Tax Bills

[43210]

^ Some article suggest (guess?) that FIFO would be implemented per brokerage, i.e. the brokerage reports that you sold the earliest lot(s) held at that brokerage, and that would determine you cost basis. That version is much easier to implement, but also means the investor wouldn't really be being forced to sell their absolute oldest lots first.

 

[NW-Bound]

... One interesting issue might be that we hold the same ticker in our individual and joint accounts... so is FIFO applied to each account or across all accounts since we file a joint return. I suspect the latter... across accounts. So for example, if I sell the oldest lot in my account but there is an older lot with a lower cost basis in DW's account the the gain would be calculated based on the older lot in her account.

Similar but different than the separate brokerage accounts issue. Could get messy, especially if a MFJ couples trading is not coordinated.

About the comparison of this with the wash sale rule, the wash sale rule applies if you sell and buy the same stocks in a tax-deferred account and a taxable account.

This FIFO rule will most likely be applicable across tax-deferred and taxable accounts the same way.

If you have both types within a brokerage, the broker's computer can easily look for this. It is tough to check across brokerages, and the IRS does not have the computer, nor the info or manpower to do this.

 

[audreyh1]

How could the FIFO rule possibly be applied across an IRA and taxable account?

Nothing today in selling stocks or mutual funds if you use FIFO or average cost basis require this to be applied across multiple accounts. It boggles the mind that suddenly average cost basis or FIFO selling would be applied across all accounts and brokerages let alone deferred and taxable accounts.

Average cost basis has never ever been done across accounts.

 

[NW-Bound]

How could the wash sale rule be applicable across an IRA and taxable account?

By a decree from the IRS or something like that.

When Congress passes a law, it does not consider all the ramifications in real life. The IRS often has to sort it out and provides further details.

I did not know about the wash sale rule between taxable and tax-deferred accounts, and intentionally did that following the advice I read from the Web. Apparently, this trick to circumvent the wash sale rule caught on, and more people did it. Then, there was the IRS 2008-5 ruling that finally said explicitly that it was not OK.

 

[audreyh1]

How could the wash sale rule be applicable across an IRA and taxable account?

By a decree from the IRS or something like that.

When Congress passes a law, it does not consider all the ramifications in real life. The IRS often has to sort it out and provides further details.

I did not know about the wash sale rule between taxable and tax-deferred accounts, and intentionally did that following the advice I read from the Web. Apparently, this trick caught on, and more people did it. Then, there was the IRS 2008-5 ruling that finally said explicitly that it was not OK.

That may be. But people have been using LIFO, FIFO, and average cost basis for years, and it has only ever applied within a given account. So it seems absurd that suddenly it would change to apply across all accounts, different from what it has up until now.

The wash sale rule you only have to wait a month after selling at a loss to buy something.

The oldest tax lot stuff would last forever under all conditions.

 

[pjigar]

Does anyone know if the preferential tax treatment given to Schedule C filers (ie 17% business income deduction) will also be extended to Schedule E filers who consider themselves a business?

I know that we have multiple landlords on this forum...

-gauss

Schedule E subtitle says "(From rental real estate, royalties, partnerships, S corporations, estates, trusts, REMICs, etc.)". So I am assuming schedule E would be rated with preferential tax rate! Just a wild guess at this point.

 

[NW-Bound]

That may be. But people have been using LIFO, FIFO, and average cost basis for years, and it has only ever applied within a given account. So it seems absurd that suddenly it would change to apply across all accounts, different from what it has up until now.

The wash sale rule you only have to wait a month after selling at a loss to buy something.

The oldest tax lot stuff would last forever under all conditions.

I agree that it will cause a lot of grief. However, if the intention of the law is to make you pay more in taxes, then the IRS may have to further clarify the rule to disallow circumvention.

In the case of the wash sale, it is not forbidden to sell at a loss in a taxable account then buy back immediately in an IRA. It's only that you cannot write off the loss.

They can define something similar for this FIFO law. Whether they can catch people is another thing.

PS. It is also possible that the IRS will say it is not applicable across taxable and tax-deferred. We will see.

 

[JoeWras]

Agree that the IRS will sort it out. There may even be people who test it and go to tax court. It may take a while, look at the megabackdoor roth. That took a while for the IRS to make a notice. I suspect it will start with the brokerage reporting first and they'll go from there.

Yes, it does suck for some. This was intentionally put in there to recover more tax somewhere else.

It is really lazy of me. I've been meaning to change to specific lots on my brokerage for some time, but haven't. I've been mostly either selling everything of a specific security, or donating the oldest to charity. In both cases, the FIFO setting was OK. I was going to get around to changing it soon. I guess I don't have to worry about that now...

 

[audreyh1]

The AMT is still there? They raised the thresholds a bit?

 

[catotx]

The AMT is still there? They raised the thresholds a bit?

AMT is still in the Senate bill, with higher thresholds.

 

[Winemaker]

how does the increased standard deduction cover it. Remember the standard deduction does go up, but you loosed the individual exemption. For MFJ the old standard deduction+2 exemptions is just a bit less than the new standard deduction.

But each taxpayer and dependent gets a $500 tax credit as I understand it.

 

[bingybear]

But each taxpayer and dependent gets a $500 tax credit as I understand it.

The post I comment on (and quoted) did not include tax credits in his reasoning, just the larger standard deduction.

I knew of child tax credits, but not of tax payer credits. That may or may not be enough to offset the deductions that poster lost. But remember he did not include that in his rational.

 

[audreyh1]

OK - the PBS summary had the actual new AMT thresholds. The only place I found them. But I could see something was wrong with their numbers.

Alternative Minimum Tax – Senate Republicans initially repealed the AMT, but have brought it back now in order to pay for some other additions (see below). The AMT is intended to be a minimum tax on the wealthy. In this version, the GOP raises the income levels where it hits so it will affect fewer people. For individuals, the minimum threshold goes from $50,600 to $70,600. For those filing jointly, the threshold rises from $78,750 to $109,400. (Pg. 95)

That PBS information on current thresholds is incorrect - those are from years ago. The current 2018 thresholds are $55,400 for single filers and $86,200 for joint filers.

So it's a $23K increase in AGI threshold for MFJ before being subject to AMT (not $30K as the PBS paragraph indicates).

 

[Golden sunsets]

Don't forget that you are losing your personal exemptions as well, which is a big deal. For MFJ over 65, the current standard deduction plus exemptions is 23.8K, so the effective increase is only $200 for these folks.

This is a point I'd like clarification on. In my local newspaper (I live in Susan Collins home state), there was a reference to the fact that Collins managed to save the additional deductions currently available to filers who don't itemize, for those over 65. I looked at the standard deduction language in the links provided to try to find this language re over 65 standard deduction and found nothing. However I am also inclined to think that by not striking the current code language that provides that additional standard deduction, that the addition is thereby preserved. It's relatively small potatoes ($1,250 per person), so if I am correct?, then the standard deduction for a couple over 65 is $26,500.

I'd also like to clarify whether the $500 credit per dependent in the Senate bill includes both individuals for a couple filing MFJ, for a reduction to total taxes of $1,000.

One final thought. Is it my imagination or do the standard deductions and more importantly tax brackets for widows, which will be the same under both house and senate versions, be equal to those applied to MFJ? I think this is a big change and benefit to widows, and is not currently the case.


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[audreyh1]

This is a point I'd like clarification on. In my local newspaper (I live in Susan Collins home state), there was a reference to the fact that Collins managed to save the additional deductions currently available to filers who don't itemize, for those over 65. I looked at the standard deduction language in the links provided to try to find this language re over 65 standard deduction and found nothing. However I am also inclined to think that by not striking the current code language that provides that additional standard deduction, that the addition is thereby preserved. It's relatively small potatoes ($1,250 per person), so if I am correct?, then the standard deduction for a couple over 65 is $26,500.

I'd also like to clarify whether the $500 credit per dependent in the Senate bill includes both individuals for a couple filing MFJ, for a reduction to total taxes of $1,000.

One final thought. Is it my imagination or do the standard deductions and more importantly tax brackets for widows, which will be the same under both house and senate versions, be equal to those applied to MFJ? I think this is a big change and benefit to widows, and is not currently the case.


Sent from my iPad using Early Retirement Forum

Maybe they were talking about the medical expense deduction which lowers the deductible medical expense threshold to 7.5% of AGI for two more years. This was attributed to Collins.

 

[pb4uski]

I was thinking some more about the change in Roth rechacterizations.

Since the bills provisions are effective for tax years beginning after December 31, 2017, I'm interpreting that in 2018 we can do recharaterizations of Roth conversions done in 2017 since those recharaterizations reduce 2017 taxable income. However, it is not particularly clear from the language in the bill.

I have a question into my Vanguard rep as to whether Vanguard will allow recharterizations of 2017 Roth conversions in 2018 or not. Not sure if I will get an answer, but if I do I'll post it.

 

[JoeWras]

Re: AMT

House majority leader McCarthy was on CNBC this morning and was confident that AMT is high on the list of things that will change in conference. Stay tuned.

 

[Golden sunsets]

Maybe they were talking about the medical expense deduction which lowers the deductible medical expense threshold to 7.5% of AGI for two more years. This was attributed to Collins.

I'm still not sure. This exerpt from an AARP article dated 11-29 would imply otherwise. What I don't know is, if that language was further revised after the final draft was approved.

In some important aspects the two bills diverge. For example, under the SFC bill, a large number of individual tax relief provisions expire after 2025 to comply with a technical Senate rule. In addition, the SFC bill would retain two current-law provisions important to taxpayers 65+: the extra standard deduction for the blind and older taxpayers and the medical expense tax deduction.

 

[gerntz]

The big deal is that it might raise someone’s taxable income big time because they may be forced to realize the highest gains. Usually the oldest shares have the highest gains.

For folks who are using the 0% LTCG tax rates, you could be filling up that range much faster with smaller after tax proceeds.

And the realized gain increase shows up in your MAGI for folks who qualify for ACA subsidies or having more of their SS income subject to taxation.

For folks subject to IRMAA on Medicare, higher taxable capital gains income can cause higher Medicare premiums.

I don’t think it’s nearly as innocuous as you suggest.

Who is forcing you to sell? Isn't it a choice?

 

[gerntz]

I agree that it might be a big deal for long time buy-and-holders. If one has to pull a certain sum out of one’s portfolio to cover living expenses, a larger portion of it might be subject to income tax if forced to liquidate the oldest shares first.

No one is forcing you to sell that I can see. It's a lifestyle choice as I see it.

 

[RunningBum]

Who is forcing you to sell? Isn't it a choice?

Not always. Some of us "total return" people liquidate at times for living expenses, or big ticket items. There may be other choices, but they may not be as good. It's really handy to be able to control how much gains you take when you need to raise cash.

 

[RunningBum]

Portfolio rebalancing to keep your AA in range would be another non-lifestyle reason. Ideally you do that in an IRA but that's not always possible.

 

[gerntz]

This is a point I'd like clarification on. In my local newspaper (I live in Susan Collins home state), there was a reference to the fact that Collins managed to save the additional deductions currently available to filers who don't itemize, for those over 65. I looked at the standard deduction language in the links provided to try to find this language re over 65 standard deduction and found nothing. However I am also inclined to think that by not striking the current code language that provides that additional standard deduction, that the addition is thereby preserved. It's relatively small potatoes ($1,250 per person), so if I am correct?, then the standard deduction for a couple over 65 is $26,500.

The local newspaper is the last place I'd rely on for correct financial reporting. They are hired for their journalistic talents, not their math/finances understanding.

 

[audreyh1]

Who is forcing you to sell? Isn't it a choice?

I didn't say anyone was forcing you to sell. Rather they are forcing you to sell the oldest shares when you sell. Big difference.

 

[cathy63]

I was thinking some more about the change in Roth rechacterizations.

Since the bills provisions are effective for tax years beginning after December 31, 2017, I'm interpreting that in 2018 we can do recharaterizations of Roth conversions done in 2017 since those recharaterizations reduce 2017 taxable income. However, it is not particularly clear from the language in the bill.

I have a question into my Vanguard rep as to whether Vanguard will allow recharterizations of 2017 Roth conversions in 2018 or not. Not sure if I will get an answer, but if I do I'll post it.

I asked this question of Wells Fargo Advisors a couple of weeks ago and their legal dept said they would have to wait for the final law before they would be able to respond. I had a chat with my broker where we speculated about the likely outcome, and he said their lawyers typically use the most conservative interpretation of the tax code, so if there's any ambiguity whatsoever, they would probably disallow recharacterizations of 2017 conversions; and given the timeline, they will not make that decision until the new year when it's already too late. Therefore, I am proceeding as if recharacterizations of any prior conversion will not be possible after January 1.