"What If" they change the tax laws?

There is talk, and it is only talk at this time, of congress changing the 2017 tax brackets in the first quarter of next year. The current proposal calls for only 3 tax brackets with a much larger standard deduction and no exemptions. This will save you considerable tax dollars if you currently use standard deductions, but could actually hurt you if you have large itemized deductions.

The outer From/To columns in this chart represent the actual current and proposed tax brackets. The inner From/To columns have been adjusted with the current and proposed Standard Deductions and Exemptions.

The Gross Income column shows the points at which the various brackets start and end based on standard deductions and exemptions. The white background points are for the existing tax law while the yellow background points are proposed under the new law.

The delayed start of taxation results in a fair amount of tax savings at lower income levels, the first green area. A small amount is then given back since the initial tax rate is 12% instead of 10%, the red area. But the 15% bracket has been replaced with a continuation of the 12% bracket and the 25% bracket starts later which results in an even larger green area of tax savings for middle income Americans.

Dividends cause a minor change in the structure of savings picture at the start of the 25% bracket.

Not shown in this graph is the small give back during the current 28% bracket and the continued savings for those earning $423,700. Note also that those with high 6 figure incomes get no advantage from the large increase in standard deductions and are actually limited by the proposed $200,000 cap on itemized deductions.

While receiving Social Security benefits, the old marginal tax brackets were 10%, 15%, 18.5% or 22.5%, 27.75%, and 46.25%. They will be replaced with new marginal brackets of 12%, 18%, 22.2% and 46.25%.

The start of the 46.25% Tax Hump is also delayed due to the additional $4,500 of taxable income before the 25% standard bracket begins. The actual delay is only $2,432 due to the 85% SS benefit taxability level.

The combined deferred taxation level on dividends and Social Security also drops from 55.5% to 49.95% at the start of The Hump.

An important item for consideration is how this changes your decision process for Roth Conversions. Your marginal bracket before the 46.25% Tax Hump has dropped from 27.75% to 22.2%. One of the major reasons for doing Roth Conversions prior to retirement is to reduce your MRDs and avoid the 46.25% marginal bracket. If you overdid the conversions you would still get a small benefit by paying 25% today to cut back on 27.75% later. This is no longer the case now that your retirement bracket has dropped to 22.2% which is now lower than the 25% conversion level.

As stated at the top of this page, this is only in the talking stage. If it does happen there will probably be compromises on the initial proposal. The percentages and / or the bracket points could easily change. This page is provided early to give you an idea of how changes in the tax laws might change your retirement decisions and lifestyle.

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