Many of we early retirees and aspiring early retirees are on the never ending quest to Never Pay Taxes Again.

With the Tax Cut and Jobs Act of 2017 about to be signed into law (aka the Largest Tax Cut in HistoryTM, perhaps a better name than The Mother of All Tax Cuts) it is worth assessing what impact this round of tax reform may have on the common tax minimization strategies.

Overall, I prefer a little more reform in my tax reform, but most individuals should see…

…at least a minimal reduction in their tax bill in the short term.

Let’s review the changes.

Tax Rates

Early tax reform proposals suggested that the tax code would be simplified by reducing the number of unique tax brackets. The old tax code had 7. The new tax code has… you guessed it, 7. See, reform.

The tax rates on those brackets have been lowered, as per the chart below.

The new tax brackets (purple) are noticeably lower than the old brackets (blue.) This results in lower tax paid and effective tax rates.

As reference, a Married couple Filing Jointly (MFJ) with no children will save about $600 on $50k income, $2.2k on $100k income, and $5.8k on $200k income.

Standard Deduction / Personal Exemptions / Child Tax Credit

One of the big talking points of the TCJA is that the standard deduction was doubled. Sounds nice, right?

However… while the standard deduction was (approximately) doubled, personal exemptions were eliminated. Repeat: there are no personal exemptions. This will induce fewer people to itemize, which will simply tax time for many.

As shown in the table below, this can impact people couples with children. To offset this, the Child Tax Credit was increased from $1,000 to $2,000 per child. (I share MFJ only to highlight the concept, single filers are slightly more complicated due to potential to file as Head of Household.)

 Married filing jointly
Tax free incomeOld tax codeNew tax code
No kids$21,300$24,000
1 kid$25,450$24,000
2 kids$29,600$24,000
3 kids$33,750$24,000

For early retirees with few dependents, this provides a larger play space for Roth IRA conversions. It also makes it easier to make generic spreadsheets :)

Roth Recharacterization

An useful tool for Roth conversion aficionados was the ability to recharacterize a conversion after the fact.

That is a mouth full. What it means is we could convert some $ from a Traditional IRA to a Roth IRA (a conversion), and then later decide to undo in part or full. A mulligan, if you will.

Mulligans are no longer allowed. If you want to recharacterize a conversion for the 2017 tax year, do it before Dec 31st.

Recharacterization was useful for filling up lower tax brackets, such as we have done with the 0% tax bracket in the past. (See tax return example.) I’ve never done a recharacterization since I run a pretty thorough year-end tax review, but it was nice to have the option.

Feel free to continue to do Roth conversions to your heart’s desire, but perhaps use a little more finesse in the calculations. For an example of our 30+ year long Roth conversion pipeline, see here.

Qualified Dividends / Long Term Capital Gains / Cap Gain Harvesting

Early House proposals included a 6% tax on dividends and capital gains. That is not in the final bill. This means another 8+ years of tax free qualified dividends and long term capital gains.

Early drafts of the bills also included provisions preventing specific lot sales. Instead, whenever you sold stock you had to sell the oldest shares first (FIFO.) This had the potential to complicate capital gain harvesting a bit, and could have resulted in higher taxable gains for normal cash flow withdrawals. However, this did not make it into the final bill.

Capital gain harvesting is unaffected, and continues to be a powerful tool in the tax minimization game.

Under the new law, the amount of tax free dividend / gain income is no longer coupled with the other tax brackets. Now we have to look up another number (simple, right?) fyi, for 2018 those numbers are $38,600 for individuals and $77,200 for married couples.

Health Insurance / Obamacare / Individual Mandate

The TCJA eliminated the individual mandate, which assessed a penalty to anybody who didn’t want to have health insurance.

So feel free to self insure if you like starting in 2019 (after the 2018 elections, wink wink.) The IRS no longer cares.

This will probably result in more young/healthy people choosing to go uninsured or (maybe) to go with the old High Deductible Heath Plans (HDHP) that were disallowed under the ACA. This is expected to increase insurance premiums on the remaining insurance pool. People earning under 400% of FPL will just get larger subsidies, no big deal. Those earning over 400% of FPL would then have to decide if those plans were still of value.

For early retirees doing the previously mentioned Roth IRA Conversions, this potentially vastly simplifies tax optimization tradeoffs.


For US citizens who live abroad, the Foreign Earned Income Exclusion is alive and well.

The use of Overseas Corporations continues to be an effective way to eliminate Self Employment taxes. However, high earning businesses will no longer be able to retain earnings tax free.

Other resources

Clearly the above is just a brief summary of the total changes. Here are some great resources to review.

Detailed overview of changes, including SALT: Michael Kitces – Individual Tax Planning Under The Tax Cuts And Jobs Act Of 2017

Impact on high earners – Physician on Fire – Tax Reform! How Physicians and the Self-Employed are Affected

Business owners eligible for pass-thru deduction: Stephen Nelson – Pass-thru Income Deduction: Top 12 Things Every Business Must Know

Expats and overseas business owners: Stewart Patton – 2017 Tax Reform for US Expats: Either Nothing Change or Everything Changes

And of course, you could always just read the actual bill.


The Tax Cut and Jobs Act of 2017 appears to have minimal impact on taxes for the early retiree. I expect we will have more $0 tax bills in the future, with some slight benefit from the increased Child Tax Credit. Aspiring early retirees will benefit from the decreased tax rates.

Taxes on qualified dividends and capital gains remain at 0%, and the tax minimization tools of Roth IRA conversions and Capital Gain harvesting remain in full effect. The elimination of Roth recharacterization adds a small complication, but is easily overcome with some planning.

The biggest impact for early retirees is likely to be the elimination of the Individual Mandate. TBD how this affects the insurance market over the coming years.

As with any new law, full ramifications will take some time to understand. These are my initial impressions.

Feel free to ask questions / highlight anything I missed in the comments.