Why the Trump Tax Cuts Make Early Retirees Richer

Wanderer
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Wanderer

The Wanderer retired from his engineering job at a major Silicon Valley semiconductor company at the age of 33. He now travels the world, seeking out knowledge from other wealthy people, so that he can teach people how to become Financially Independent themselves.
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Photo By Gage Skidmore @ Wikipedia.

I should be a Trump supporter.

I was on a Skype chat with Jim “The GodFather” Collins a few weeks ago when I half-jokingly said this, and JLCollins responded with an incredulous “Excuse me?”

“Okay, I’m actually not,” I replied sheepishly. “But on paper, I should be. Every policy he’s actually signed into law (i.e. the ONLY one) made early retirees like us richer. ”

JLCollins laughed. “OK, why don’t you write that into an article and post it in your blog. I’m sure your readers will get a KICK out of you saying that.”

So I did.

Here’s why the Trump tax cuts make early retirees like us richer.

The Tax Cuts Help the Wealthy

This is what the Trump Tax Cuts look like for taxpayers.

Income Tax Rate Income Levels for Those Filing As:
2017 2018-2025 Single Married-Joint
10% 10% $0-$9,525 $0-$19,050
15% 12% $9,525-$38,700 $19,050-$77,400
25% 22% $38,700-$82,500 $77,400-$165,000
28% 24% $82,500-$157,500 $165,000-$315,000
33% 32% $157,500-$200,000 $315,000-$400,000
33%-35% 35% $200,000-$500,000 $400,000-$600,000
39.6% 37% $500,000+ $600,000+

On the surface, it seems to sprinkle a 2-3% reduction across many tax brackets, but as with any tax cut structured this way it inordinately helps higher earning people. This is because people earning more will benefit from the tax reductions in their bracket PLUS all the brackets below them.

In fact, according to the NY times tax-cut calculator, a married couple earning $25k will get a tax cut worth precisely $0. Yet a married couple earning $750k will get $32,240. And since most people doing this whole FIRE thing tend to make a lot of money while working, this tax cut directly benefits them.

So will YOU benefit from the Trump tax cut? Maybe. The standard deduction gets doubled to $12k per person. But it eliminates the personal deduction you get per child. And it limits the amount of mortgage interest you can deduct to $750k. And it limits the amount of state and local taxes (like property taxes) you can deduct to $10k.

So at lower income levels and depending on what personal deductions that you were using that have now been eliminated, it’s possible that your tax bill may actually go up. According to the NY times, approximately 75% Americans will have their personal taxes reduced by this tax bill.

And what about health care, you might ask? The Trump tax cuts eliminate the individual mandate clause of Obamacare, which was designed to induce people into buying health insurance. Without that mandate, health insurance costs will go up since healthy people would likely skip buying insurance until they actually need it.

That being said, while this will make premiums go up, it doesn’t eliminate the government’s role in subsidizing the cost of those health care premiums. He tried to eliminate those subsidies, but he failed. Repeatedly.

So now we’re in a strange situation where health care premiums will rise, but government subsidies will also rise accordingly.

Why is this good for early retirees? When you’re working your health care will likely be covered by your employer, so changes to Obamacare don’t directly affect you. But when you retire, your income drops to effectively 0, meaning you qualify for federal subsidies to pay for health insurance. So even though those premiums might rise because of this bill, your out-of-pocket costs won’t.

Tax cuts REALLY favor corporations

Now where the tax cuts REALLY change the game is how it affects corporations. The big headline-grabbing bullet point is that this tax cut slashes the corporate tax rate from 35% to 21%. This is a huge change because a tax reduction that large immediately improves the profitability of a company, all else being equal. And because stock prices are determined (in part) as a multiple of a company’s earnings per share, this directly boosts the stock price. In fact, this stock market rally that has lasted since Trump’s election was driven largely in part by anticipation that this corporate tax cut would get passed.

The second, less understood seismic shift in corporate taxes is changing corporate taxation from a worldwide tax system to a territorial tax system. Most countries only tax earnings that are made inside that country. This is a territorial tax system. The US (and, apparently, Eritrea for some reason) taxes corporations on their income no matter where it’s earned, but only charge that tax when the money re-enters the US, a process called repatriation.

This causes multinational companies who earn their profits overseas to leave their money parked outside the country. And I know this because the company I used to work at ran into this exact problem. We designed our chips in the US, but actually manufactured them in Taiwan, then sold them to electronics manufacturers all over the world.

Many of those devices would then get sold to end consumers back in the US, but because we didn’t sell to end-consumers directly, we would be sitting in an odd situation where we were at the same time cash-strapped yet had all this overseas cash sitting there that we couldn’t touch. Other companies in Silicon Valley like Apple and Amazon also had this problem, which is why Tim Cook was seen personally lobbying Trump for this to be addressed.

This tax bill fixes the issue, and also includes a way to repatriate money already held overseas at a one-time low tax rate.

Publicly, Republicans have been crowing that this will be a huge benefit to average workers in the form of fatter bonuses, higher wages, and a hiring spree. And to be fair, a small number of companies did choose to share their tax savings with their workers.

According to the White House’s own compilation and more recent announcements, only 18 companies in the S&P 500 have responded to the tax overhaul by raising wages, handing out bonuses or improving employee benefits.

CNN: Only a small slice of corporate America has shared tax savings with workers so far

But a far more likely outcome will be companies choosing to use that extra cash to return money back to their shareholders, since CEOs and high-level executives typically own a lot of stock in their own company.

The two primary ways of doing this are stock buybacks, and dividends. Stock buybacks are when a company buys its own stock in the open market. This reduces the amount of shares available to trade, which increases the stock price since earnings per share suddenly shot up. And the second way is to pay dividends, in which an amount of money is simply paid out to every shareholder.

A truism of capitalism goes that when rich CEOs are faced with a choice between giving more money to workers and giving more money to themselves, the choice is usually pretty easy.

The president has held fast to his pledge even as top executives’ comments have run counter to it for months. Instead of hiring more workers or raising their pay, many companies say they’ll first increase dividends or buy back their own shares.

Bloomberg: Trump’s Tax Promises Undercut by CEO Plans to Help Investors

Trump voters THINK they benefit…

The sad/funny part of all of this is that this tax cut has gotten rave reviews from his supporters, despite the fact that most of them are poor working-class out-of-work white people. An income tax cut doesn’t help you if you don’t have an income, and a rising stock market doesn’t help you if you don’t own any stock.

Watch this CNN video of them trying to explain why they’re happy with these changes.

But in reality, it’s Early Retirees like us

The reality is the biggest beneficiaries of this tax cut are early retirees like us. The stock market has roared ahead since this Trump guy took power, and our personal net worth went up by over $100k in 2017. And other FI bloggers who had a more equity-heavy portfolio are sitting on even higher gains.

Trump knows this too. Despite the fact that he sold this tax cut by saying that rich people like himself wouldn’t personally benefit, he was recorded during the holidays at Mar-A-Lago bragging about how they all “just got a lot richer.”

President Trump kicked off his holiday weekend at Mar-a-Lago Friday night at a dinner where he told friends, “You all just got a lot richer,” referencing the sweeping tax overhaul he signed into law hours earlier.

CBS: “You all just got a lot richer,” Trump tells friends, referencing tax overhaul

And he’s right. So thank you President Trump for making millionaires like us who don’t need the money “a whole lot richer.”

And as for the people who actually voted for him?

35 thoughts on “Why the Trump Tax Cuts Make Early Retirees Richer”

  1. I’m up a little less than a half million USD since Trump won the election. Also made a ton under Obama. And previously made a ton under Bush 🙂 Moral of the story: always be making money regardless of who’s Bozo in Chief.

    This new tax policy will put a little more in most people’s pockets. For some that will translate to more consumer spending, therefore more corporate profits. Corporate tax policy should increase the bottom line after tax profits of most companies too since their tax bill will shrink. Both good bits of news for the stock market.

    So far I haven’t been too disappointed or shocked by the things Trump has actually done that have passed muster after court review. The legislature and judiciary are keeping a kinda short leash on this wild dog of a president, and the public outrage over crazy ideas of his help keep things in line. After all, the House is up for re-election in 10 months (elected in full every 2 years) so they have to be accountable to The People. Democracy is muddling its way through once again. Yay!

    Now if he could just put down his Blackberry and stop tweeting threats of nuclear war, we’d all rest a little easier with our newfound wealth.

    1. Yeah that’s what’s been really surprising thing about this presidency: the fact that the legislative checks-and-balances that are meant to keep him from doing anything too destructive have been, for the most part, successful.

      The parts that have made it to become law are not that radical from a GOP perspective. So while I thought he was going to screw everything up those checks and balances have relegated him to be a very loud, very annoying, but ultimately a regular conservative president.

      Unless he gets everyone into a nuclear war, of course. Then all bets are off.

      1. I remember our discussions in Germany last summer (or maybe it was just me and Kristy on facebook??) after Trump was elected and subsequently sworn in. Lots of fervor over the bad stuff he was going to do but I figured he would mostly just be ineffective (and loud…). That’s why I wasn’t too worried. The rhetoric is scary but it’s just more blah blah blah, same old crap he was spewing on the campaign trail.

        Midterm elections coming up soon and it’s looking like our country is sliding back to the left. Which means more do-nothing for Washington (probably good news for us investors IMHO 🙂 ).

  2. My wife and I are likely to save a bundle due to the lower rates and doubled standard deduction; it was already a near toss-up for us in 2017, whether to itemize or not. Now the big question is whether Roth savings make more sense than the pre-tax 401(k) contributions.

    It’ll probably come down to socking away just enough to slip into that 12% bracket, then putting any savings after that into Roth IRAs and 401(k)s.

    (While at the same time throwing donations every month at the ACLU and Planned Parenthood and whatnot. I’d be thrilled to pay more in taxes if it meant this megalomaniacal self-deluded ignoramus would be forced to row his douchecanoe out of the Oval Office. GO GO MUELLER RANGERS)

    1. Kind of off topic, but a strategy I have read about if you don’t qualify for IRAs or they are maxed, is to use Universal Life policies to generate tax deferred wealth in retirement.

      You basically dump a lot of money into a UL, and then closer to retirement you can withdraw the principle and interest tax deferred or tax free in some cases. You can also borrow against the policy, and not have to pay back the principle, ever, as it is paid out by the policy itself.

      The beneficiary does not have to pay tax, but you do have to die for this to happen. (ok bummer)

  3. In the long run, the blowback from this planned demolition of the US healthcare system will benefit early retirees because it will create the necessity to usher in universal Medicaid. By that point, the working classes will be subsidizing the insurance of early retirees.

    Until then, things will get more painful for at least the next decade, as healthcare costs finally exceed the ability of working class people to pay. Hundreds of thousands are already dying from ability to pay, and hundreds of thousands more will die in the coming years.

    1. He’s declared Obamacare “dismantled,” so I think that’s his signal that he’s declaring victory and moving on. If this is as bad as it gets, then I think we’re gonna be OK. You’re right that rising health care costs will put more and more pressure on everyone else, and I hope you’re right that it causes support for universal health care to spike in time for the next election.

  4. “The US (and, apparently, Eritrea for some reason) taxes corporations on their income no matter where it’s earned” I must say I don’t think I’ve ever seen my 2 nationalities displayed next to each other. Very strange 😊. Awesome post!

  5. We’ve been looking into this and I think we’re going to do pretty well seeing how we typically take the standard deduction and own an S-Corp. Which is kind of hilarious in a way, sad in another. I feel like that money could be used to I don’t know… provide healthcare to everyone.

    1. Hey, good for you! And yes, hilarious and sad is how I would describe my reaction to my own rising bank account. I’m like “But…I don’t need this!”

    1. I’m really torn. I do see the FIRE blogs trying to do a balanced job of talking the pros and cons of the US tax cuts. Most news organizations on both sides of the spectrum, IMHO, do not.

      I would have really liked to see some real tax reform – eliminating loop holes in our tax code and simplifying the hold darned mess such that the average joe could actually file their own returns without the help of professionals with the expensive tax programs. This tax reform was more of a tax cut and less reform for my liking.

      The thing that most forget when taking sides on the tax cut is that 1) the government doesn’t make any money, it takes OUR money – so the tax cuts are allowing us to keep more of what is already ours, 2) everyone can save and invest – Mr. Money Mustache has shown how a family of 3 can live on a fraction of what most spend in a year, 3) the real issue for most (paraphrasing Mr. Collins) is we buy crap we don’t need to impress people we don’t like – this is true for most people and for the US government as well.

      I’m willing to pay my fair share of taxes for defense, infrastructure, eduction, reasonable health care – but I abhor the waste and fraud that is so evident that it is painful.

      Our current tax code is way too full of “social engineering” for my liking. The next time we have tax reform lets hope there is some real progress on simplification.

  6. And what about the US Government that needs the tax money to survive, and the Billions of dollars that go into the US Military. We seem to forget that the US is Trillions in Debt, (ok, I just made that up… but its a big number…)

    I remember what… 8 years ago, they shut down all Military Air show participants because they ran out of money, and does anyone remember the US Gov crisis where all non essentials were shut down ? Is this going to happen again?

    Oh ya, Canopy is up, WEED baby… 88% so far… lov ya Justin… (Trudeau that is)

    1. Trillions is right. It is either 15 or 20 trillion, depending on what you count. The government owes itself 5 trillion. It is future debt, but is it debt now?

  7. Thanks for the article! One minor thing to point out is that the bill also doubles the size of the child tax credit (goes from $1000 to $2000 per kid). It’s also partially refundable for lower-income people with low / no tax bills.

    The bill also SERIOUSLY increases the phaseout for this credit, from an AGI (adjusted gross income) of $110K for a married couple (pror law) all the way to $400K for a married couple in the new bill. This is huge for many of us high-ish income families saving for FIRE. We used to never be able to get this credit because our income was above the $110K phaseout, but now everyone up to $400K AGI (married) gets it – including us.

    For the MSW family, this change alone instantly put $4000 in my pocket in 2018! My guess is that this was done to offset the elimination of the personal deductions and (for some people anyway) to take the sting out of the $10K SALT cap.

    Source: http://money.cnn.com/2017/12/16/news/economy/child-tax-credit/index.html

      1. I think I read that it was both, but…who knows? For now I’ll enjoy the extra $4K! Not sure how I feel about the country going $1.5T in debt – at a minimum – to pay for all of this though….

  8. An interesting perspective from someone who does not need to buy health insurance in the US. My biggest issue with Trumpcut is it adds 200 billion per year to the deficit. Republicans will use that as an excuse to defund Medicare (for the elderly), Medicaid (for the poor), social security, and Obamacare (self employed or < 65). They started talking about cutting social programs before the tax cut was even passed. Eliminating the 3rd leg of the Obamacare stool, the mandate, also makes an already uncertain source of insurance more insecure. How do early retirees budget for health expenses when they do not even know if insurance will be offered, let alone affordable?

    1. You can always flee the country and get health insurance as an expat as a last-resort backup plan. Right now, it seems that Obamacare is still intact enough to work for early retirees, but you’re right, we don’t know what they’re planning on doing in the future. That being said, that’s always true no matter what government’s in power. The best you can do is plan based on the information you have now.

  9. Small correction:

    “Most countries only tax earnings that are made inside that country. This is a territorial tax system. The US (and, apparently, Eritrea for some reason) taxes corporations on their income no matter where it’s earned, but only charge that tax when the money re-enters the US, a process called repatriation.”

    This is incorrect. Most countries – including Australia, Canada, UK and NZ – tax based on both source (earnings made inside that country) and residence (earned by an entity resident in the country – including companies and other non-individuals). Only a few places have territorial tax systems – Hong Kong and Singapore are notable examples. So this change will not be bringing the US in line with the rest of the world.

  10. While this is a minor tax cut for most of us, just remember that these cuts are temporary. They are set to expire and taxes are expected to go up by 2027. In other words–with the exception of corporations–Trump just raised your taxes. You just don’t know it yet.

    As for the idea of being happy to pay more for education, infrastructure, and health care, the US Government is probably the last place you want your money to go if you actually want improvements in those things. Our government will squander the money overseas or give it to multi-generational welfare families before it ever goes to education reform.

    As for the stock market performance, it’s a fleeting and temporary boost. The market will increase over the long run regardless of what the corporate tax rate is.

    Color me not a fan of this fake tax cut. All this is is a tax increase that somehow adds to the national debt. The only winner here is Donald Trump. Now he and his worthless son have something to brag about on Twitter.

    Sincerely,
    ARB–Angry Retail Banker

    1. I’d say that it solidifies the gains of 2017 that were in danger of being a temporary and fleeting boost. You’re right that the stock market would have gone up over time eventually, but not this fast. Hey I don’t like the guy either, but you have to give credit where credit’s due.

  11. Wanderer – of course the poorest people in America aren’t getting a tax break, because the richest people in America pay 90% of the federal income taxes! Your example, a couple making 25k, would pay $420 in federal income taxes with nothing other than the standard deduction and two personal exemptions. Under the new law, only using the higher standard deduction, they will own $100. In order to pay lower taxes you have to pay them in the first place. Of course a tax reduction is going to help the people who pay the most taxes, that is how math works.

  12. I’m not surprised at all when a person who pays more gets a bigger benefit compared to the person who pays less. Isn’t that how it’s supposed to work? If you paid very little in taxes you aren’t going to get very much tax relief. Makes sense. If you are poor and paid zero in taxes, I expect you won’t see any additional benefit.

  13. Be careful about assuming that early retirees income will be reduced to 0, particularly if you are single and live in a high cost of living area. You will need to generate some income, typically from a portfolio of investments to cover your costs, and the annual gains/dividend income you require to pay your rent and other costs may be far in excess of the new $12,000 standard deduction, and that has implications for Obamacare premiums. I still think on balance its a good deal for early retirees, largely because investments in US public companies just got a lot more valuable.

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