How Trump’s Tax Reform Could Affect Baby Boomers
There is no arguing that Donald Trump’s victory in the presidential race shocked just about everyone. However, now many people are wondering what will come next.
Though it’s tough to predict where President-Elect Donald Trump will take this country, most experts are sure that it will involve some degree of tax reform.
If you’re a Baby Boomer, this is definitely going to affect you, but let’s try to drill down to some specifics about how.
Tax Reform Won’t Necessarily Help the Economy
When people think of tax reform, they generally get one of two images. There are those who empathically cheer because they believe this will give them a lot of their hard-earned money back and make the entire economy better and there are those who imagine the rich getting richer and the rest of us suffering from a government collapse.
Under the current plans, we’re seeing proposed by President-Elect Trump, neither of these scenarios are going to play out.
There is no doubt that there are massive tax cuts planned for businesses and the rich. This could amount to somewhere between $4 and $6 trillion going into the economy over the next decade, mostly through business cuts.
That might sound great, but for an economy that is right around $17 trillion in size, tax cuts would have to be much bigger before most Baby Boomers feel any benefits. Initially, this seemed to be Trump’s plan, but deficit hawks quickly swooped in.
Furthermore, even if his tax reform plans achieve enhanced growth, it wouldn’t be evenly distributed. Our income tax system is a progressive one, after all, but spending is not. There’s no reason to think that Donald Trump’s tax reform policy would give a lot more money to people with a high-marginal inclination to consume.
This is important for Baby Boomers to understand. If Trump’s tax reform plans play out, you won’t all of a sudden have a robust economy to benefit from. Stocks will still be risky.
It’s not that his tax reform plan is necessarily a bad thing, but again, there’s no reason to think that your retirement outlook is going to suddenly improve dramatically just because the new president may reduce them.
Begin to Defer
That being said, interest rates will most likely go up, meaning now may be a good time to defer for Baby Boomers who haven’t hit their 70s yet.
While there are a number of ways to do this, I think the best is using a tax-efficient IRA, especially one that holds bonds. As they are tax-deferred, you’ll get a much better return on your investments.
You still need to pay attention, though, to news about President Trump’s tax reform policies. One thing he has been very clear about is his intention to combine income brackets, so that we’re left with:
This is important to Baby Boomers because these lower rates would affect the timing and amount of their IRA distributions. Many may decide to convert their traditional IRAs to Roth IRAs.
If you don’t already have a retirement planner, now would be a good time to get one, simply for the sake of your IRA (or starting one) if for no other reason.
Of course, 401k’s are great for tax reasons, too.
Modified Tax Deductions
Trump has also been very outspoken about standard and itemized tax deductions. Under his tax reform plan, they may increase from $6,300 for singles and $12,600 for couples who file jointly to $15,000 and $30,000.
People who claim itemized tax deductions would see a ceiling created at $100,000 and $200,000 for couples who file together.
These changes would make it a very good time to reconsider how you’re currently making deductions. For example, your mortgage interest payments might no longer be entirely deductible, which would affect whether or not you should keep your mortgage or pay it off ASAP.
Similarly, the best way to make charitable donations would be impacted, as well. A donor-advised fund, which is far more flexible, would give you some room to move come tax season.
Social Security Will Most Likely Stay the Same
Another topic a lot of Baby Boomers are talking about is Social Security. While it’s easy to speculate and come up with a number of different “possible” scenarios, Casey Dowd gives some very sobering advice:
“When it comes to Social Security, Trump’s campaign promise was to protect Social Security benefits. Because of the vagueness of his plans for the future of Social Security, the Personal Capital report advises people nearing retirement age, (the age when they will elect to start receiving Social Security), to maximize their benefits on the assumption that no major changes to payouts will occur.
In other words, don’t rush to take it. It remains very possible, according to Personal Capital, that investors over the age of 60 will experience benefit reductions and that cost of living adjustments will be reduced to reduce the risk of Social Security insolvency.
While this may be bad news to those already receiving it, this “reduced risk” means you shouldn’t let fear push you to take payments earlier than planned, because the good news is it won’t run dry.”
Keep in mind, too, that, according to the 2016 Social Security Board of Trustees report, Social Security is set to hit a deficit by 2020. Shortfalls can be covered by 2034, at which point, benefits may need to be cut by as much as 21%.
This is important because Trump’s tax reform policy may, in part, affect Social Security. While he didn’t mention anything like this on the campaign trail, Republicans have long called for the age of retirement to be increased to address the aforementioned problem.
If that does happen and you end up working longer to offset your lack of Social Security payments, you’ll also be taxed longer, too.
It will be at least a month before we start getting any idea of what to expect from President-Elect Donald Trump’s tax reform plan, but the above will all prove helpful for Baby Boomers to keep in mind.