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Although no one really knows what type of "tax reform" (if any at all) will get enacted, and I am hesitant to add to speculation, etc. --

There is some chatter about the GOP using a provision from the 2014 Camp proposal as a revenue raiser (really a revenue accelerator), to offset any new tax breaks, e.g., reduced corporate rate.

The "Rothification" approach basically involves limiting employees' pre-tax contributions to 401(k) plans.  Under the 2014 proposal, you would have been allowed to make pre-tax contributions only up to one-half of the allowable annual contribution limit ($18k in 2017). All of an employer's match would still be treated as pre-tax.

From a big picture standpoint, this approach really just accelerates tax revenue from long-term future periods into the short-term budget window. But from a personal standpoint, however, it would result in higher current tax liability for those of us who like to max out our 401(k)'s. Anyway, FWIW.

For some more reading:

http://www.taxanalysts.org/content/rothification-seen-unsustaina... 
http://money.cnn.com/2017/07/24/pf/taxes/401k-tax-reform/ 
http://www.investmentnews.com/article/20170712/FREE/170719976/pr... 

ETA:  While we're talking about "tax reform" pay-for's -- there's also chatter about tweaking the home mortgage interest deduction.  No specifics, although apparently they have discussed reducing the current $1m indebtedness limit down to $500k.  See:  http://www.politico.com/story/2017/08/04/trump-homeowner-tax-ben...

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The problem, though, is that the company's tax deduction is 1.25m with a cash outlay of 250k, even with a nonrecourse li... (more)

marginoferror (Aug. 09, 2017 @ 6:38p) |

A barrier to what?

scripta (Aug. 09, 2017 @ 11:57p) |

Except that's a cash outlay of $250k every year, and eventually the $5M has to be repaid.

cestmoi123 (Aug. 10, 2017 @ 9:47a) |

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I'll believe it when I see it. This Congress is so impotent and incompetent it couldn't declare war on Hitler.

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Big surprise...tax reform that only benefits the wealthier folks.

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That doesn't really sound like a tax benefit for the wealthy. The people contributing $9k per more of their own money to 401k seem like they will skew much wealthier than average.

It's debatable that Roth is better than Traditional, but for people in a high tax bracket now, it's more likely that Traditional will be better in the long run. That could turn out to be incorrect if future rates climb or based on lots of other personal circumstances, but it's certainly not a sure thing that pushing anyone into a Roth is for their own good. The idea sounds like it would reduce current tax benefits primarily used by the wealthy.

But psych is right, no point wasting energy on consideration of any proposals or ideas until the feds somehow figure out how to break out of the deadlock that one party controlling all three branches has somehow created.

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SlimTim said:   That doesn't really sound like a tax benefit for the wealthy. 
  
Of course it is. Traditional 401k is good for less wealthy folks because they will have a lower marginal tax rate in retirement plus it offers a way to reduce their AGI to qualify for tax breaks like retirement savers credit (a $2000 tax break).

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SlimTim said:   But psych is right, no point wasting energy on consideration of any proposals or ideas until the feds somehow figure out how to break out of the deadlock that one party controlling all three branches has somehow created.
 

  
They don't control, and are apparently scared to death of, the Fourth Estate, AKA the media.
They desperately want the Democratic Representatives in the House of Media to like them, but it's never going to happen.
The only thing they get out of trying to make the media like them is hate from their own (ex?)voters.

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avalon6 said:   
SlimTim said:   That doesn't really sound like a tax benefit for the wealthy. 
  
Of course it is. Traditional 401k is good for less wealthy folks because they will have a lower marginal tax rate in retirement plus it offers a way to reduce their AGI to qualify for tax breaks like retirement savers credit (a $2000 tax break).

  I don't know of many people who make less than $31,000 that are able to save over $9,000 towards retirement.  

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avalon6 said:   Big surprise...tax reform that only benefits the wealthier folks.
decreasing/eliminating the homeowner mortgage interest exclusion benefits renters and lower middle class, and hurts the rich.

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solarUS said:   avalon6 said:   Big surprise...tax reform that only benefits the wealthier folks.decreasing/eliminating the homeowner mortgage interest exclusion benefits renters and lower middle class, and hurts the rich.Just because it removes a benefit from homeowners, does not mean It benefits renters. It removes a huge incentive to homeownership for people in a certain income range, which, in turn, could benefit landlords, because more people might rent for longer. It may also put pressure on housing prices within a certain price range, because they'll be less affordable compared to renting (but only for people in the right income range who could have qualified for a mortgage and then took the mortgage interest deduction).

I didn't read the links, but as far as avalon6's comment I really don't see how limiting pre-tax 401(k) contributions benefits the wealthy.

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Wow, Republicans can't catch a break. Even when they propose things that should be met with support on both sides, they get slammed.

Both of these tax benefits that they're supposedly planning on reducing/removing disproportionately benefit high income/HNW individuals. Now, they're doing it so that they can make other cuts that disproportionately benefit even higher income/higher net worth individuals, so it's not like their motives are pure, but getting rid of these two items in particular should have support across the aisle.

I'm personally for one of the proposals (home mortgage interest) and against the 401k change. However, the 401k change can happen, probably without much collateral damage. But the interest deduction is much more difficult to get rid of. One issue is that local governments rely on it so they'll take a hit if that goes into effect. Perhaps they can weather it before they see any effect, but I'm not familiar enough with how property valuations occur.

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ntr91 said:   
avalon6 said:   
SlimTim said:   That doesn't really sound like a tax benefit for the wealthy. 
  
Of course it is. Traditional 401k is good for less wealthy folks because they will have a lower marginal tax rate in retirement plus it offers a way to reduce their AGI to qualify for tax breaks like retirement savers credit (a $2000 tax break).

  I don't know of many people who make less than $31,000 that are able to save over $9,000 towards retirement.  

  
Yea, you don't really know what you are talking about. You can make close to $75k if you max out on deductions that reduce your AGI and still qualify for the $2000 retirement savers credit. See math below. Besides the retirement savers credit, there are other reasons to reducing your AGI (i.e. obamacare subsidy, student loan IBR, earned income tax credit, etc.). Removing the option to do pre-tax 401k contributions will hurt people that rely on these AGI-sensitive tax benefits. 

5500 (IRA) + 2500 (Student Loan Interest) + 6300 (Standard) + 4000 (Personal Exemption) + 18000 (401k) + 2000 (Health Ins) + 3000 (capital loss) = 44650 in AGI dedudctions

 

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avalon6 said:   5500 (IRA) + 2500 (Student Loan Interest) + 6300 (Standard) + 4000 (Personal Exemption) + 18000 (401k) + 2000 (Health Ins) + 3000 (capital loss) = 44650 in AGI dedudctions
 

  Since when did standard deduction and personal exemption reduce AGI?

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Smart people are going the Roth route anyway--especially younger ones: if you think SS & Medicare won't at some point be means tested I have a bridge to sell you. With all means tested programs they use AGI as the litmus test & Roth distributions won't generate any.

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No matter what tax changes are proposed, everyone is going to scream about it helping the wealthy. It gets old.

To me, Roth vs 401k is a coin toss as to which will be better at my retirement. I can compare them until I'm blue in the face, but do I honestly expect either plan and/or tax rates to be identical when I retire? Not a chance. The same principle remains true with all investments, diversify. Have one of each.

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avalon6 said:   
SlimTim said:   That doesn't really sound like a tax benefit for the wealthy. Of course it is. Traditional 401k is good for less wealthy folks because they will have a lower marginal tax rate in retirement plus it offers a way to reduce their AGI to qualify for tax breaks like retirement savers credit (a $2000 tax break).
You are saying that traditional 401k is good for the less wealthy. Therefore cutting 401k is bad for the less wealthy. Sure, I'm with you.
And since it's bad for the less wealthy, it is good for the wealthy? You lost me here. Just because some policy is bad for a particular group of people, doesn't make it good for everyone else.

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scripta said:   
avalon6 said:   
SlimTim said:   That doesn't really sound like a tax benefit for the wealthy. 
Of course it is. Traditional 401k is good for less wealthy folks because they will have a lower marginal tax rate in retirement plus it offers a way to reduce their AGI to qualify for tax breaks like retirement savers credit (a $2000 tax break).

You are saying that traditional 401k is good for the less wealthy. Therefore cutting 401k is bad for the less wealthy. Sure, I'm with you.
And since it's bad for the less wealthy, it is good for the wealthy? You lost me here. Just because some policy is bad for a particular group of people, doesn't make it good for everyone else.

  
Tax reform is literally an add sum game because the Senate is trying to pass it through reconcilliation, which requires the bill be revenue generating. Getting rid of pre-tax 401K contributions could be used as an excuse to generate revenue to pay for tax breaks for the wealthy. And no, you can't argue tax breaks for the wealthy will generate revenue when the CBO (Congressional Budget Office) does the math. 

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Keep in mind that the main objective of the current "tax reform" is business taxes, specifically reducing the corporate tax rate and implementing territoriality, so as to be "competitive" with other countries.  The US has the highest corporate statutory rate in the G20.  The real question is if & how are these tax cuts "paid for" (offset) by tax increases.

Traditionally, when trying to maintain revenue neutrality, there's been a practice of "compartmentalization," i.e., business tax cuts are paid for by business tax increases, individual cuts paid for by individual increases.  Will be interesting to see if this will continue to be the case, or will individuals be forced to effectively pay for corporate tax cuts, maybe on some sort of theory that the corporations will create jobs, etc.

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tuphat said:   ...Will be interesting to see if this will continue to be the case, or will individuals be forced to effectively pay for corporate tax cuts, maybe on some sort of theory that the corporations will create jobs, etc.Yes, give some sugar to the borderless and heartless legal entities and watch the sweet, sweet jobs trickle down onto the proletariat.

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From my CPA: (edit* Crap, sorry about the format)

Outlining the Trump Tax Plan
As a candidate in 2016, Donald Trump
promised significant tax reform. A
few months after becoming President,
Trump released a one-page outline of
his goals in that area. As the year goes
on, we may see details added to his plan
and eventually learn whether major
tax legislation is enacted. Here are the
major areas that will be addressed.
Taxes on business
Trump wants to cap the corporate
income tax rate at 15%. Currently,
the top rate is 35%. Such a reduction,
he asserts, would make American
companies more competitive worldwide.
The outline also includes a one-time
tax on “trillions of dollars” held overseas.
Previously, Trump indicated that he
favors a 10% tax on corporate offshore
profits brought into the United States.
In addition, the plan would eliminate
tax breaks for unspecified “special
interests” and implement a “territorial
tax system” to level the playing field for
American companies. Generally, in a
territorial tax system, domestic profits
are taxed at the full rate, whereas profits
from abroad are not subject to domestic
income tax.
Taxes on individuals
The Trump plan calls for reducing the
number of tax brackets from seven to
three. Today, individual taxpayers start
with a 10% income tax rate and move
into the 15%, 25%, 28%, 33%, 35%,
and 39.6% brackets, as their taxable
income increases. The three proposed
tax rates would be 10%, 25%, and 35%.
Depending on the cut-off points
for these tax rates, it’s possible that
taxpayers now in the 15% bracket
would have a 10% marginal tax rate
under this plan. Those in the 28%,
33%, and perhaps the 35% bracket
could be in the 25% bracket, whereas
the top rate would fall from 39.6% to
35%.
The tax plan also calls for doubling
the standard deduction, which is
available to individual taxpayers. That
standard deduction is now $6,350 for
single taxpayers, $9,350 for heads of
households, and $12,700 for couples
filing joint returns. Doubling those
numbers would produce standard
deductions of $12,700 for single filers,
$18,700 for household heads, and
$25,400 for married couples filing
jointly.
In addition, the outline calls for
tax relief for families with child and
dependent care expenses without
giving details. Press reports hint that
one approach could be an increase in
the child and dependent care tax credit,
which now allows people with carerelated
outlays to reduce their tax bill
by up to $2,100.
Tax simplification
Under this heading, the outline would
“protect” the home ownership and
charitable gift tax deductions. In other
words, many itemized deductions, such
as medical expenses as well as state and
local taxes paid, would be eliminated,
but the deductions for home mortgage
interest and charitable contributions
would be spared.
Assuming the preceding proposals
are enacted, more taxpayers would take
the larger standard deduction rather
than itemizing deductions. The only
ones still itemizing would be taxpayers
with mortgage interest and charitable
deductions that exceed the standard
deduction amounts.
The next item on the list—repeal
the alternative minimum tax (AMT)—
would possibly make the interaction
between the standard deduction and
itemized deductions more thoughtprovoking.
As mentioned, state and
local income and property tax no longer
would be deductible. However, some
people who now pay large amounts of
those taxes owe the AMT and don’t
get the benefit of deducting such taxes.
Would the repeal of the AMT make up
for the loss of deducting state and local
tax payments? Our office can go over
the numbers for you in your specific
circumstances.
The Trump outline also calls for
repeal of the 3.8% surtax on net
investment income, a tax that applies to
taxpayers with high incomes. Currently
high-income taxpayers can be subjected
to a 43.4% marginal tax rate on some
income, if they are in the 39.6% bracket
and have ordinary investment income
subject to the 3.8% tax. Long-term
capital gains can be taxed at a rate as
high as 23.8%, with the surtax included.
Also on the outline’s “to repeal”
list is the federal estate tax. This
tax now has an exemption of $5.49
million, which can be $10.98 million
for married couples, so relatively few
estates owe this tax anyway. Still,
owners of valuable small companies
and investment property might get
some relief when those assets pass to
younger generations, if the estate tax is
repealed.
Another bullet point in this section
calls for eliminating targeted tax breaks
that mainly benefit the wealthiest
taxpayers.
From outline to legislation
Such an outline must be fleshed out
before it’s presented to Congress
for approval or rejection. Observers
predicted that the process probably
would last beyond the lawmakers’
August recess. Therefore, it’s likely
that taxpayers won’t know until the
fall whether any of these changes will
become law this year.

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avalon6 said:   Big surprise...tax reform that only benefits the wealthier folks.
This is incorrect. The mortgage interest deduction has always been accused of favoring the upper middle class and wealthier taxpayers. Those who are less wealthy, but still own, tend not to have enough deductions to itemize, so they do not benefit from the mortgage interest deduction. This is especially true now that as part of the tax reform the administration wants to increase the standard deduction.

Likewise, very few taxpayers in the lower tax brackets tend to contribute more than 50% of the annual 401(k) limit. Those who do max out their respective 401(k) accounts tend to be in high tax brackets, and in those situations Traditional accounts tend to be far more advantageous.

Hence, at least the two proposals being discussed here actually make things more expensive for the wealthier taxpayers.

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geo123 said:   
avalon6 said:   Big surprise...tax reform that only benefits the wealthier folks.
Likewise, very few taxpayers in the lower tax brackets tend to contribute more than 50% of the annual 401(k) limit. Those who do max out their respective 401(k) accounts tend to be in high tax brackets, and in those situations Traditional accounts tend to be far more advantageous.

  
Getting rid of traditional 401k won't affect the truly wealthy because they tend to have other retirement options available to them that ordinarily people do not (i.e. a lucrative pension or a Top Hat 457f plan that lets you contribute an unlimited amount on a tax-deferred basis).

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I've been putting all my money in Roth as I expect tax rates to be much higher in the future. Government has ruined health care so bad that it will eventually be 100% socialized which will require a massive European style tax increase. Massive deficits and out of control spending will require higher taxes to service the debt (not even talking about paying it down).

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psychtobe said:   I'll believe it when I see it. This Congress is so impotent and incompetent it couldn't declare war on Hitler.
  They unanimously passed sanctions on russia

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brettdoyle said:   I've been putting all my money in Roth as I expect tax rates to be much higher in the future. Government has ruined health care so bad that it will eventually be 100% socialized which will require a massive European style tax increase. Massive deficits and out of control spending will require higher taxes to service the debt (not even talking about paying it down).
  You probably already know this, but:  in addition to, or in lieu of, they could change current law applicable to Roth distributions.  For example, instead of 100% of distributions being tax-free, they could dial it back to, say, 50% if your AGI is over $X.  Nothing's really permanent.

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avalon6 said:   
geo123 said:   
avalon6 said:   Big surprise...tax reform that only benefits the wealthier folks.
Likewise, very few taxpayers in the lower tax brackets tend to contribute more than 50% of the annual 401(k) limit. Those who do max out their respective 401(k) accounts tend to be in high tax brackets, and in those situations Traditional accounts tend to be far more advantageous.

  
Getting rid of traditional 401k won't affect the truly wealthy because they tend to have other retirement options available to them that ordinarily people do not (i.e. a lucrative pension or a Top Hat 457f plan that lets you contribute an unlimited amount on a tax-deferred basis).

No, 457(f) plans have nothing whatsoever to do with being wealthy, and are actually available to quite a few middle/upper middle class taxpayers. They do not allow for an unlimited amount of tax deferral either. Most importantly, 457(f) plans are extremely unpopular since non governmental 457(f) plans are subject to claims of the employer's general creditors and cannot be rolled over into standard IRA's or 401(k)'s.

Regardless, even if your last post was true, which it is not, it would not in any way provide support for your initial statement that limiting the mortgage interest deduction and Rothifying half of the retirement contributions somehow "benefits the wealthier folks."

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People complaining about tax cuts for the wealthy, really just mean "wealthier than me". The bottom line is to see how the plan will affect you personally. I think overall it will reduce taxes for everyone, but you can always points to one item and complain that it helps someone else and not you.

Doubling the standard deduction is the big win for most people. 2/3 of filers take the standard deduction and this is clearly aimed to help the middle and lower class.

Another interesting thing I wonder about, is if the elimination of the state income and property tax deductions are a clever attack on high income states like CA and NY. The fed government is essentially subsidizing these state taxes through the deduction. If that is cut, then would states have to reduce their taxes as well, leading to smaller state governments? Could that be a secondary goal?

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tuphat said:   Keep in mind that the main objective of the current "tax reform" is business taxes, specifically reducing the corporate tax rate and implementing territoriality, so as to be "competitive" with other countries.  The US has the highest corporate statutory rate in the G20.  The real question is if & how are these tax cuts "paid for" (offset) by tax increases.

Traditionally, when trying to maintain revenue neutrality, there's been a practice of "compartmentalization," i.e., business tax cuts are paid for by business tax increases, individual cuts paid for by individual increases.  Will be interesting to see if this will continue to be the case, or will individuals be forced to effectively pay for corporate tax cuts, maybe on some sort of theory that the corporations will create jobs, etc.

  This has only been true since the mid-80s. The corporate income tax's percentage of revenue has been relatively steady at about 10% since then. Prior to that it made up a larger percentage of total federal tax revenue and steadily decreased over time until the mid-80s.

Also, just throwimg it out there that there is a possibility that the tax structure could look totally different in 20 years. Not talking about just changing provisions - but a complete shift, maybe to something like a wealth tax. Trying to predict that far into the future is not possible.

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geo123 said:   avalon6 said:   
geo123 said:   
avalon6 said:   Big surprise...tax reform that only benefits the wealthier folks.

  
Getting rid of traditional 401k won't affect the truly wealthy because they tend to have other retirement options available to them that ordinarily people do not (i.e. a lucrative pension or a Top Hat 457f plan that lets you contribute an unlimited amount on a tax-deferred basis).

No, 457(f) plans have nothing whatsoever to do with being wealthy, and are actually available to quite a few middle/upper middle class taxpayers. They do not allow for an unlimited amount of tax deferral either. Most importantly, 457(f) plans are extremely unpopular since non governmental 457(f) plans are subject to claims of the employer's general creditors and cannot be rolled over into standard IRA's or 401(k)'s.


You are totally wrong about 457 (f) plans. They are only avilable to the highest compensated empolyees and there are no contribution limits. I know because my employer offers it.

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avalon6 said:   
geo123 said:   
avalon6 said:   
geo123 said:   
avalon6 said:   Big surprise...tax reform that only benefits the wealthier folks.

  
Getting rid of traditional 401k won't affect the truly wealthy because they tend to have other retirement options available to them that ordinarily people do not (i.e. a lucrative pension or a Top Hat 457f plan that lets you contribute an unlimited amount on a tax-deferred basis).

No, 457(f) plans have nothing whatsoever to do with being wealthy, and are actually available to quite a few middle/upper middle class taxpayers. They do not allow for an unlimited amount of tax deferral either. Most importantly, 457(f) plans are extremely unpopular since non governmental 457(f) plans are subject to claims of the employer's general creditors and cannot be rolled over into standard IRA's or 401(k)'s.


You are totally wrong about 457 (f) plans. They are only avilable to the highest compensated empolyees and there are no contribution limits. I know because my employer offers it.

  I don't recall an highly compensated employee requirement under 457(f). It would have to be exempt from ERISA, but there are ways to do that other than a top-hat plan which appears to be what you're describing as your employer's method.

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tuphat said:   brettdoyle said:   I've been putting all my money in Roth as I expect tax rates to be much higher in the future. Government has ruined health care so bad that it will eventually be 100% socialized which will require a massive European style tax increase. Massive deficits and out of control spending will require higher taxes to service the debt (not even talking about paying it down).You probably already know this, but:  in addition to, or in lieu of, they could change current law applicable to Roth distributions.  For example, instead of 100% of distributions being tax-free, they could dial it back to, say, 50% if your AGI is over $X.  Nothing's really permanent.I think the likelihood of crippling the original Roth rules for existing accounts is *extremely* unlikely. I would be less surprised if they introduced a new retirement account for this purpose (Roth v2) and at the same time prohibited further contributions to the existing Roth accounts, but they'd retain the original distribution rules.

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taxmantoo said:   SlimTim said:   But psych is right, no point wasting energy on consideration of any proposals or ideas until the feds somehow figure out how to break out of the deadlock that one party controlling all three branches has somehow created.
 

  
They don't control, and are apparently scared to death of, the Fourth Estate, AKA the media.
They desperately want the Democratic Representatives in the House of Media to like them, but it's never going to happen.
The only thing they get out of trying to make the media like them is hate from their own (ex?)voters.


Well, they just spent an incredibly large amount of time and energy trying to pass a health care bill that was wildly unpopular with the public across the political spectrum, so maybe the media aren't the problem...

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libralibra said:   People complaining about tax cuts for the wealthy, really just mean "wealthier than me". The bottom line is to see how the plan will affect you personally. I think overall it will reduce taxes for everyone, but you can always points to one item and complain that it helps someone else and not you.

Doubling the standard deduction is the big win for most people. 2/3 of filers take the standard deduction and this is clearly aimed to help the middle and lower class.

Another interesting thing I wonder about, is if the elimination of the state income and property tax deductions are a clever attack on high income states like CA and NY. The fed government is essentially subsidizing these state taxes through the deduction. If that is cut, then would states have to reduce their taxes as well, leading to smaller state governments? Could that be a secondary goal?


Put more simply, eliminating the state income tax deduction hurts rich people in states Republicans don't care about.

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avalon6 said:   
geo123 said:   
avalon6 said:   
geo123 said:   
avalon6 said:   Big surprise...tax reform that only benefits the wealthier folks.

  
Getting rid of traditional 401k won't affect the truly wealthy because they tend to have other retirement options available to them that ordinarily people do not (i.e. a lucrative pension or a Top Hat 457f plan that lets you contribute an unlimited amount on a tax-deferred basis).

No, 457(f) plans have nothing whatsoever to do with being wealthy, and are actually available to quite a few middle/upper middle class taxpayers. They do not allow for an unlimited amount of tax deferral either. Most importantly, 457(f) plans are extremely unpopular since non governmental 457(f) plans are subject to claims of the employer's general creditors and cannot be rolled over into standard IRA's or 401(k)'s.


You are totally wrong about 457 (f) plans. They are only avilable to the highest compensated empolyees and there are no contribution limits. I know because my employer offers it.

 Quite a few of us here have 457(f)'s available to us, and have invested in them before. The eligibility rules don't mean what you think they mean. For instance, many non-profit universities, medical schools, etc... offer them to their employees, and, depending on the employer, the salary threshold can be quite low. When my wife was in residency, the residency program's 457(f) eligibility only required a salary over $75,000 (this was years ago, so the salary threshold could be higher now). Non-physicians had to have a certain title to be eligible, but it was otherwise open to all physicians. Likewise, in practical terms, although not required to do so, a ton of employers that do offer 457(f) plans impose contribution limits, as a lot of people not familiar with them do not immediately realize just how inflexible and risky those plans are. Once again, non-governmental 457(f) plan assets cannot be rolled over into an IRA or 401(k) and must remain subject to the claims of the general creditors of the employer. 

Hence, although in your mind non-governmental 457(f) plans appear to represent some secret tax shelter only available to the "wealthier folks," the reality is totally different. Their inflexibility, combined with the substantial risk of forfeiture rules, make them extremely unpopular, such that noone in her or her right mind would ever invest in them instead of a 401(k)/403(b). Hence, once again, your initial statement that the proposed limitation on the home mortgage interest deduction and Rothification of one half of the 401(k) contributions somehow "benefits the wealthier folks" is absolutely and categorically incorrect.

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Re: eliminating deductions for state income tax & property tax -- Would be funny/sad/ironic if they did so and thereby as a result effectively apply the allegedly big bad AMT to more people.

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As tax reforms go, this would be a minor change in the big picture. The fraction of people contributing more than $9k per year to their traditional 401k/403b is pretty small. For employees who have such plans available, most only contribute up to 6% of salary (due to employer match). So you have to go above $150k income to go over the $9k. In addition, all this is shifting future tax revenues to the short term revenues, meaning potentially more trouble to pay for entitlements if somehow the added short-term income delays entitlements reform.

For those of us who max out 401k/403b contributions, it'd mean higher tax liability now but less tax liability in retirement. But it'd also mean being able to contribute effectively more (assuming the current annual contribution limits stay the same) since half of your contributions could be post-tax dollars instead of pre-tax ones currently. So in a way, it would allow wealthier people to contribute more to tax-advantaged retirement accounts even if they don't have a Roth 401k option currently.

Personally, I think it's a stupid idea. It makes it looks like it's reforming stuff but it really is not. Plus, I'd prefer promoting employers offering both 401k and Roth 401k plans instead of forcing people into one or another. But anyway, it's not a proposal yet so considering how things went with healthcare, a ton of things will happen until we have to worry about the impact of this.

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libralibra said:   Another interesting thing I wonder about, is if the elimination of the state income and property tax deductions are a clever attack on high income states like CA and NY. The fed government is essentially subsidizing these state taxes through the deduction. If that is cut, then would states have to reduce their taxes as well, leading to smaller state governments? Could that be a secondary goal?
If you state that the fed government is subsidizing these state taxes through the deduction, would the states not have to INCREASE their own tax revenues to effectively compensate for the loss of said subsidies?

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libralibra said:   Another interesting thing I wonder about, is if the elimination of the state income and property tax deductions are a clever attack on high income states like CA and NY.Yes.
The fed government is essentially subsidizing these state taxes through the deduction.Not exactly. You could say the fed govt is "subsidizing" the PAYERS of these taxes by giving them a break, but it's not subsidizing the states themselves. It's not like the people who itemize their state income tax and property tax on their federal return will suddenly decide to earn less money (to pay less state income tax), move to another state, or move to a cheaper property. I'm sure a few people will consider it, and some may have to downsize their home (which, as I mentioned earlier, could put pressure on housing prices within a certain range), but it probably won't be enough to change how or how much the states and counties collect.

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Yet another "tax reform" rumor is to move the individual charitable deduction above-the-line, such that non-itemizers could deduct and also others wouldn't get haircut by itemized deduction limits.  Taxpayers in all quintiles would benefit, but taxpayers in top 1% would benefit the most.  See:  https://taxfoundation.org/the-effects-of-making-the-charitable-deduction-above-the-line/?utm_content=buffer2ae48&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

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Significant progressivity in the US federal income tax system is a major reason why tax reform is so hard.  From the Tax Foundation:

 The top 20 percent of households—which starts at $117,000 for a two-person household—pay nearly 90 cents of every $1 dollar of federal income taxes. While admittedly these families earn more than 50 percent of the nation’s income, they pay a staggering 88 percent of federal income taxes.

The ratio is even more extreme for the top 1 percent of households. The top 1 percent of households—which starts at $500,000 for a two-person household—earn 15 percent of the nation’s income, but pay 38 percent of federal income taxes. That’s a burden twice their share of income.

By contrast, the bottom 80 percent of households collectively earn 47 percent of national income but pay just 12 percent of federal income taxes. Isolating middle-income households, we can see that they earn 14 percent of the nation’s income but pay just 4 percent of income taxes. The bottom 40 percent of households actually receive more tax credits and refunds from the IRS than they owe in income taxes. Thus, their “income tax burden” is actually negative, as is illustrated in the chart.

More: https://taxfoundation.org/americas-highly-progressive-tax-system...

Skipping 19 Messages...
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marginoferror said:   
cestmoi123 said:   
marginoferror said:   
puddonhead said:   >> Regarding #1, companies would much prefer to classify EVERYTHING as opex for tax purposes, rather than classify it as capex and have to only get the depreciation deduction over time.

I am not an accountant or tax expert!

However, my impression from some discussions long ago with some accountants (they were users for a system we were building for them) is that there are some scenarios involving borrowed money, cap expenditure, depreciation and some other factors that I forgot that basically allows you to manufacture phantom losses for the tax purposes.

Our dear leader is rumored to be particularly fond of an extreme/simplistic form of it - capturing losses on borrowed money for tax purposes!! Magically, the loans are discharged in bankruptcy, but the "losses" stick around for his tax return forever!!

Apparently there are more subtle forms of these tricks that corporations with both leverage and a large amount of assets on their books use!!

Again - I got no expertise in this matter. Just trying to remember as best as can and relay what I heard from some other people over beer.

  What I think you're referring to is a major "problem" (depending on how you see it I suppose) with the tax system as it relates to liabilities. However, I don't believe classifying it as a capital asset makes the treatment better than classifying the purchase as an expense.

Broad strokes - purchase an asset for 5m and leverage it 100% (so no cash outlay). You get a depreciation deduction on the asset (not an accountant either, so don't know what the depreciation amount actually would be, but lets say 1m) based on the 5m. Even though your cash paid was $0, your tax benefit is 350k. I believe, but am not 100% sure, that if it were not a capital asset and simply an expense that you were somehow able to leverage, your tax benefit in year 1 would be 1.75m (35% of 5m).

  
If we assume that capex is depreciated over five years (reality is a wide range, depending on what the actual item purchased is), and opex immediately expensed, then:

Buy something for $5M: -$5M cash
Borrow $5M: +$5M cash
Pay $250k in interest (5% on $5M): -$250k cash

Whether it's an expense or a capitalized item, the $250k in interest expense is deductible.

Basically, the only tax difference is a time value of money question: if it's expensed, you get the full $5M tax deduction now (worth $1.84M), while if it's capitalized, you get $1M in deductions (worth $350k)/year for the next five years.  

  The problem, though, is that the company's tax deduction is 1.25m with a cash outlay of 250k, even with a nonrecourse liability. This is, what I believe, puddonhead was referring to.

  
Except that's a cash outlay of $250k every year, and eventually the $5M has to be repaid.

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