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 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 10 years, the cost of getting into the tax-free bucket just went on sale! Not only would taxes go on sale, but 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 to take advantage of lower taxes. Every year that goes by where they fail to take advantage of historically low tax rates is potentially a year on the back end where they’d be forced to pay at higher rates.