Labor Day marks the unofficial end of the summer and beginning of the presidential election season. In that vein, Republican presidential candidate Mitt Romney released his economic plan yesterday. With polls showing him running second in the primaries and strongest against Obama in the general election, it may be a good idea to examine what Romney's economic plan could mean for your personal finances.
Making the Bush tax cuts permanent
Under current law, income tax rates are scheduled to revert to their pre-Bush tax cut levels. That means the highest rate would go from 35% to 39.6% and the lowest would go from 10% to 15%. The tax on long-term capital gains would go from 15% to 20% and taxes on qualified dividends would go from 15% to ordinary income tax rates.
Romney's plan would freeze these current rates in place and may even reduce them further. Lower rates would mean more take-home pay available for savings and a higher after-tax return on those savings. Dividend paying stocks would be relatively more attractive and tax-free municipal bonds and money market funds less so.
No tax on investment income if you earn less than $200k
This goes well beyond preserving existing rates and actually eliminates taxes on interest, dividends, and capital gains for any taxpayer with an adjusted gross income of under $200k a year. For people making less than that amount, it essentially makes Roth, 529, and even many custodial accounts obsolete since you could get tax-free investment earnings without the restrictions placed on these accounts. That's only true, of course, if you don't think a future President and Congress might reinstate those taxes again.
Corporate tax cut
Romney's plan would also cut the top corporate income tax rate from 35% to 25%. Unlike lower rates on dividends and capital gains, this could benefit anyone who owns corporate stock, either directly or in a retirement plan. It could also make investing in U.S. stocks relatively more appealing than investing in bonds or foreign stocks.
No estate tax
Under current law, estates may exclude up to $5 million when calculating estate taxes, but that exclusion amount is scheduled to drop to $1 million in 2013. When you think about the amount of your life insurance payouts and how much your net worth (including your home) may increase over the rest of your life, you may very well find yourself with a taxable estate. Romney's plan would eliminate the estate tax for everyone and possibly save you the cost and hassle of drafting a trust to minimize estate taxes (although there are other reasons to have a trust as well like maintaining privacy and avoiding probate).
Repeal of Obamacare
No Republican proposal is complete without a repeal of President Obama's signature policy accomplishment. First, this would eliminate a couple of tax increases scheduled to occur in 2013 for people with MAGI over $200k (or $125k if you're married filing separately or $250k if you're married filing jointly). One is a Medicare hospital insurance tax increase of .9 percentage points on wages, and the other is a 3.8% tax on investment income. Second, you would no longer be required to have health insurance starting in 2014.
However, this is not all good news for everyone. That's because starting in 2014, Obama's plan also prohibits insurance companies from discriminating against people with pre-existing conditions, expands Medicaid eligibility to people with incomes up to 133% of the poverty line, and subsidizes premiums for people with incomes up to 400% of the poverty line. All these benefits would be lost under Romney's plan so if you need to buy your own health insurance, you may have trouble finding an affordable policy, especially if you have pre-existing conditions. This could make it harder for people to retire before becoming eligible for Medicare at age 65.
Fund Medicaid using block grants to each state
By allowing the states more management of Medicaid, there would likely be more variation in how each state's Medicaid program covers long-term care expenses. This could then become a more important criteria for retirees to decide what state to live in if they don't have long-term care insurance.
Potential Changes in Social Security and Medicare
While he hasn't released specifics, Romney has hinted about changes he'd make to save these troubled entitlement programs. He's mentioned raising the retirement age for Social Security and reducing the growth in benefits for higher-income people. He also expressed support for something similar to Congressman Paul Ryan's proposal to require future retirees to pay more out of pocket for their Medicare coverage. Both of those changes might mean needing to save more for retirement to replace lost benefits.
None of this is to say that Romney's proposals are good or bad ideas. After all, I'm not even factoring in the effects it could have on the economy, the deficit, and the health care system in general since those are all up for political debate. There are also ideological questions about the proper size and scope of the federal government and the distribution of taxes on people with various levels of income. Instead, this is just meant to get you started thinking about what Romney's presidency could mean for your finances. I'll let the politicians and the pundits fight the rest out over the next 14 months. Enjoy!
Liz Davidson is the founder and CEO of Financial Finesse, the leading provider of unbiased financial education for employers nationwide, delivered by on-staff CERTIFIED FINANCIAL PLANNER™ professionals. For additional financial tips and insights, follow Financial Finesse on Twitter and become a fan on Facebook.
6 comments