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Retirees: 4 ways you can start planning for possible tax law changes now

Senior couple retirement
Cathy Yeulet | Getty Images

The Trump administration and Republicans' plan to reform taxes in the U.S. is far from a done deal. What's more, it's short on details — and whatever details there are seemingly change daily.

"In the tax world, a nine-page tax framework is equivalent to a tweet," says Jean-Luc Bourdon, a wealth adviser and principal at BrightPath Wealth Planning. "It leaves many questions unanswered."

Not surprisingly, financial experts say there's not much you should do until the proposals become the law.

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But that doesn't mean you ought not do some what-if planning. Here's what experts suggest:

Move to a tax-friendly state?

The so-called "framework" for fixing the tax eliminates most itemized deductions (such as the deduction for state and local taxes), but it retains tax incentives for home mortgage interest and charitable contributions. At the same time, the framework increases the standard deduction to:

$24,000 for married taxpayers filing jointly, and $12,000 for single filers.

That means, those saving for or living in retirement and especially those who live in high state and local tax state who now itemize their deductions will have to crunch the numbers to see if they will pay more or less in taxes after factoring in their new marginal individual income tax bracket — 12%, 25% and 35%, and possibly a fourth higher rate on the highest-income household.

If you are paying more in taxes, you might consider moving to a more tax-friendly state.

"For retirees still one of the biggest areas of planning is determining which state they wish to live in," says Jonathan Gassman, the CEO and founder of The Gassman Financial Group. "So many Northerners from the East Coast tend to migrate to southern states such as Florida because the state does not impose a personal income tax and is not going to change under the Trump regime. Or for those living on the West Coast moving to Nevada which does not have an income tax. So, planning for which state to retire in still remains a big part of planning."

Bourdon says it's possible many retirees might stand to benefit from the higher standard deduction, and might not need to consider moving. "Under the proposed framework, if spouses have less than $24,000 in itemized deductions, they'd benefit from taking the standard deduction," Bourdon says. "Many pre-retirees and retirees don't have a home mortgage or have an old one which no longer provides much of an interest deduction. So, most retirees would not have sufficient charitable deductions to exceed the standard deduction and get a tax benefit from their donation."

One flexible strategy

"I advise clients to be strategically flexible," Bourdon says. His advice: Taxpayers might consider funding a donor-advised fund to get a current-year tax deduction but make charitable distributions in future years when the taxpayer expects to take the standard deduction.

According to Fidelity Investments, a donor-advised fund, or DAF, is a charitable giving vehicle sponsored by a public charity that allows you to make a contribution to that charity and be eligible for an immediate tax deduction, and then recommend grants over time to any IRS-qualified public charity.

"Essentially, the taxpayer would pre-fund future charitable giving," Bourdon says. "Donations of appreciated investments to a DAF aren't subject to capital-gain tax and get a tax deduction at fair market value. The DAF provides a current-year tax deduction and allows charitable distributions to be made in future year."

According to Bourdon, this strategy is particularly relevant when it's beneficial regardless of the current tax proposal's outcome. "For example, if a pre-retiree is in a high-tax bracket now but expect lower tax-brackets in the future," he says. "The current tax-proposal could help make the strategy much more valuable."

Don't plan on paying less on estate taxes

The framework would repeal the estate tax and the generation-skipping transfer tax.

"If the estate and gift tax is eliminated this may actually help retirees redeploy capital to help younger generations save for their own retirements," Gassman says. "But let's not be fooled by a lot of this, as the estate tax has come and gone several times."

Tax incentives for retirement?

According to the Republican's framework, tax reform will aim to maintain or raise retirement plan participation of workers and the resources available for retirement. But the framework was short on detail. "There is nothing in the proposal that I see that would cause someone to focus on saving more, now," Gassman says.

Should the proposed reforms ever become law, those saving for retirement will have to evaluate their marginal and effective tax rates to determine whether to change the way they fund their various retirement accounts.

The current rule of thumb would have you fund your HSA first and then, depending if you'll be in a higher or lower tax bracket in retirement, either a Roth 401(k) or a traditional 401(k) first. If you anticipate being in a lower tax bracket, you'd typically fund your traditional 401(k) now; and your Roth 401(k) now if you anticipate being in a higher tax bracket later.

"As for which would people be better off with as far as Roth vs. non-Roth, traditional vs. non-deductible IRA, one must run numbers and make some assumptions and forecast what tax bracket would they be in now vs. when they intend on retiring," Gassman says.

And for those who are investing in taxable accounts, Gassman recommends sticking to your overall investment plan. "If you don't have one, it's time to engage a planner and put one together," he says.