Trump Tax Cuts and The Power of Zero

September 18, 2017

I’m often asked the question by advisors and potential clients alike: “How does getting to the 0% tax bracket change if President Trump lowers taxes?”  My answer is nearly always an enthusiastic, “It gets even better!”

Here are the facts.  If Trump is to push his tax cuts through, it will likely be under what is known as Budget Reconciliation.  The passage of otherwise controversial laws requires a filibuster-proof supermajority or three-fifths vote in the House and Senate.  Since Trump is unlikely to get get that supermajority, he has the alternative of pushing his tax cuts through under Budget Reconciliation.  Budget Reconciliation only requires a simple majority (which he has in both the House and Senate) and is filibuster-proof.  Here’s the catch, just as with the Bush tax cuts in 2003, any tax reductions pushed through under Budget Reconciliation would sunset in 10 years.  In other words, Trump can get his tax cuts for ten years, but in the 11th year, taxes would revert to their current levels.

So, what exactly does this mean for advisors who want to get their clients to the 0% tax bracket in retirement?  This is absolutely huge!  Remember, the cost of getting money into the tax-free bucket (Roth IRAs, Roth 401k’s, Roth Conversions and Life Insurance) is that you have to be willing to pay a tax.  Well guess what, if tax rates come down for ten years, the cost of getting into the tax-free bucket just went on sale!  What’s better, we’d know the exact year and day when they’d revert to their normal rates!

Can you think of a better incentive for clients to begin the process of repositioning surplus dollars from their taxable and tax-deferred buckets to tax-free?  Trump tax cuts would open up a 10-year window of opportunity during which your clients can take advantage of lower taxes.  Every year that goes by where they fail to take advantage of these low tax rates is potentially a year on the back end where they’d be forced to pay at higher rates.  Talk about creating a sense of urgency for your clients!  And, as it turns out, 10 years is just about the perfect time frame within which to implement a zero-tax retirement plan.  Remember, your clients should shift dollars to tax-free slowly enough that they don’t rise too rapidly in their tax cylinder (and get tax heartburn), but quickly enough that they get all the heavy lifting before tax rates go up for good.  Ten years is the perfect time frame within which to accomplish the ideal shifting program.

While finalized details of the new tax plan have yet to come out, Trump has hinted at lowering taxes not on the rich, but on the middle class.  This bodes well for the vast majority of clients for whom getting to the 0% tax bracket is a realistic goal.  My experience shows that most people who are repositioning surplus dollars to tax-free in an attempt to get to the 0% tax bracket are paying taxes at the 25% or 28% bracket.  For these clients, getting to the 0% tax bracket just got a whole lot less expensive!

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