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Retirement Accounts Appear To Be Big Winners Under Trump Tax Plan

Here’s an article written by Adam Bergman about the Trump Tax Plan and it’s effect on retirement savers –

On September 27, 2017, President Trump and the Republicans leaders presented a tax plan that included sharp cuts in tax rates to both corporations and individuals. Under the Trump tax plan, the corporate tax rate would fall to 20% from 35% as well as reduce taxes on business pass-through income to 25%. The tax plan would also allow immediate write-offs of business investment, preserve tax breaks for research and low-income housing, while also limiting deductions for interest. The tax plan also provides corporations with a one-time tax on stored foreign profits and would allow the tax-free repatriation of foreign income. The proposed tax plan would also repeal the estate tax and the alternative minimum tax. With respect to individuals, the Republication tax plan proposed would collapse seven individual income tax brackets into three and the top rate on individuals could drop to 35% from 39.6%.

U.S. President Donald Trump speaks during an event to discuss tax reform at the Indiana Farm Bureau building on the Indiana State Fairgrounds in Indianapolis, Indiana, U.S., on Wednesday, Sept. 27, 2017. Trump and Republican leaders projected unity — and won initial approval from conservative groups — as they announced a long-awaited tax plan that would represent a major legislative win this year.

In addition, the plan would nearly double the standard deduction for most households to $12,000 for individuals and $24,000 for married couples. The plan would also retain the mortgage interest and charitable deductions as well increase the child tax credit. However, the tax plan would eliminate state and local income tax deductions, as well as repeal the personal exemption potential reducing the benefit of the increased standard deduction for many taxpayers. For example, under the current tax rules, due to the personal exemption of $4050 for each spouse, a dependency exemption of $4050 for each child, and standard deduction of $12,700 for a married couple in 2017, a married couple with two children would not pay tax on the first $28,900 of income. That number is greater than the $24,000 standard deduction the married couple would receive under the proposed tax plan.

The proposed tax plan is short on many important details, however, the increase in the standard deduction under the plan coupled with the elimination of the state and local tax deduction could provide many households with less incentive to itemize their income tax deductions, making the tax deductions such as the mortgage income tax deduction and charitable contribution tax deduction less attractive.

In the case of the reporting of pre-tax IRA or employer qualified retirement plan contributions, such as a 401(k) plan on the 1040 return, the IRS categorizes these deductions as above-the line deductions, meaning one can take the IRA or 401(k) plan deductions regardless of whether one itemizes or claims a standard deduction. In other words, even if the Trump tax plan causes more households to claim the increased standard deduction and to forego itemizing their tax deductions, since IRA and 401(k) plan pre-tax contributions are above-the-line deductions, the ability to benefit from the pre-tax income deductions associated with making IRA or 401(k) contributions will not be impacted by the Trump tax plan. In fact, making a pre-tax IRA or pre-tax 401(k) plan contribution could become even more beneficial to many income taxpayers under the Trump tax plan.

The Republican tax plan includes many income tax changes as well as many unknown details. However, the tax and retirement benefits associated with making pre-tax IRA or 401(k) plan contributions appear to be a big winner in the proposed Trump plan.

For more information about how Trump’s tax plan could effect you, please contact us @ 800.472.0646.

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Posted in 401(k), IRA Category