Tax and Financial News for November 2017
The Trump Tax Reform Plan - What Is and What May Be
Major tax reform enactment is a rare event, with the last occurring back in 1986 under President Ronald Reagan. As a result, current discussions could pan out to be much ado about nothing; however, with the solid majorities that Trump and the Republicans hold in both houses of Congress, there is real potential for tax reform to pass.
Timing and Certainty
The Trump administration’s goal is to get the tax changes passed and signed into law by the end of 2017. So, what should you expect from a tax bill that will likely be more than 1,000 pages long by the time it’s all over? Let’s take a look at some of the most notable changes widely impacting taxpayers and see. Note that these provisions are currently under debate and are subject to change between the writing of this article and the time the bill passes.
401(k) Tax Deductibility Changes
In addition to these proposals, there is one particularly contentious change on the docket that impacts the tax deduction related to 401(k) plans, being referred to as Rothification. Rothification essentially turns your current 401(k) into a Roth 401(k) by limiting pre-tax contributions to $2,400 versus the current limits of $18,000 ($24,000 if you are 50 and older). Plan participants are still allowed to save on an after tax basis up to the old limits.
Looking at the numbers, say you currently contribute $10,000 per year into your 401(k) plan and are in the 25 percent federal and 5 percent state tax brackets. Assuming your entire contribution amount falls within these marginal tax rates, you save $3,000 per year in taxes. Under the new proposals, you would only save $720, or a difference of $2,280 (assuming your marginal tax rates are not impacted).
Trump recently tweeted that there will not be any changes to 401(k) deductions; however, it was originally in the plan and could come back into play. Employers are concerned that this will discourage savings and Wall Street is terrified because managing 401(k) assets is big business.
The sheer magnitude of the proposed tax overhaul along with the contentious political environment means that exactly what, if anything, comes out of the administration’s plan is uncertain. Major changes could happen, so you’ll want to work with your tax advisor to navigate any new rules.