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What else can they take away?
Old 02-25-2013, 05:35 PM   #1
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What else can they take away?

Capping Top Earners

"Pressure is growing to change incentives for retirement savings as U.S. lawmakers look for revenue, and top earners may pay the price.
The budget challenges confronting the federal government are leading to scrutiny of tax-advantaged savings accounts such as 401(k)s because they’re among the costliest tax breaks. A Brookings Institution report scheduled for release tomorrow will add to research that recommends curtailing the benefits for top earners to boost U.S. coffers."

Top earners seems to mean anyone above the 28% tax bracket.
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Old 02-25-2013, 06:33 PM   #2
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I found a link to the proposal, which is due to be released tomorrow.

Just keep saying to yourself "it's only a think tank proposal..."

http://www.hamiltonproject.org/files...dget_Prop6.pdf

Quote:
a Tax Policy Center (2009) analysis of the major retirement savings tax
expenditures suggested that 84 percent of the benefits went to
tax units with cash incomes above $100,000, whereas less than
1 percent went to tax units with cash incomes less than $30,000.
Quote:
Cap the rate at which deductions and exclusions related
to retirement saving reduce a taxpayer’s income tax
liability at 28 percent. Such a change would reduce the
benefit associated with contributions to 401(k)s, IRAs, and
other qualified retirement accounts for the higher-income
tax payers whose tax rate exceeds 28 percent. As discussed
above, studies of households’ responses to retirement
tax incentives suggest that the (mostly high-income)
individuals that do alter contributions in response to
changes in the return on these investments tend to simply
offset these adjustments with changes in other forms of
saving. The Tax Policy Center has estimated that entirely
eliminating the tax preference for new contributions to
defined contribution plans would raise about $30 billion
from households in the top 5 percent of the income
distribution, which is very roughly the fraction of
households that would be affected by a deduction rollback.
Limiting the value of the deduction to 28 percent would
reduce its value to taxpayers in the 33 to 39.6 percent tax
brackets by roughly one quarter. So, if we estimate that the
rollback would raise about 25 percent as much revenue as
completely eliminating it, the proposal should raise about
one quarter of $30 billion, or $7.5 billion per year.
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Old 02-25-2013, 06:42 PM   #3
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Hmmmmmmm .... I so this would be a reason to NOT succumb to "OMY" syndrome ?
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Old 02-25-2013, 07:17 PM   #4
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Originally Posted by Live And Learn View Post
Hmmmmmmm .... I so this would be a reason to NOT succumb to "OMY" syndrome ?
Not necessarily. If the proposal is passed into law and you are above the 28% bracket and you are still saving for retirement in a 401k or IRA, then you would need to evaluate how much the tax break reduction would impact your particular situation. In other words, if you currently can save $X in your "one more year", then you would need to decide if that year is still worth it if you only save $X - $Y where $Y is how much of the tax benefit you would lose for 401k contributions.

If anything, the article tells me to get my "one more year" in now before a proposal like this actually passes into law and reduces the tax benefits of 401k contributions.

My gut tells me that such a law is unlikely though. I believe that this would be incredibly unpopular legislation in the current political climate. That climate may change in the future, but hopefully I'll have finished my last "one more year" by then

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Old 02-25-2013, 07:23 PM   #5
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All I can say is that I am so looking forward to dropping out of the US tax net when I FIRE.
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Old 02-25-2013, 08:34 PM   #6
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I only hope none of this think "tanking" comes as a surprise to anyone. Clearly, we've chosen to "enhance" revenues more than cut spending. Whether that's good or bad depends upon your point of view, I suppose. But, at least someone is finally "thinking" about maybe, perhaps, just possibly starting to think about maybe dealing with the deficit. Of course, I could be wrong. I usually am when I give the gummint credit for attempting to try to think about doing what might be considered, possibly, to be the "right" thing. Obviously, YMMV.
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Old 02-26-2013, 04:04 AM   #7
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Quote:
"Pressure is growing to change incentives for retirement savings as U.S. lawmakers look for revenue, and top earners may pay the price." ... "Cap the rate at which deductions and exclusions related
to retirement saving reduce a taxpayer’s income tax
liability at 28 percent."
Am I missing something? Doesn't a percentage cap on the effect of a tax deduction/exclusion adversely impact less affluent people more than more affluent people? So that cannot be the mechanism that they're suggesting. How would such a cap work?
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Old 02-26-2013, 04:54 AM   #8
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Brewer, I know that you have both done a lot of thinking about these issues - what would your thoughts be on making 401k savings non-deductible, but 25% government matching to the 401k account? (say 25% tweaked up or down to equal the current tax deduction costs so budget neutral to gov't)
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Old 02-26-2013, 06:24 AM   #9
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Originally Posted by bUU View Post
Am I missing something? Doesn't a percentage cap on the effect of a tax deduction/exclusion adversely impact less affluent people more than more affluent people? So that cannot be the mechanism that they're suggesting. How would such a cap work?
This is my understanding of the proposal's effect.

Married filing jointly, taxable income $300,000 = 33% 2013 marginal tax rate.

So taxes owed without a deductible 401k contribution would be $99,000.

2013 401k max contribution per earner is $17,500, or $35,000 per couple.

Taxes owed with a max contribution under current law: (300,000 - 35,000) x .33 = $87,450.

Under the proposal, the math would be (300,000 x .33) - ($35,000 x .28) = $90,200.

The difference between $90,200 and $87,450 is the added tax liability resulting from the policy change.

The boundary between the 28% and 33% tax bracket for a couple is $223,000, so this wouldn't have an effect on less affluent people.

Corrections welcomed if I have miscalculated.
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Old 02-26-2013, 06:32 AM   #10
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I understood the proposal to mean there would be a new total limit on deductions and adjustments to income (adjustments are retirement account contributions) of 28%. So, gross salary of $300k means maximum deductions and adjustments of $84k.

The proposal is confusing.
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Old 02-26-2013, 07:44 AM   #11
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Originally Posted by MichaelB View Post
I understood the proposal to mean there would be a new total limit on deductions and adjustments to income (adjustments are retirement account contributions) of 28%. So, gross salary of $300k means maximum deductions and adjustments of $84k.

The proposal is confusing.
Micahel: I believe what you describe is covered in think tank paper #7 (the one Brewer posted is described in #6)

All of them here:
15 Ways to Rethink the Federal Budget *»* Papers *»* The Hamilton Project

#7 Limiting Indiviual Income Tax expenditures is here:
http://www.hamiltonproject.org/files...dget_Prop7.pdf

Quote:
There are several different ways to reduce income tax expenditures across the board, which can be sorted into two
categories: those that reduce the tax subsidies by affecting the
size of the subsidies at the margin (a price-incentive effect),
and those that reduce the subsidies primarily by capping or
limiting the total value of the subsidies (an income effect).

The following are three policy options that reduce the price subsidy
effects of tax expenditures, thereby affecting the price incentive
effects:
[The first is...] Limit marginal-tax-rate-dependent tax preferences to one
of the lower-bracket rates. President Obama has proposed a
limit of itemized deductions to the 28 percent rate in each
of his past budgets; in 2012 he expanded the proposal to
include some other tax expenditures such as the exclusion
of employer-provided health benefits and the preferential
tax rate on dividends. The Congressional Budget Office
(CBO) estimated that this expanded version would raise
$523 billion over ten years (CBO 2012). (The prior versions
of the 28-percent limitation, which were limited to itemized
deductions, were estimated to raise almost $300 billion
over ten years.) The CBO has also described a proposal
to further limit the rate on itemized deductions (but not
other tax preferences) to 15 percent. The CBO estimates
this proposal would raise $1.2 trillion over ten years (see
CBO 2011, revenue option 7, pp. 151–152).1
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Old 02-26-2013, 08:30 AM   #12
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Originally Posted by Htown Harry View Post
This is my understanding of the proposal's effect.

Married filing jointly, taxable income $300,000 = 33% 2013 marginal tax rate.

So taxes owed without a deductible 401k contribution would be $99,000.

2013 401k max contribution per earner is $17,500, or $35,000 per couple.

Taxes owed with a max contribution under current law: (300,000 - 35,000) x .33 = $87,450.

Under the proposal, the math would be (300,000 x .33) - ($35,000 x .28) = $90,200.

The difference between $90,200 and $87,450 is the added tax liability resulting from the policy change.

The boundary between the 28% and 33% tax bracket for a couple is $223,000, so this wouldn't have an effect on less affluent people.

Corrections welcomed if I have miscalculated.
Your numbers aren't accurate but the general idea is right. If you're in the 33% tax bracket that doesn't mean you're taxed at 33% for all your income. As you can see from this link: IRS Announces 2013 Tax Rates, Standard Deduction Amounts and More - Forbes

The end result would be an increase in taxes from $63,763 to $65,513. This is for your example of a married couple filing jointly who earn $300,000 and contribute $35,000 to 401K.
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Old 02-26-2013, 08:53 AM   #13
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I wonder if small businesses will elect not to set up retirement accounts for themselves and their employees. Those employees then would be limited to their own IRA contribution limits.
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Old 02-26-2013, 09:31 AM   #14
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The frustrating part of this is not the specific proposal. It is that they are opening teh can of worms on a program that has been one of the few successes in helping a sizable chunk of the working population save for retirement. Why on earth would you monkey with that? Its like the Bush administration wanting tod ismantle social security: yeah, the system has warts, but don't ruin what has largely worked for decades.
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Old 02-26-2013, 09:48 AM   #15
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Quote:
Originally Posted by Htown Harry View Post
Micahel: I believe what you describe is covered in think tank paper #7 (the one Brewer posted is described in #6)
got it. I read the first line and jumped to the wrong conclusion.

Quote:
Cap the rate at which deductions and exclusions related to retirement saving reduce a taxpayer’s income tax liability at 28 percent.
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Old 02-26-2013, 10:52 AM   #16
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Interesting proposal and it would create a weird scenario for exactly the people facing a cap on the 401k tax break to 28%. In retirement or when they hit RMDs they may be back at a tax rate of 33% or 39.6%, and when they have 401k withdrawals they will get taxed at those higher rates. In other words, put money in and save 28%, then take it out (maybe even the next year) and pay up to 39.6%. I imagine there would be some convoluted extra tax form you would file to have that income taxed at 28% later somehow to defeat this additional taxation of income.

One change I would like to see is making the catch up contributions (extra 1000 or 5500 for IRA or 401k, respectively) available to all or to none. Or as a compromise, you can use it any 10 years you want regardless of age.
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Old 02-26-2013, 10:56 AM   #17
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Originally Posted by Live And Learn View Post
Hmmmmmmm .... I so this would be a reason to NOT succumb to "OMY" syndrome ?
When I retired at 57, knowing the US fiscal revenue/spending outlook and demographic projections, somewhere well down my list of reasons to retire early and forego many more years of good income (and delaying withdrawals) was - at some point during my retirement, a larger $ portfolio would probably just result in more taxation. Not sure where the line between patriotic and pointless really is.

Sometimes you're smart, and sometimes you're just lucky (me)...

Doesn't mean I agree with capping top earners, just that it seems like an increasingly distinct possibility to tax wealth and income. Seems counterproductive, but that may not stop legislators answering to the masses. You hear more and more proposals all the time, think tank or otherwise.

The generations that follow most of us have it tougher than us already, this proposal works both for and against them...
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Old 02-26-2013, 12:33 PM   #18
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Your numbers aren't accurate but the general idea is right. If you're in the 33% tax bracket that doesn't mean you're taxed at 33% for all your income.
Oh, of course.
Thanks for clarifying.
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Old 02-26-2013, 12:54 PM   #19
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Originally Posted by Htown Harry View Post
Quote:
a Tax Policy Center (2009) analysis of the major retirement savings tax expenditures suggested that 84 percent of the benefits went to tax units with cash incomes above $100,000, whereas less than 1 percent went to tax units with cash incomes less than $30,000.
I've been called some low-down names in my time, but "tax unit" just about takes the cake!
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Old 02-26-2013, 12:59 PM   #20
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I've been called some low-down names in my time, but "tax unit" just about takes the cake!
I am glad we finally recognize our purpose and station in life.
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