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How To Win Under The Proposed Republican Tax Plan
but also one of the highest real estate prices. 4) Move out of states with high state income tax rates. Consider relocating to one of the seven states with no state income tax: Washington, Nevada, Wyoming, South Dakota, Texas, Florida, or Alaska.
5) Get married and make up to $1,000,000The current top tax rate is 39.6% for individuals making more than ~$420,000 and married couples making more than $470,000That rate is set to decline by 4.6% to 35% if the GOP plan passesIf you are an individual, the proposal is for you to pay the 39.6% tax rate again on income above $500,000, so you’re really only saving $80,000 X 4.6% = $3,680But if you are married, your benefit is $530,000 X 4.6% = $24,380 because the threshold goes up to $1,000,000.
The roughly doubling of income threshold makes sense for those who believe in equality between man and womanFor example, if a man and woman each make $400,000 a year for a combined total income of $800,000, why would they ever get married if they now have to pay a 39.6% tax rate above $470,000 on their combined income? They would simple remain single in order to pay a 33% top marginal tax rate as individuals, saving themselves roughly $21,000 a year in marriage penalty tax ($800,000 – $470,000 = $330,000 X 6.6% = $21,780 minus income paying the 35% marginal tax rate).
Related: The Average Net Worth For The Above Average Married Couple
6) Start a S-Corp to earn pass through incomeIf the top tax rate for businesses with pass-through income declines to 25%, you’re basically winning if you have operating profits of over $92,000 per individual or $153,000 per married couple because those are the cutoff amounts for a 25% marginal income tax rate.
If you don’t have a business idea, then consider switching from full-time employee to consultant and having your old employer pay you a higher rate as a businessThey might oblige since they don’t have to pay you any benefits.
If you aren’t willing to start a business or become an independent contractor, then consider investing in businesses that will benefit from the corporate tax cut to 20%And if you don’t know what company to invest in, then you can simply buy an S&P 500 index fund.
Related: The 10 Best Reasons To Start An Online Business
7) Step on the gas when it comes to building wealth, or die before Trump leaves officeRepealing the death tax should motivate you to try and accumulate far beyond $5.49M as possible to leave to your loved ones or charitable organizations you care aboutBut even if the death tax limits are repealed, they will likely be reinstated with the next administration, unless every single administration after Trump’s is Republican.
If you have the ability and motivation to build great wealth, you might as well go for it during this windowAs soon as you start thinking about how your wealth can be used to help others, then there’s endless upside.
Related: The Benefits Of A Revocable Living Trust
States that hurt the most from State and Local Tax (SALT) deduction elimination
8) Enjoy being a middle class AmericanReducing the $1 million mortgage indebtedness to $500K, raising the child tax credit to $1,600 from $1,000, limiting the deductibility of property tax to $10,000, raising the income limit to $1,000,000 from $470,000 for married couples until the 39.6% marginal income tax kicks in, and eliminating the death tax doesn’t affect the middle class.
But what does help the middle class is almost doubling the standard deduction, whether you have a property or not, to $12,000 for individuals and $24,000 for familiesRoughly 70.4% of taxpayers claimed the standard deduction on their tax return, therefore, most Americans will benefit from the increaseOf those who do itemize their deductions, the average claim for 2014 was $27,447 according to the IRSTherefore, there is a convergence and a simplification or the tax code.
A $24,000 standard deduction for married couples equates to paying a 2.4% interest rate on a $1,000,000 mortgageHence, the increase in standard deduction takes some of the sting out of the potential halving of the mortgage interest deduction to $500,000That said, property in higher cost areas should still feel downward pressure at the margin because mortgage interest is only one of several itemized items for deduction.
Related: We’re All Middle Class Citizens
Try To Avoid Getting Stuck In The Upper Middle
The GOP tax proposal is telling everybody not to get stuck in the upper middle like garbage in a trash compactorThe people who may lose are working individuals making between $200,000 – $416,700 and families making $260,000 – $470,700 living in high tax rate statesThese folks may see their marginal income tax rate go up from 33% to 35% and see many deductions disappearAlthough, they will benefit from lower taxes on the lower portion of their income.
You either want to make less than $200,000 as an individual or less than $260,000 as a married couple or as close to $500,000 as an individual or as close to $1,000,000 as a married coupleEverything else will either be neutral or slightly negative The real frustration is the cost of living for most high income W2 wage earners.
As for me, I plan to generate as much business profits as possible until the next administration arrivesIf the business pass through tax rate does get capped at 25%, I will use my tax savings to hire someone to help run the business and write content so I can spend more time with my familyReaders win because I won’t end up quitting under the strain of full-time parenthood for the next five yearsThe economy wins because one more person gets a job and spends.
I’ve already sold a very expensive property in San Francisco to lock in gains, simplify life, and diversify into heartland real estateIf the mortgage indebtedness cap for interest deduction does decline to $500,000, I will pay down my principal mortgage debt to $500,000 if previous mortgages above the threshold are not grandfatheredFinally, I plan to leave San Francisco and move to Honolulu where the property tax rate is 70% lower within the next three years.
Hopefully by the time tax rates rise again, I’ll be completely sick of making money and want to relaxAs a retiree, you want high tax rates so that other people can pay for your benefitsIn a low tax rate, bull market environment, it’s best to press as much as possible.
Readers, how do you feel about the latest GOP tax proposal? Will you do anything to take advantage? What are some tax reform issues I’ve missed?
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Filed Under: Taxes Author Bio: Sam started Financial Samurai in 2009 to help people achieve financial freedom sooner, rather than laterHe spent 13 years working in investment banking, earned his MBA from UC Berkeley, and retired at age 34 in San FranciscoEverything Sam writes is based on first-hand experience because money is too important to be left up to pontification.
His favorite free financial tool he’s been using since 2012 to manage his net worth is Personal CapitalEvery quarter, Sam runs his investments through their free Retirement Planner and Investment Checkup tool to make sure he’s properly planning for his financial future.
Sam is currently most interested in the real estate crowdfunding space, where he has invested $510,000 with RealtyShares, one of the largest platforms in the spaceThere is currently a large opportunity to arbitrage the valuation differential between heartland real estate and coastal city real estate.
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MrFreaky Frugal says
November 4, 2017 at 4:59 am
Sam – Thanks for the nice analysis!
I’m impacted very little by the GOP planI have no mortgage, so I use the Standard Deduction anywayWith the old plan, MrsFF and I get $21,700 between the Standard Deduction and Personal ExemptionsWith the new plan, MrsFF and I get $24,000 and no exemptionsA slight improvement
My tax bracket decrease slightly from 15% to 12% because we’re FIREd and have low taxable incomeAnother slight improvement, but I could use the extra headroom in the 12% tax bracket to do larger Roth IRA Conversions.
November 4, 2017 at 5:17 am
My family of 4 will be seriously screwed under this tax plan if it passesI’m “upper middle” living in NJ with high property taxesThe highest federal tax rate we pay will go from 33% to 35%I will lose the SALT deduction and lose more than half of my property tax deductionAnd let’s not forget that healthcare premiums will now be taxed if you work for a company that offers benefitsMy paycheck from day one goes downThe only good things about the plan are the death of AMT and the possibility that my wife’s income as an independent contractor will be taxed lowerBut there is very little detail about who qualifies for thatBut the losses will far exceed those two possible outcomes.
Basically, “tax reform” is being paid for by 6-7 statesIt’s a big FU to blue states and I’m an Independent!
November 4, 2017 at 8:26 am
It sounds like you actually may benefit more than you realize I am an “upper mid” earner and also assumed I’d lose out under this plan due to my tax bracket increasing from 33% to 35%, losing a big sales tax deduction and some of my property tax deduction But I ran the numbers through my tax spreadsheet, and I’ll actually save a couple grand in taxes (1-2% of my total federal tax bill) due to so much more of our income being taxed at the new lower 12/25% rates On top of that, if the AMT goes away I could save another $5K Not to mention benefits from economic activity increasing if corporate taxes get slashed, which should benefit my stock portfolio.
It pains me to see the media and many individuals talking out of both sides of their mouths on this issue, simultaneously claiming that Trump’s plan only benefits the rich but then griping that it’s skewed to hurt “high tax states.” The “losers” under this plan are high earners with tons of deductions, regardless of what state you live in But those “rich people” are also getting the benefits of the elimination of AMT and estate taxes, along with being shareholders set to be some of the few who will benefit from the corporate tax rate decrease (to hear the media tell it)
The pros and cons actually seem remarkably balanced to me – actual reform, not just a tax cut, requires special interest deductions to be cut Everyone wants to close “loopholes” until it actually comes down to it.
Financial Samurai says
November 4, 2017 at 8:56 am
I agree with your thinkingThere’s so much political rhetoric in the media, they are so biased/sensational to get more viewsBut when I look at who benefits through this article, it seems like most people benefit, and there is a simplification of the tax code which everybody will benefit from
The people who lose are those who are receiving other benefits that will be taken away to pay for this tax proposalAnd of course the high income earners in states like California, New Jersey, New York, and Illinois.
November 4, 2017 at 8:58 am
My very talented tax accountant disagrees with youAnyone who thinks the corporate tax cut will benefit employees is naiveThey will buy back more stock, increase dividends and only invest in ways to increase automation.
Financial Samurai says
November 4, 2017 at 9:09 am
Then the solution is to simply invest in those companies that are publicly tradedAs the hundred percent owner of my small business, I will not be buying back even more stock because I own all the stock
America is mostly run by Small Businesses And I will be hiring more help if there is a pass-through tax cut.
Do you run a small business?
November 4, 2017 at 9:34 am
My comment was to ElizabethBut to answer you Sam, no I don’t run a small businessI agree with you that the high tax states lose but making $200k – $400k in NY doesn’t mean you’re wealthyThose are the tax payers paying for this “reform” and my tax accountant agrees.
November 4, 2017 at 11:47 am
My point was that as a shareholder I stand to benefit from the corporate tax cuts – not as an employee Most high earners who may otherwise be losing should be in the same boat unless they aren’t investing I agree that companies are likely to use much of their tax savings to boost profits and reinvest, but since I plow quite a bit of my income into broad US index funds I stand to benefit from resulting increased dividends and share appreciation Most literature does indicate that the general economy should benefit too, especially at first if offshore cash floods back to the US – to what degree is what is debatable
I agree that high earners aren’t necessarily wealthy (yet), but I disagree that the “coastal blue states” are the losers here There are high earners paying plenty of state, property and sales tax in red middle America too, and plenty of low/middle earners in NY and CA.
Jim Bob says
November 6, 2017 at 11:36 am
KS, those in the other forty three or so states applaud the reduction of their subsidizing the federal budget for the benefit of you folks in wealthier states who’ve been paying less than your fair share for decadesAnd don’t forget that about 88% of the cost of the s-a-l-t tax increase, net of the standard deduction increase, is paid by the richThe liberals love socking it to the rich, as long as they’re in conservative, poorer states.
November 6, 2017 at 5:46 pm
I see you’re drunk on talking pointsRed states are far more dependent on the federal government than blue statesWho’s paying their fair share?
November 4, 2017 at 5:39 am
I suspect it’ll change ten more times before anything gets signed That being said as written it will work to our advantage or be neutral Our mortgage is approaching payoff so our itemization was creeping close to the standard deduction(low income tax state) My biggest concern is charities might also suffer if less people itemize due to loss of charitable deduction value at lower incomes.
November 5, 2017 at 8:19 am
Great for you!
How about for a new professional family making 300,000k per year (for the first year ever), wanting to buy a house, with 300,000k in student loans – or, every single physician fellow in America next year.
No student loan interest deduction
MID cut in half
No deductions for state taxes
This is a HUGE FU to professional couples just coming out of school and looking to start a life.
November 6, 2017 at 6:29 am
Your income will be too high to deduct any student interest under the current tax planYou may want to calculate again under both scenariosThe tax savings on the lower income will offset some or most of the deductions lost.
November 6, 2017 at 9:35 am
Professionals coming out of school and looking to start a life benefit from lower taxes in the lower band of their income, (zero taxes for the first 12k for individuals or 24k for couples), coupled with higher standard deductions that really benefit renters who in the current tax system do not make enough or own property to deduct mortgage interest and prop taxes, many people who don’t own homes have the ability to do itemized deductionsThis tax savings should allow for young professionals to save more money for home buying and retirement.
Nirav Desai says
November 6, 2017 at 1:42 pm
So renters in expensive cities can now afford their rent increases, right? :-P
November 6, 2017 at 5:46 pm
The state income tax may burn but in the grand scheme of physician compensation you’re allready shooting yourself in the foot working in an area with high state income tax if that’s the case.
Bad news for you is there isn’t any student loan interest benefit to you at your income anyway, so I wouldn’t get to riled up because somebody long ago allready sent that FU your way.
Don’t buy a million dollar house not a good idea anyway.
If you’re in cali, NY, NJ etc think about who is really screwing you The state grabbing their X% of your income or the federal gov saying you have to pay the same for federal services as every other person in the nation making the same amount as you.
Apathy Ends says
November 4, 2017 at 6:41 am
I am curious to see how this shakes out for us, it should benefit us but MN has a high income tax rate that might make it a neutral event.
We are close to maxing out our 401ks and should be able to make it happen next year – that seems to be the easiest way to reduce the impact (thankfully they didn’t gut the 401k max)
Shouldn’t be much of a real estate impact, not a lot of 500k plus houses in the suburbs of MN I imagine we will see a lot of 499-560k final sales
Dads Dollars Debts says
November 4, 2017 at 6:59 am
It will be interesting to see how tax code changes will effect early retireesWill we aim for different earning levels? Sell real estate? ….who knowsIt has been a very long time since substantial changes have been made to the tax bill.
November 4, 2017 at 7:43 am
Hi Sam! Tennessee actually repealed its Hall Tax this yearIt’s being phased out over the next few years (4% in 2017, ten decreasing 1% per year until 0)
Thanks for the great article as always!
November 4, 2017 at 7:47 am
Definitely starting a finance consulting business, already in the works and planning to make this my full time job to take advantage of the lower tax bracket
November 4, 2017 at 7:47 am
Nice breakdown of the proposal More than likely things will change if/when it gets approved, but it’s good to know where things stand I’m glad the 401k contribution limit is untouched for now I’ve been hearing some stories (fake news?) that the limit would be slashed considerably If that happened, there will be a lot of poor Americans in the future
While middle and low income families aren’t negatively effected all that much, the group that stands to do the best are very rich business owners Slashing the corporate tax rate and eliminating the estate tax have been on the Republicans radar for a long time.
November 4, 2017 at 8:40 am
One other proposed change that is not getting much attention is the phase out of the capital gains exclusion on home sales ($250K single, $500K married) for those with incomes over those levels At this point I’m not sure if the profit from the home sale would count as incomeIf it does it will surely affect our planned retirement downsizing in 2019I agree with KS who commented that ‘tax reform’ is being paid for by 6 or 7 states.
Lily @ The Frugal Gene says
November 4, 2017 at 9:55 am
We’re in the upper middle hovering just around $260K-$280KIt would be a very close call where we landWe live in Washington so there’s no income taxThis state has high property and auto taxWe dont own a carOur property is a business expense so we get to deduct mortgage interest, so that doesn’t effect usDoubling the standard deduction is good for us (and most Americans).
We save money (most people will) under the new plan but it will be a hit to the deficit.
Damn Millennial says
November 4, 2017 at 10:34 am
Do you plan to keep your other SF real estate when you move to Hawaii? Would you buy a home or rent when you do move? Interesting considerations I think the big take away (if anything gets changed at all) is the mortgage interest deductionThose living in expensive homes with large mortgages could get dinged.
Jim Bob says
November 6, 2017 at 11:42 am
DM, “those living in expensive homes with large mortgages” account for about 6% of taxpayers.
Damn Millennial says
November 6, 2017 at 1:52 pm
Hi Jim Bob,
Agreed but they are also most likely high earners to qualify for those mortgages and therefore bring in a disproportionate amount of revenue for the government each year to make those paymentsAs opposed to the large majority who pay nothing in federal taxes.
Nerd Abroad says
November 4, 2017 at 10:39 am
Good to see at least an attempt to simplify and reduce taxes in the US, which should attract investment capital and be stimulatory to the economy Even if the companies which benefit just buy back more shares, that returns capital to shareholders who will find other uses for the money That can still be stimulative to the economy as they spend it, lend it, or re-invest in companies with more growth potential Lower corporate tax rates will incentive would-be business owners to take on the risk.
In Canada our federal and provincial governments are taking the opposite approach, in recent years adding new high income brackets with higher tax rates, and recently introduced changes to small business taxation that will stifle investment and economic activityI expect the US to outperform and Canada to underperform in relative terms I’m seriously considering a move south!
Michael @ Financially Alert says
November 4, 2017 at 10:49 am
Thanks for the thorough breakdown, Sam It’ll certainly be interesting to see if or how much of it goes through I was surprised to see the mortgage deductions cut so much, and the doubling of the standard deduction I guess it’ll simplify things overall Sucks to be stuck in the upper-middle class bracket!
November 4, 2017 at 10:50 am
Don’t forget the “hidden” 46% tax bracket! If you make more than $1 million in taxable income, there’s an extra 6 percent tax on the next $207,000.
This is to claw back the $12,420 in tax savings from the difference between the 12% tax rate and the 39.6% tax rate on the first $45,000 in taxable income.
I wonder why no one is talking about thisIt’s yet more incentive not to work too hard.
November 6, 2017 at 6:54 pm
I’d be interested to see who the 1 million dollar salaries are and how they structure their income.
Those I know would be hit would be high paying medicine specialists, lawyers and executives.
In those setting generally you have a lot of pull in how you get paid Deferred compensation deals or structures with stock compensation and such.
Don’t feel to bad for the million + earners I’m not there yet but even my pay structure has an option for deferred compensationThey’ll find a way to avoid it.
November 4, 2017 at 10:59 am
As an investor in stocks bringing the corporate tax rate down is goodPurely from an investor perspectiveEveryone else who doesn’t own stocks though is screwed cause the lowering of the rate comes at their expenseThe same with everyone that doesn’t own a small businessThe same with everyone that doesn’t have a massive estateA lot of readers of this site should be excited about this planIt gives them even more.
November 4, 2017 at 12:05 pm
I agree Wealthier members of society benefit a disproportionately large amount through a number of channels such as the elimination of the estate tax, potential reduction in highest income tax bracket or starting it at a higher dollar amount, and the reduction in the corporate tax rate (since the wealthiest people own a disproportionately large percentage of capital assets like stocks and bonds)
Most other people will notice a minimal impact in the short-run, but it’s important to keep in mind that the government will have to make up the lost tax revenues somewhere Either future tax rates will have to be increased, significant additional changes to the tax plan will need to be made, or run at a large deficit for a while until someone decides to take action The plan in its current form has to be altered.
November 5, 2017 at 9:05 am
I do think a form of this tax plan will go throughThey won’t alter it much moreMost of Congress is rich and will allow it through.
Agreed, someone in future will need to fix itThere will be an economy bump, followed by a hard crashThe best that I can do is watch for the signs of the hard crash after the continued run upBelieve that Very high interest rates and consumer prices are also in our future.
November 4, 2017 at 11:16 am
I really don’t see why people think a marriage penalty for the upper middle is a good ideaTo make it even worse, it actually goes away for the very wealthyI’m telling my kids who work in tech not to get marriedAnd with two working people in a marriage, you also have two commuting costs, two work clothes expenses, plus potentially daycare and other itemsSeveral of my married working friends need two houses or an additional apartment because of the distance between their jobsThose GOP leaders really want to keep women out of STEM or other high income but salaried professionsIt is too bad for our future generations.
Financial Samurai says
November 4, 2017 at 11:52 am
I think you read their proposal wrongThe GOP tax plan is raising the marriage income limit to $1 million from $470,000 combined income when the 39.6% marginal income tax rate kicks in
This eliminates the marriage penalty tax For single people who want to get married who make over $470,000 combinedPlease reread section #5 where I Give an example.
November 5, 2017 at 6:30 am
The marriage income penalty goes away for people making above 400,000 But the 35% tax bracket for married couples starts at 260,000 while the 35% tax bracket for individuals starts at 200,000. If those individuals weren’t married but made 200,000 each, they would be in the 25% tax bracket The cost of getting married for those individuals could be $14,000 per year.
Nirav Desai says
November 6, 2017 at 1:47 pm
Yup, a two-income household where the HHI is between $260k-$400k gets unfairly penalizedThis is basically a large portion of dual income households in CA and NYVery well-off, but not wealthy…what I presume is the upper middle class.
As usual, when politicians says we need to raise taxes on the rich, they mean the upper middle class.
November 5, 2017 at 10:08 pm
The marriage penalty is sexist and is anti-marriage / anti-familyWe aren’t in the days where the wife stayed at home and didn’t get an education…thank God!
Jim Bob says
November 6, 2017 at 11:56 am
Alice, the claim that “GOP leaders really want to keep women out of STEM or other high income but salaried professions” is ridiculousWho told you that, and what proof did they offer? When MsDevos advocates “Promoting Science, Technology, Engineering, and Math (STEM) Educat
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