . Limiting the 401(k) amounts would hamper a lot of self employed persons' ability to plan and obtain premium credits for health insurance. Health insurance has gotten so insanely expensive since the ACA passed, and the tax credits are the only way of even pretending it is affordable now. Speaking for myself, the current high limits on the 401(k) are a valuable tool to reduce my MAGI and qualify for any sort of credit. Otherwise, health insurance runs between $27,000 and $53,000 annually for my family.
Also a good point, but health insurance seems to be a much bigger priority for this administration than this 401(k) proposal. The 401(k) proposal is on Biden's campaign website, but I haven't heard anything about it in terms of actual proposed legislation. I think there was talk of increasing the subsidy income limits such that no one would pay more than 9.5% of the there income for health insurance, so the ability to limit MAGI might not be quite so critical.
Limiting the 401(k) to 20% would be a huge change for folks in a similar situation and would make planning more difficult to impossible depending upon income.
It seems to be just political ideology that wants to reduce the maximums. You can certainly do things to benefit lower income folks with retirement planning without screwing higher income folks, but "equity" these days does not seem to allow for that with politicians who use those sorts of words.
Where are you seeing a 20% limit? I'm pretty sure the limits would remain the same, but everyone would get the same $19,500 x 26% = $5,070 refundable tax credit (if they max out their limit) instead of getting a $19,500 tax deduction which results in a $2,340 saving for someone in the 12% tax bracket and $7,215 saving for someone in the 37% bracket. As I understand it the 26% supposed to be revenue neutral such that the total tax savings for people are the same, but everyone gets the same savings for their contribution instead of higher income people getting a larger savings than lower income people.
If the goal is to encourage retirement savings so people have to rely less on government programs in their retirement it seems like a good idea. Higher income people are going to save no matter what, so incentivizing lower income people to save more might increase the total amount saved.