A Trump Tax Update on 401(k): Why Words Matter

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On Wednesday, April 26th, 2017, President Donald Trump presented his latest plan for tax reform with a press conference accompanied by a seemingly straightforward document that outlined the goals of the plan. 

Highlights from the plan included getting rid of the Alternative Minimum Tax (AMT), doubling the standard deduction while doing away with most itemized deductions (we'll come back to this in a moment), and reducing the amount of tax brackets from 7 to 3. 

But just like any quality TV drama - my wife & I are big fans of Chicago Fire in case you were wondering - Trump's press conference left everybody wanting more. 

More information, more details, more one-liners, more 'Merica.  

Details would be nice to have, especially given the magnitude of the proposed changes, but there's been a swath of media outlets, pundits, & politicians already gathering the pitch forks & townspeople in protest of the lack of detail to his outline of the proposed tax reform. 

By definition, it's not going to have the detail and there was no indication that Trump was planning to use the presser to lay out the plan in full detail yet.

Words Matter

Unfortunately, the vagueness of Trump's plan has started to cause confusion for a host of reasons and, like most things these days, it's opened up the opportunity for prognostication and political jockeying.

But then, there's the type of scenario that played out at a Press Briefing on Thursday between Press Secretary Sean Spicer & a CNBC journalist.  At the 1:08 mark in the clip below, you can see the exchange between Spicer  & Javers, regarding 401(k) plans:

 
 
 
 

It's not entirely obvious and frankly, it's actually not too surprising as many people think that any type of tax benefit is synonymous with "deduction."

In this case, the comparison of the tax benefits from a 401(k) contribution and an itemized deduction are not apples to apples and prior to answering the question this should have been addressed. 

 

Misconception 1

Javers: "Can you lay out what the president's vision is for 401(k)s, and [particularly] tax deductions surrounding those? Does the president imagine removing those deductions entirely, along with the other deductions or is he going to protect those?"

Fact: Pre-tax 401(k) contributions are tax-exempt in the current year; itemized deductions potentially reduce adjusted gross income


 

Misconception 2

Spicer: "So the secretary of the Treasury and Director Cohn yesterday both talked about that. The current plan both protects charitable givings and mortgage interest, and that's it."

Hindsight is 20/20, yet Press Secretary Spicer should have clarified that the subject was regarding itemized deductions, which was exactly how the Whitehouse responded to clarify afterwards.


 

Misconception 3

Javers: "So these tax deductions come with their own group, lobby, ...et. al ...are you prepared for a battle on all those tax deductions?"

By using the term "deduction" when talking about an "exemption," his presumption and narrative for the discussion are skewed; lobbyists for the mortgage industry would be in favor of keeping the mortgage interest deduction so that's one sector - every single business in the United States could potentially have the benefit of a 401(k), along with all of the individuals that are employed by those companies. Framing the argument is much different between these two examples.


 

By dismissing or not paying attention to the context of the situation, one person's misspoken words can become to be relied upon as facts to someone else. "Well, if he/she said it, it must be true."

They say the devil is in the details and in those details of Trump's tax plan, there could be a whole lot of other things that could affect 401(k) contributions completely unrelated to this. 

While the Whitehouse took responsibility and cleared the air - for now - that 401(k) contributions will not be affected by Trump's Tax plan to remove most itemized deductions, a lot is being left up to the imagination right now. 

But remember, words still matter. 

 

Corey Purkat