President-Elect Trump & Your Money
This week your fellow American's elected a new president. Whether you supported him or not we should start planning for how these changes may affect your finances.
Donald Trump ran on an agenda of fiscal restraint, lower taxes and less regulation. He believes the combination of his policies will increase economic growth and help solve many of our countries problems. Below are four areas of personal finances that are likely to be affected by President-Elect Trump's policies.
During his presidential run, Donald Trump proposed broad tax cuts and deductions for middle and upper income tax payers. His plan is to eliminate 4 out of the 7 tax brackets currently in place. Married-joint filers with an income of $75,000 or less will be in the 12% bracket; income above $75,000 but less than $225,000 will be taxed at 25%; and income above $225,000 will be taxed at 33%. Here are some other tax proposals:
- Increase the standard deduction for joint filers to $30,000 (from $12,600) with caps at $200,000. For single filers, the standard deduction would be $15,000 with a cap of $100,000
- Eliminate the alternative minimum tax
- Eliminate the Estate Tax
- For families with young children, he plans to reduce the cost of childcare by allowing families to deduct “the average cost of childcare” from their taxes
- Repeal the 3.8 percent Affordable Care Act tax on investment income
- A unified corporate tax of 15% versus the current 35%. This means S-corps and partnerships would now pay a maximum of 15% instead of the current maximum of 39.6%.
- Lower the tax rate that corporations have to pay on cash that is held overseas. The expectation is that companies will use that money to invest in operations here in the U.S.
We must wait and see exactly what legislation is passed after negotiating with congress before making changes to your tax strategies. No matter what changes are made I will continue to review your investments for tax efficiency and optimization
This means selling securities at a loss to offset other realized gains. Tax loss harvesting can be done all year in non-retirement accounts but we have until December 31 to lock in losses for the 2016 tax year. You can also claim up to $3,000 in losses as a deduction against regular income.
This is the process of putting high income assets in tax-deferred or tax-exempt retirement accounts and putting low or no income securities in taxable accounts. Investments such as bond funds or high dividend stocks should go in IRAs, while municipal bonds, and non-dividend growth stocks usually should be bought in taxable accounts.
Tax Efficient investments
There are tax efficient investments and tax inefficient investments. Tax efficient investments usually include individual stocks and exchange traded funds (ETFs). Actively managed mutual funds are notoriously tax-inefficient because they are forced to distribute capital gains even if those gains came when an investor didn’t even if you did not sell the fund. Also, most active mutual fund managers are much more concerned with the top line performance number than the less reported after- tax number. This can lead to high turnover and high capital gains distributions.
Approximately 10,000 Baby Boomers reach retirement age daily. Looking to the future, the Millennial generation is larger than the Baby-Boomers and will put greater strains on the system. In 2010, the Social Security trust fund began distributing more money than it received. Current projections are that in 2034, benefits will be reduced. Mr. Trump expects increased economic growth and therefore increased FICA taxes into the system will help shore up Social Security benefits.
Strategies for receiving benefits can depend on your marriage status. For a single person it is usually best to defer receipt of payments as long as possible. For married people, it usually means the higher earning spouse (especially if that spouse is older or a man) should defer as long as possible because whichever spouse lives longest will continue to receive the highest benefit. The other spouse should consider taking benefits early (age 62) or at the full retirement age (depends on your birth year).
Given the current state of Social Security we should probably expect an increase in the Social Security tax rate on wages and/or a reduction in Social Security benefits in retirement.
Under Age 40
Many people under 40 say to me they don’t expect to receive Social Security. I think this is not likely, as politicians will not want to be blamed and removed from office. However, I do believe that benefits will be reduced and means testing (lower income people receive more) will be enacted to make it “fair.”
President-Elect Trump has proposed a plan to use an additional $20 billion to prioritize federal dollars for education. These federal monies would favor states with private schools, magnet schools and charter laws. He would also like states to contribute another $110 billion of their own education budgets towards school choice, which would allow children living in poverty to choose what school to attend.
Mr. Trump has also discussed a plan to ensure universities try to reduce the cost of college and student debt in exchange for tax breaks. Students will then be able to attend, pay, and leave college in a better financial position than currently.
These plans will take time to implement and for students and parents to see lower costs. For now, it is best to plan on education costs to be close to what they are now plus inflation. In 2015, the College Board reported that the cost of tuition and fees had risen 3 percent since the year before. An appropriate average tuition cost to aim for is $25,000 per year for public schools, and $40,000 per year for private schools, in today’s dollars.
Mr. Trump has talked extensively about repealing and replacing the Affordable Care Act (Obamacare). Part of his overhaul will include increased promotion of Health Savings Accounts (HSAs). HSAs are medical savings accounts that allow individuals to save a portion of their income tax-free toward medical costs. The accounts can roll over annually if not spent within the year. Additionally, Trump plans to allow Americans to purchase insurance across state lines to create competition between companies and push down premiums.
No matter what, the cost of health care will continue to be a burden for most Americans. Current estimates on how much people will spend on health care in retirement are between $260,000 and nearly $400,000. Even though Medicare is there to cover health care expenses, it will not cover all of your expenses. Dental and vision expenses are not covered. You have to pay for Part B, and the cost goes up as the individual’s income increases (with a max of nearly $400 monthly for an individual with over $214,000 in adjusted gross income or couples with over $428,000 in adjusted gross income).
Federal tax credits may be available to purchase insurance if a person is retired, not yet eligible for Medicare and has income that is between 100 percent and 400 percent of the federal poverty level. Proper financial planning of distributions from retirement accounts and when to start Social Security can save someone money on insurance premiums.
Please contact Chris Peterson, CFP® if you have any questions or concerns about how these potential changes may affect you and your financial plan.