Several of President-elect Donald Trump’s campaign promises pleased many advisors and clients alike. One example is extending the lower marginal tax rates, enacted in 2017, that are scheduled to sunset at the end of 2025.
Other Trump proposals have been greeted with less enthusiasm. That includes putting an end to Social Security taxes, as Roger Young, thought leadership director at T. Rowe Price Associates, maintains in an interview with ThinkAdvisor.
“Eliminating [those taxes] could undermine the Social Security system, significantly accelerating the date that the trust fund runs out,” Young says. “It could put pressure on Congress for other ways to extend the life of the system and avoid draconian cuts to benefits.”
Young, a CFP whose research and analyses provide planning insights for financial advisors, stresses not to make taxes pivotal to a financial plan.
Yet, Scott Bessent, a hedge fund CEO nominated to be U.S. Treasury secretary, is reportedly in favor of making the 2017 tax cuts permanent and doing away with taxes on Social Security benefits.
ThinkAdvisor interviewed Young a few hours before Trump announced his Treasury pick, and Young declined to comment on the nomination.
In the interview, Young suggests some possible tax planning strategies that may be applicable, depending on a client’s situation.
Here are excerpts of our conversation:
THINKADVISOR: What should financial advisors be telling their clients or studying concerning Trump’s campaign tax proposals?
ROGER YOUNG: Reassuring them that they don’t necessarily need to make a lot of dramatic decisions right now but explaining what you know and what isn’t yet known.
People don’t need to feel in a rush to make big changes in advance of tax rates going up because it’s highly likely they won’t be going up in the near term.
What about financial planning?
We caution people: Don’t let taxes unduly affect the basis of your financial plan. Near-term, you don’t need to overreact to the election results.
But I think there are some highly likely things that people can think about from a financial planning perspective.
Such as?
It seems likely that the lower marginal tax rates in the 2017 Tax Cuts and Jobs Act that were going to expire at the end of 2025 will be extended.
That’s good. Isn’t it?
Yes, but one thing we’re grappling with is how long they’ll be extended. There’s some uncertainty about what is politically possible and what effect that would have on the [U.S.] deficit and the debt.
How long do you estimate the cuts could be extended?
I imagine the Republicans would certainly like to extend them for at least the period of their control — four years. But it could be 10 or 20 years. We just don’t know.
Why are you “grappling” with the extension issue?
When we think about strategies for our clients, we’re focused largely on retirement strategies and retirement income strategies. And we’re talking about a retirement that could be 30 years long.
Therefore, what should our long-term assumptions be for tax rates? This is very hard to predict.
If you have a long time horizon and if the tax cuts get extended for some time, that would have upward pressure on the deficit and the debt.
Long-term, it might even increase the likelihood that, at some point, tax rates have to go up.
