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tax-free savings vehicles
One plan, called a Lifetime Savings Account, would allow individuals to set aside up to $7,500 a year.
The money could be withdrawn at any time, for any purpose, without penalty or tax.
The second, a Retirement Savings Account, would replace current IRAs and more than double the limit on contributions to $7,500.
Money could not be withdrawn until retirement age.
It should be noted that this is an opening gambit in what is likely to be a long negotiation.
As I noted , Bush has been as passionate about increasing government spending as he has about reducing taxes, and the resulting deficit pressure is starting to make it harder for him to push bold plans like this one through an increasingly skeptical Congress.
That said, a move like this one could be very helpful to non-taxpayers like myself, increasing the amount of our tax-free income, and keeping more of it liquid.
On the other hand, proposals like this one might be used as cover to eliminate or reduce other deductions and credits, so it’s hard to say how we’d fare until the proposal becomes law.
The $7,500 “Lifetime Savings Account” that you can take money from penalty-free sounds especially suspicious — almost exactly the same amount as the personal & standard deductions combined.
What do you bet the plan is to replace those deductions with this “Lifetime Savings Account” so that only if you establish the account and play by its rules do you get to take the deduction?
Poor people who live paycheck to paycheck will be unable to make the required deposits, and the result will be to push more poor people onto the tax rolls than before.
Sneaky pool, if my speculation is accurate.
Some conservatives are hoping that by making private savings accounts like these more attractive and easy-to-use, they’ll eventually be able to get more public support for reducing and eventually eliminating Social Security and Medicare.
I’ve written about the payroll tax : how it’s not as easy to get out of as the income tax, and how the government uses this supposed “trust fund” to supplement the general fund.
But getting rid of this tax is a long-term goal of conservatives and it’s a long shot that much will change in the short term.
I’ve been crowing lately about the potential advantages of the new Health Savings Accounts for folks like myself who are trying to stay under the tax line.
There may be more where that came from.
The Bush administration is trying to push for more types of tax-advantaged savings accounts:
That $7,500 isn’t tax-free, the way contributions to the Health Savings Accounts are, though — instead it would work kind of like a Roth IRA, where the money is taxed at your current tax rate before being deposited into the fund, but any earnings those deposits generate (via interest or investment appreciation) are never taxed.
Improving on the Roth IRA, though, is that you don’t have to wait until “retirement age” to withdraw the money — you can get at the money any time you want, tax and penalty free.
Over at the tax law blog Start Making Sense, Daniel Shaviro shares the inside scoop from one of his informants:
The first one is no big surprise, and neither is the second one.
Number three isn’t too new either, except for that “large incentives to convert” twist.
With traditional IRAs and 401(k) plans, you can deposit untaxed money that is taxed when you withdraw it later in life.
With Roth IRAs, you deposit money that has already been taxed, and then when you withdraw it later, it’s tax-free.
So there’s this pool of money out there in traditional IRAs and 401(k) accounts that is due to be taxed sometime but hasn’t been taxed yet.
If the Dubya Squad can come up with some way to convince people to let him tax it now instead of later, he can have more of our money to play with today without having to actually raise taxes.
This follows the Dubya Squad modus operandi of spending freely today and sticking tomorrow with the bill.
Pretty sneaky, eh?
How are they going to do this?
Carrot or stick.
Probably carrot — they might give a discount on the tax people pay when they transfer funds from a traditional IRA or 401(k) to a Roth or Roth-like IRA.
Here’s an example of how someone might be convinced to transfer their money from a tax-deferred account to a taxed account — I did it last year: In , I earned about $18,000. I ran the numbers and determined that I could have earned as much as $25,000 and still be under the federal income tax line.
So I transferred $6,500 from my traditional IRA to a Roth IRA.
That $6,500 is considered part of my income for (I left some wiggle room: $18,000 + $6,500 = $24,500).
This sort of transfer is legal, and there’s no penalty (as there would be if I just withdrew the money from the traditional IRA rather than transferring it to a Roth IRA) — but I do have to pay the tax on that $6,500 now instead of later.
However, I pay that tax at my current rate of taxation, which, because my total income is so low, is 0%.
So that $6,500 went from being money that I was due to be taxed on eventually to being money that was never taxed and never will be.
(Although if the people who want to replace the federal income tax with a federal sales tax get their way, all that careful planning on my part will be wasted.)
This sort of transfer is sensible not only for those of us with a little space in our 0% zone, but for anyone who thinks that they’ll be in a higher income tax bracket when they retire than they are today.
Of course, this is just guesswork, but in a case like mine where today’s rate is 0%, it’s a no-risk no-brainer.
Depending on the incentives that the Dubya Squad tax reform plan offers in the future, though, this option may come to make more sense to even more tax resisters.
Congress is wrapping up its tax legislation.
Here is some of what I’ve learned about it — particularly those parts that might be important to people trying to eliminate their income tax as I do, by keeping our incomes low:
This is expected to be costly to the U.S. Government.
It is projected to lead to the government collecting $1 trillion dollars fewer in taxes over the next decade.
This will likely show up as increased government debt, as the Republicans had a hard enough time doing the easy part (lowering taxes) and are unlikely to be able to muster enough courage to do the hard part (reducing spending).
Republican optimists hope that by keeping this $1 trillion out of government hands and in the private sector, the economy will boom, leading to higher tax receipts after all, and so things will all balance out in the end.
People who know how to run the numbers, though, don’t seem to be taking that scenario seriously.
The bill reduces both corporate and individual tax rates.
But for a lot of people, what really controls how much they’ll pay is not their rate, but how much of their income is subject to the income tax and how much is safely deducted out of harm’s reach.
In any case, the lowest of the rates (10%) remains the same as before and covers just about the same amount of taxable income, so from the point of view of a low-income tax resister like myself, nothing much has changed here.
Next year, the standard deduction had been scheduled to go up to $6,500, and the personal exemption to $4,150 — shielding $10,650 of a single person’s income from income tax.
The new legislation eliminates the personal exemption, but boosts the standard deduction to $12,000 — thereby adding $1,350 to the amount that’s shielded in this way (people filing as married-joint, married-separate, or head-of-household also see rises to their standard deductions).
Modifications to the child tax credit and credits for non-child dependents are meant to make up for the absent personal exemption for people with dependents.
The bill eliminates some itemized deductions, but also eliminates the limitation on how much of such deductions you can take if you’re well-off.
You will also be able to take a slightly higher proportion of your Adjusted Gross Income (60%, up from 50%) as a deduction for charitable contributions, and the law will become somewhat more generous about allowing you to take a deduction for medical expenses.
I haven’t looked into this very closely, but it’s possible that this holds out some hope to high-rollers that they might eliminate their federal income tax through zealously pursuing itemized deductions.
The bill would allow you to use tax-advantaged education savings accounts to pay for a child’s tuition at a private elementary/secondary school (in the past, these accounts could only be used for post-secondary education).
This could be a useful tax shelter for people who would prefer not to inflict government-run schooling on their children.
It’s surprising to me just how little actual change there is from the status quo.
Everybody complains about the complexity of filing their income taxes, and politicians get lots of mileage about promising to let people file on the back of a postcard and the like.
But after all of the wrangling, this new bill keeps the individual Alternative Minimum Tax and doesn’t even reduce the number of tax brackets — the cheapest trick in the “simplification” bag.
It even introduces a lot of new complexity by means of its new method of taxing “pass-through” income — something that may cause some new headaches (or, may we hope, offer new tax-saving opportunities) to those of us with Schedule C income from sole proprietorships, gig economy work, or small businesses.
I was also a little surprised to see neither the House nor Senate try to boost Health Savings Accounts.
These are a more Republican-identified health care policy reform measure, and I would have thought that as they try to sabotage Obamacare that they would have put some effort into bolstering some of their own alternative ideas.
No such luck.
It makes me wonder if maybe Health Savings Accounts are a craze that has come and gone and that we might expect the program to atrophy at some point.
