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2017-11-02 18:12:03
Your Money: Why It’s Too Soon to Predict What the Tax Changes Will Mean for You

The news on Thursday that Congress does not (for now at least) plan to fundamentally alter our workplace savings plans was a pleasant surprise on its own. Current homeowners won’t see their mortgage interest deductions disappear, either.

But the fact that these particular trial balloons popped loudly is also a good reminder not to make too much just yet of any of the changes that are under discussion, or the precise figures behind them.

The tax bill unveiled by the House of Representatives was a mix of widely predicted measures, like disallowing the deduction of state and local income taxes for individuals, with a few surprises thrown in, like the end of the dependent care accounts that many families get through employers and use to pay for child care. In the coming days, politicians and pundits will speak with great authority about what will happen now and what it means for you. That’s their job.

My job, however, is to remind you that we should express great skepticism toward anyone who claims to know how this tax bill will evolve, and how any bill would actually change our behavior and our financial lives.

I count at least six major areas of uncertainty.

Nothing may come of any of this. After what happened with the health care bill this year, there is no reason to have great confidence in the current crop of lawmakers in Washington. Tax reform is arguably harder than health insurance, given how many more constituents this bill may affect.

Even if it passes, the final bill will be different. Remember that the Senate will offer its own legislation, and then the haggling will begin in earnest. The debate over deducting state and local taxes for individual taxpayers is almost certainly not over, as lawmakers from high-tax states will put up more of a fight. As of now, those deductions would disappear, though you would still get to deduct up to $10,000 in property taxes.

And any changes that affect the bill’s overall math will require countervailing alterations elsewhere.

Sacred cows are hard to slay. A hearty congratulations to the Save Our Savings coalition, a financial services industry lobbying group that worked to keep the tax benefits for retirement savings (and the ever-increasing balances in members’ accounts) as they are. Despite all the chatter about reducing the amount you could put in 401(k) accounts and other workplace savings plans before paying income taxes, no lowered cap emerged after all.

That’s not surprising when you consider recent history. When President Barack Obama tried to place some limits on 529 college savings accounts, the blowback was so severe that he backed down within days. It turns out that Americans don’t like to be punished for doing the right thing, financially, for themselves and their families.

Hence the lowered cap on the mortgage interest deduction that also emerged Thursday, which should still encourage some people to buy real estate and use mortgage payments as a forced savings vehicle. The deduction would remain intact for current homeowners.

For people buying in the future (which the bill defines as Nov. 2, 2017, or later), mortgage interest deductions would have a cap of $500,000, down from the current $1 million. Moreover, only debt from primary residences would count toward that limit, and you could not include any interest from home equity loans or lines of credit.

But will real estate sales and home builder lobbies push back further, and will they succeed?

Our own behavior. While we cannot be sure exactly how much more or less money we might all have without redoing our taxes once a bill, if any, becomes law, it would be a mistake to try to predict how we’ll all react once we do know.

In the wake of the last big tax reform effort in 1986, the rules changed on the deductibility of credit-card interest. That didn’t keep card companies from devising all sorts of clever ways to induce people to spend and borrow much, much more.

Outside actors may have an impact on us, too. If state and local taxes become more expensive because of federal changes in their deductibility, state legislatures might then come under pressure to lower taxes.

Our own changing lives. The biggest question mark for any of us comes from the unknowable future.

Will we change jobs? Earn more? Have kids? Help our adult children? Retire early because of our own choice, or choices made by employers who no longer want us around? These things matter so much more than any tax rules. Depending on how our lives change, any tax changes may help or hurt.

Changing tax rates over time. When all of Washington is occupied with today’s proposed tax changes, it’s easy to forget that we’ve been here before and will be here again. Nearly every recent president has taken his shot at revising the system. And while the proposals here are potentially farther reaching, future politicians will make changes, too.

“In the back of my mind, I don’t anticipate taxes staying low for a long period of time,” said Julie Welch, an accountant and financial planner in Leawood, Kan.

After all, we’re adding to the national debt here in the hopes of stoking growth. If that doesn’t work, it won’t change the fact that Medicare and Medicaid will cost ever more money as the population ages. Something will have to give, and because Medicare is one of the most sacred cows of all, we’re more likely to raise taxes again than to make older people pay more for their health care.

Changing tax rules over time. Our retirement accounts seem safe for now, though it wouldn’t be surprising to see the tax rules for 401(k)s and similar workplace savings accounts back on the table next week or next year.

In the meantime, consider the possibilities. If more people keep saving in Roth retirement accounts of various sorts, where you don’t get a tax break when you put aside the money but it comes out free of income taxes after decades of appreciation, the balances will one day dwarf what sits in them today. And as they grow, legislators will be tempted to cap their size or to tax withdrawals.

This possibility has to be on the mind of any prudent financial planner working with younger clients who have the most time to save, given how often wholesale changes to Roth accounts have already come under consideration.

“It’s disconcerting to me that planning based on the promise of certain rules and taxation levels is actually being second-guessed after clients had put money into that vehicle,” said Katie Brewer, a financial planner in Garland, Tex., whose clients tend to be in their late 30s.

But that is just how things are going to go with this and so many other tax rules, whether 529 accounts or mortgage interest. So what is there to do in the absence of any certainty?

Avoid rash or unnecessary decisions, and remember that maximizing flexibility is always the best strategy. Be wary of home purchases that depend on tax laws’ staying the same. Invest in enrichment for your kids for the pure fun and joy of learning, but also so they might someday earn scholarships in case your savings plan doesn’t work out perfectly.

And when it comes to retirement, this is an excellent moment to be reacquainting ourselves with what the accountants and financial planners refer to as tax diversification.

In the same way that it’s smart to have a mix of investments that might perform differently at different times, it’s best to divide money among various tax-favored accounts. If you have money in a 401(k) or I.R.A., a Roth account and a normal taxable brokerage account (where you’d tally up your long-term capital gains when you withdraw money, under an entirely different set of tax rules), you should have at least some choices come retirement time.

At that point, you can make the withdrawal from the account that serves your tax goals at that moment.

There is one thing we do know for sure in all of this tax talk: Reformers come, and reformers go. We, however, must persist for six or seven decades of adult living and financial planning, and the only way to do that while staying sane is to give ourselves as much room to maneuver as possible.