Proposed tax plan

[Winemaker]

It looks like a win for us. We normally deduct ~$27,000 and that included mortgage interest... we only have 6 years left on a 15 year mortgage. Okay that goes to $24,400. Our 15% bracket for $75,300 goes to $90,000 at 12%. Real estate investments seem safe at this point.

Did lose the monetary incentive for charitable contributions, but that isn't why we did them anyhow.

 

[pb4uski]

Since I was a bit skeptical of the spin of a "middle class tax cut", I did some quick calculations for an under 65 yo married couple with no kids that takes the standard deduction at various levels of income and the savings from lower rates and wider brackets are pretty signifcant. Of course, if your itemized deductions and exemptions exceed $24,000 then the savings due to changes in rates and brackets are somewhat offset depending on your circumstances.

In our case, the saving are very modest... only a few hundred $.

Income	Current Tax	Proposed Tax	$ Savings	% Savings
25,000	420	120	300	71%
50,000	3,448	3,120	328	10%
75,000	7,198	6,120	1,078	15%
100,000	11,278	9,120	2,158	19%
125,000	17,528	13,550	3,978	23%
150,000	23,778	19,800	3,978	17%
175,000	30,061	26,050	4,011	13%
200,000	37,061	32,300	4,761	13%

 

[PatrickA5]

Since I was a bit skeptical of the spin of a "middle class tax cut", I did some quick calculations for an under 65 yo married couple with no kids that takes the standard deduction at various levels of income and the savings from lower rates and wider brackets are pretty signifcant. Of course, if your itemized deductions and exemptions exceed $24,000 then the savings due to changes in rates and brackets are somewhat offset depending on your circumstances.

In our case, the saving are very modest... only a few hundred $.

Income	Current Tax	Proposed Tax	$ Savings	% Savings
25,000	420	120	300	71%
50,000	3,448	3,120	328	10%
75,000	7,198	6,120	1,078	15%
100,000	11,278	9,120	2,158	19%
125,000	17,528	13,550	3,978	23%
150,000	23,778	19,800	3,978	17%
175,000	30,061	26,050	4,011	13%
200,000	37,061	32,300	4,761	13%

Looks like you might be missing the $300 credit for TP and spouse.

From Kitces summary: In addition, the new rules provide for a new $300 credit for non-child dependents (e.g., college-aged children, or even elderly parents), and the taxpayer themselves (and his/her spouse) will each receive their own $300 “Family Flexibility Credit” as well (though both of these new $300 credits phase out after 5 years in 2023).

 

[audreyh1]

Since I was a bit skeptical of the spin of a "middle class tax cut", I did some quick calculations for an under 65 yo married couple with no kids that takes the standard deduction at various levels of income and the savings from lower rates and wider brackets are pretty signifcant. Of course, if your itemized deductions and exemptions exceed $24,000 then the savings due to changes in rates and brackets are somewhat offset depending on your circumstances.

In our case, the saving are very modest... only a few hundred $.

Income	Current Tax	Proposed Tax	$ Savings	% Savings
25,000	420	120	300	71%
50,000	3,448	3,120	328	10%
75,000	7,198	6,120	1,078	15%
100,000	11,278	9,120	2,158	19%
125,000	17,528	13,550	3,978	23%
150,000	23,778	19,800	3,978	17%
175,000	30,061	26,050	4,011	13%
200,000	37,061	32,300	4,761	13%

And this is comparing the 2018 rates recently published by the IRS and before the new tax proposal was published?

 

[pb4uski]

I used 2017 rates and brackets... but even if I used 2018 rates and brackets then the overall conclusion would be sound, it is just that the savings might be slightly less... but you make a good point.

OTOH, I did not factor in the $300 tax credit that PatrickA5 mentions and that would increase the savings until the credit phases out... but the phase out is another reason to not include it.

 

[pb4uski]

And this is comparing the 2018 rates recently published by the IRS and before the new tax proposal was published?

Updated to compare 2018 rates and brackets to the proposed plan.. also updated to 2018 standard deduction and exemption amounts for both current and proposed. (While headline deduction is $24,000... that is for 2017 and will increase to $24,400 in 2018).

Income	Current Tax	Proposed Tax	$ Savings	% Savings
25,000	370	72	298	81%
50,000	3,353	3,072	281	8%
75,000	7,103	6,072	1,031	15%
100,000	10,983	9,072	1,911	17%
125,000	17,233	13,450	3,783	22%
150,000	23,483	19,700	3,783	16%
175,000	29,733	25,950	3,783	13%
200,000	36,659	32,200	4,459	12%

 

[hesperus]

House flipping is going to be discouraged in the current version of the TCJA:
Nonetheless, Section 1402 of TCJA takes further steps to limit the “too-frequent” use of Section 121 for house flippers (or those repeatedly converting and moving into their rental properties to subsequently sell them as primary residences in 2 years) by changing the “owned and used for 2 out of the past 5 years” into a “5 out of the past 8 years” requirement.

I know quite a few members here have significant real estate rentals and I wonder how they're seeing this change in it's current form.

 

[43210]

Kitces has chimed in - I have not read it yet but he is always insightful. Looks like some nice graphics comparing current to proposed.

https://www.kitces.com/blog/tax-cut...ail&utm_term=0_4c81298299-04646a6e33-57160561

That's great. It just about answers all my questions (that could be answered at this point).

 

[ShokWaveRider]

I think the one of the good things about the proposed bill is the reduction of mortgage interest deduction. It would probably instill some sanity into the housing market. Americans are world renowned for biting off more than they can chew. If it were me I would reduce the deduction to ZERO over the next 6 years to match the expiry of other items.

 

[audreyh1]

Another big question for me is where is the 20% capital gains tax threshold.

OK - the quoted part of the bill states:

For 2018 married filing jointly: 0% capital gains up to $77,200; 15% capital gains tax up to $479,000; and 20% above that. Indexed to inflation after 2018.

Thanks for the Kitces link. I didn't realize the 3.8% Medicare Net Investment Income tax remained. This adds a 3.8% tax on long-term capital gains income that exceeds $200K single and $250K MFJ and these thresholds are not indexed to inflation.

So the MFJ tax brackets are effectively 0% capital gains tax up to $77,200; 15% capital gains tax up to $250,000; 18.8% up to $479,000; and 23.8% above that. All but the $250,000 bracket are indexed to inflation after 2018.

 

[FrugalLady]

A quick back of the napkin calculation shows minimal impact to us. We haven't been able to itemize in years. So we will benefit by the increased standard deduction, however that is offset by the fact that we will move from the 10% tax bracket to 12%. I think we would owe about $60 more per year.

 

[ripper1]

Has anything been said about how Social Security may be taxed. Sorry if I missed it here in earlier posts. Right now most of us are taxed on 85% if total.

 

[audreyh1]

Has anything been said about how Social Security may be taxed. Sorry if I missed it here in earlier posts. Right now most of us are taxed on 85% if total.

I don't think any changes were proposed on taxing social security.

 

[RunningBum]

I haven't done the backdoor Roth and I don't understand exactly what they are taking away. My thought that a backdoor Roth was a tIRA contribution followed by a conversion to a Roth. Maybe you can't do that in the same year? It won't affect me so I'm not going to look it up, maybe someone potentially affected understands it better?

The Kitces column says that backdoor Roths are not affected in the new plan.

 

[SecondCor521]

Yes, I believe so. I haven't seen anything eliminating conversions (that is the correct term for what you describe). What they seem to be taking away is the ability to back out all or part of that conversion, or at least not be able to wait until Oct 15 of the following year to do it. So you'd better not find out later you converted more than you wanted, as you may be stuck with it.

I was planning on converting a larger $X from my traditional IRA to my Roth IRA before 12/31/17 and then recharacterizing a smaller $x back from my Roth to my traditional in order to hit a very particular AGI related to FAFSA rules sometime between 1/1/18 and 4/15/18.

Doing so is much easier and safer than trying to figure my taxes in December before I know all the numbers for certain.

I am not trying to do the Roth horse race. The investments would remain the same (I am a very boring long-term-buy-and-hold type).

My understanding is that the present law takes effect on 1/1/18.

Anyone know for sure if I would be able to recharacterize in this situation?

 

[audreyh1]

I've been trying to figure out capital gains tax differences. It looked way better until Kitces informed me that the NIIT is still there. Now it's close - not much different.

I've been debating whether to sell some stuff this year or next - like rebalancing with equities having appreciated so much. I could pull some of the rebalancing into Dec from Jan.

The issue with next year is 2018 is the year that will determine DH's medicare premiums. So I prefer to keep next year and subsequent year income lower.

We'll see, I still have almost two months to decide!

 

[RunningBum]

I was planning on converting a larger $X from my traditional IRA to my Roth IRA before 12/31/17 and then recharacterizing a smaller $x back from my Roth to my traditional in order to hit a very particular AGI related to FAFSA rules sometime between 1/1/18 and 4/15/18.

Doing so is much easier and safer than trying to figure my taxes in December before I know all the numbers for certain.

I am not trying to do the Roth horse race. The investments would remain the same (I am a very boring long-term-buy-and-hold type).

My understanding is that the present law takes effect on 1/1/18.

Anyone know for sure if I would be able to recharacterize in this situation?

See my post #44 in this thread for my thought when this was previously asked.

Nobody can know "for sure" what will happen with this proposal but I can't believe they'd pass something affecting the 2017 tax year.

 

[pb4uski]

Everything that I have seen indicates that it is generaly effective 1/1/18.

 

[SecondCor521]

The issue with next year is 2018 is the year that will determine DH's medicare premiums. So I prefer to keep next year and subsequent year income lower.

Perhaps I am misreading what you are saying here, and I may be wrong about it, but I thought that the Medicare premiums were adjusted annually based on your income the previous year.

In other words, if you have high income this year, your Medicare premiums will be higher next year. But if your income drops the following year, your Medicare premiums will drop the year after.

It isn't a "this-was-your-income-in-2017-so-you-have-high-Medicare-premiums-for-the-rest-of-your-life" situation. Which is what I thought you were implying here.

I mention it only because it may affect your planning.

 

[LRDave]

Quick (hopefully non-porky) question: Does this not slam charitable contributions as a tax incentive under all sets of circumstances?


Yes, yes I know we are all charitable souls and would give as much anyway.... BUT there are some few out there that will switch that lever down to offset higher cash flow elsewhere.

 

[mamadogmamacat]

Per the kitces article, charitable deductions are not being eliminated. On fact, based on AGI, there is a slight increase in the amount that is deductible. Also appears documentation requirements are more more stringent:

"Limitations (And One Slight Improvement) On Charitable Deductions

While most itemized deduction changes under the TCJA proposal are “negative” and more limiting, a silver lining is that under Section 1306, the limitation that cash contributions to a public charity cannot exceed 50% of AGI (with a 5-year carryforward for unused amounts) would actually be increased to 60%-of-AGI instead (with the same 5-year period). In addition, the charitable mileage deduction limit – currently $0.14/mile – will finally be indexed for inflation going forward.
However, Section 1306 also proposes a number of “crackdowns”, including the ability to claim a charitable deduction for 80% of the cost of purchasing seating rights for college athletic events (entirely repealed), and the requirement that all charitable donations above $250 must have an accompanying contemporaneous written acknowledge will be expanded to all such charitable donations (regardless of whether the charity also maintains donation records and reports them in the organization’s own tax return)."

 

[gerntz]

The loss of the state and local tax deduction is going to hit a big chunk of the upper-middle class/lower-upper class in high income tax states with a big tax increase..

Yes. Will, to a large degree, bring the amount of Fed taxes that have to be paid at the same AGI on people in the places you describe up to what those that don't live there pay.

 

[Sunset]

The way it works in Canada is that the decedant is deemed to have had a disposition of his capital assets at market price on death. Exemption if spouse gets assets. Cap gains tax may be owing at that time. Beneficiaries get the assets at market price. No need for any estate tax with this system.

This accomplishes the same as an estate tax, as either way some tax is paid on the holdings during the transfer to the inheriting people.

 

[gerntz]

Another potential problem for those who currently itemize is that this could increase state income taxes because many states require you to take the standard deduction on your state return if you took it on the Federal return.

Don't see the issue. If the new standard deduction is bigger than your itemized deductions, then taking the standard deduction is a better deal. If itemized still exceed new standard, you can still take itemized.

 

[Nature Lover]

I did a quick mockup and, no surprise, it looks like I'd pay a few thousand more under the proposed plan (live in CA).