My first thought when I saw the new tax bill got passed this week was, holy crap congress passed a bill! My second thought was, I do not care all that much about the details. What do you mean Mr. Widget!? How could you not care about the new tax brackets, standard deductions, etc? The answer is actually quite simple; control.
By control I am referring to things that we as individuals have influence over in our financial lives. It might be nice to think that the government is controlled by the US population, but only in an indirect way.
Sure, you vote for one party or the other with the idea that they represent most of your interests. However, most things that get passed will not fully benefit your specific circumstance no matter what side you are on.
So what should we do to prepare for situations that are out of our control? We assume they will occur and plan for it.
Control Lost or Never Had?
If you work for the government then you are well aware of at least one thing you have no control over. In 2013 the government shut down for a little over two weeks. Employees did not get paid during this time, however most were retroactively paid once it ended.
I remember watching news interviews with people asking how they were going to get by. It was eye-opening to me that so many people who depended on steady paychecks had their financial fate in the hands of two political parties arguing with each other.
My hope is that once people went through this situation, they learned from it and started adjusting their finances to weather a storm like this in the future. After all, this situation seems like it might repeat itself soon.
Armor Your Finances
Prior to turning my financial corner, I thought the rules would remain the same with regards to 401k’s, tax deductions, etc. This was me being very naive. In the past few years I have made decisions to put the Widget family in a position to absorb changes to things like the tax code.
I started reading articles about how things could change in the future. Maybe the age for taking penalty free deductions from 401k’s will be raised right before you retire or deductions you depend on will disappear. This is why we must continually add armor to our finances. In doing so, events like this will merely bounce off and we can remain on our planned path with little impact.
Of course the best way to add armor to your finances is to live below your means. Keeping your spending in check will allow for weathering future changes that are out of you control. This is an ongoing process and involves planning and sacrifice to accomplish.
Don’t Base Large Financial Decisions on the Tax Code
One of the main proposed tax plan impacts being scrutinized was how much the mortgage interest deduction would change. One comment in the media was how people were on the fence about purchasing a home until this was resolved. This is not good.
When I was looking into purchasing a house I did not factor in how much mortgage interest we would be able to deduct into our monthly budget. In doing so I made sure the house we bought would be conservative and it would not matter if this deduction went away completely. This is similar to the way I treat social security. It will likely be there at some level, but I am not going to rely on getting a certain amount in my retirement.
The fact is only about 30% of filers itemize deductions and even fewer have mortgages with interest that surpassed the old standard deduction. With the standard deduction doubling, the people able to utilize the mortgage interest deduction will drop even lower. The people able to utilize this deduction are purchasers of higher priced homes. Typically, they have incomes allowing for adjustments in their budget to adapt to the deduction change.
By limiting large financial decisions to as many situations within our control, it reduces the impact of those we do not.
If you are reading this then you are already interested in gaining more knowledge to improve your finances. I realize many people are in tough financial situations and that these changes are very impactful. Those living paycheck to paycheck are very susceptible to small changes in the tax code. This post is not meant to diminish these situations. Quite the opposite actually. I hope it inspires people to try to protect themselves for events that they have no control over.
Also, I will of course be making adjustments in my finances to react to the new code. I have been to no less than four tax calculator sites to assess the impacts of the new code and I received a different answer at each one (awesome). It looks like this time around I will be paying less in taxes, but I am confident that will change at some point in the future. I will be better prepared with thicker armor when that happens.
Readers: Do you try to shield yourself from having changes in the tax code affect you? What changes concern you in the new tax code?