Proposed tax plan

[laurence]

I know the House just released the draft, but has anyone done any math or found a good estimator on individual impacts of the plan? Those of us in income tax states not yet retired may be looking at a tax increase with the elimination of the state income tax deduction. Those of you who worked too long (ha!) and will be leaving a large inheritance will get to leave more now. It looks like the doubling of the standard deduction will be offset (mostly) by the elimination of exemption - although I'm not sure how many people are not itemizing here (possum living?)

Young dreamers will have a new debate on keeping a mortgage if the cap on that deduction sticks, at least in high price states....

 

[MichaelB]

Details have not yet been released. Here are the talking points from the House W&M committee.

Edit to add - link updated https://waysandmeans.house.gov/wp-content/uploads/2017/10/TaxFramework_1pager.pdf

House Ways and Means committee web page on the tax bill https://waysandmeans.house.gov/taxreform/

 

[Fermion]

We have been using the standard deduction for the past several years so I guess it is a win for us. Not really sure it makes a lot of difference as adjusting for ACA MAGI is more important than the $3.50 federal tax we owe.

 

[audreyh1]

Here is the entire "Tax Cuts and Jobs" bill: https://waysandmeansforms.house.gov/uploadedfiles/bill_text.pdf

 

[MichaelB]

Here is the entire "Tax Cuts and Jobs" bill: https://waysandmeansforms.house.gov/uploadedfiles/bill_text.pdf

Thanks. So, who volunteers to read it and give us all a summary.

 

[Pilot2013]

I'm going to have to take a close look. With the elimination of SALT (7% State Income Tax in SC), and elimination of Personal Exemptions, I am not sure we will be itemizing. This could hurt. It's not done yet though.

I would prefer to see a phase out of the SALT, much like interest on student loans, etc. Would seem like that would help the middle more.

Will be interesting to watch. Might be time for the DW to leave work, or seriously cut back to part time work.

 

[audreyh1]

I can't figure out much of the estate and gift tax stuff yet. I have questions about going back to carry over basis and how stepped-up basis might be eliminated.

Plus there is some mention of 2023 with regards to estate and gift tax exemptions.

OK I found one point:

Estate tax would kick in at $11.2 million, up from $5.49 million, but it would be fully repealed as of 2024.

OK - so I feel safe to suppose stepped up basis stays in place until 2024.

CNBC says estate tax to be repealed in 6 years (2024) https://www.cnbc.com/2017/11/02/gop-bill-will-kill-the-estate-tax-after-6-years.html

I don't know where they got this though:

In addition, there would continue to be a "step-up in basis," which means if you inherit shares of stock, for example, and turn around and sell those shares, you wouldn't pay any capital gains taxes either.

Because searching the bill for "step" only brings up two references - to stepson and stepdaughter.

 

[audreyh1]

Thanks. So, who volunteers to read it and give us all a summary.

The details are released. But understanding the bill requires the original that is being modified.

 

[laurence]

I'm going to have to take a close look. With the elimination of SALT (7% State Income Tax in SC), and elimination of Personal Exemptions, I am not sure we will be itemizing. This could hurt. It's not done yet though.

I would prefer to see a phase out of the SALT, much like interest on student loans, etc. Would seem like that would help the middle more.

Will be interesting to watch. Might be time for the DW to leave work, or seriously cut back to part time work.

I was thinking this would make a difference to members of this community approaching retirement. Here in CA state income tax reaches up to 12% in the top bracket, I believe.

 

[Ian S]

Corporations will do pretty well so as a shareholder who doesn't itemize or live in a high income tax state, I should make out OK.

 

[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.

(b) APPLICATION OF CURRENT INCOME TAX BRACK-
ETS TO CAPITAL GAINS BRACKETS.—
(1) IN GENERAL.—
(A) 0-PERCENT CAPITAL GAINS BRACKET.—Section 1(h)(1) is amended by striking ‘‘which would (without regard to this para- graph) be taxed at a rate below 25 percent’’ in subparagraph (B)(i) and inserting ‘‘below the 15-percent rate threshold’’.
(B) 15-PERCENT CAPITAL GAINS BRACKET.—Section 1(h)(1)(C)(ii)(I) is amended by striking ‘‘which would (without regard to this paragraph) be taxed at a rate below 39.6 percent’’ and inserting ‘‘below the 20-percent rate threshold’’.
(2) RATE THRESHOLDS DEFINED.—Section 1(h) is amended by adding at the end the following new paragraph:
15-PERCENT RATE THRESHOLD.—
The 15-percent rate threshold shall be—
‘‘(i) in the case of a joint return or surviving spouse, $77,200 (1⁄2 such amount in the case of a married individual filing a
separate return),
‘‘(ii) in the case of an individual who
is the head of a household (as defined in section 2(b)), $51,700,
‘‘(iii) in the case of any other indi- vidual (other than an estate or trust), an amount equal to 1⁄2 of the amount in effect for the taxable year under clause (i), and
‘‘(iv) in the case of an estate or trust, $2,600.
‘‘(B) 20-PERCENT RATE THRESHOLD.— The 20-percent rate threshold shall be—
‘‘(i) in the case of a joint return or surviving spouse, $479,000 (1⁄2 such amount in the case of a married individual filing a separate return),‘‘(ii) in the case of an individual who
is the head of a household (as defined in
section 2(b)), $452,400,
‘‘(iii) in the case of any other indi-
vidual (other than an estate or trust),
$425,800, and
‘‘(iv) in the case of an estate or trust,
$12,700.
‘‘(C) INFLATION ADJUSTMENT.—In the
case of any taxable year beginning after 2018,
each of the dollar amounts in subparagraphs
(A) and (B) shall be increased by an amount
equal to—
‘‘(i) such dollar amount, multiplied by
‘‘(ii) the cost-of-living adjustment de-
termined under subsection (c)(2)(A) for
the calendar year in which the taxable year
begins, determined by substituting ‘cal-
endar year 2017’ for ‘calendar year 2016’
in clause (ii) thereof.’’.

 

[Sue J]

A quick calculation shows that our taxes will increase by $58 if this is approved for 2018.

We don't itemize and are currently in the 10% bracket (just a few dollars under the 15% bracket). So the larger standard deduction is offset by the loss of personal exemption and the increase to 12%.

Eh, I can certainly live with that.

 

[bingybear]

I haven't looked at the bill yet. I believe early discussions of repealing the death tax also eliminated the step up in basis. Anyone know if that is in there?

 

[audreyh1]

Gift Tax Exemptions:

Not clear yet - there is a section that spells out a bunch and a rate table, but it is completely unclear what thresholds apply to the gift tax.

The only thing clear is that no changes are made until 2024.

After Dec 31, 2023 (so starting Dec 2024)

(c) CONFORMING AMENDMENTS RELATED TO GIFT TAX.—
(1) COMPUTATION OF GIFT TAX.—Section 2502 is amended by adding at the end the following new subsection:
‘‘(d) GIFTS MADE AFTER 2023.—
‘‘(1) IN GENERAL.—In the case of a gift made after December 31, 2023, subsection (a)(1) shall be applied by substituting ‘subsection (d)(2)’ for ‘section 2001(c)’ and ‘such subsection’ for ‘such section’
‘‘(2) RATE SCHEDULE.—

‘If the amount with respect to which the tentative tax to be computed is:.	The tentative tax is:
Not over $10,000 ...........................................................	18% of such amount.
Over $10,000 but not over $20,000 ..............................	$1,800, plus 20% of the excess over $10,000.
Over $20,000 but not over $40,000 ..............................	$3,800, plus 22% of the excess over $20,000.
Over $40,000 but not over $60,000 ..............................	$8,200, plus 24% of the excess over $40,000.
Over $60,000 but not over $80,000 ..............................	$13,000, plus 26% of the excess over $60,000.
Over $80,000 but not over $100,000 ............................	$18,200, plus 28% of the excess over $80,000.
Over $100,000 but not over $150,000 ..........................	$23,800, plus 30% of the excess over $100,000.
Over $150,000 but not over $250,000 ..........................	$38,800, plus 32% of the excess of $150,000. $13,000, plus 26% of
Over $250,000 but not over $500,000 ..........................	$70,800, plus 34% of the excess over $250,000.
Over $500,000 ...............................................................	$155,800, plus 35% of the excess of $500,000.

(2) LIFETIME GIFT EXEMPTION.—Section 2505 is amended by adding at the end the following new subsection:
‘‘(d) GIFTS MADE AFTER 2023.—
‘‘(1) IN GENERAL.—In the case of a gift made after December 31, 2023, subsection (a)(1) shall be
applied by substituting ‘the amount of the tentative
tax which would be determined under the rate sched-
ule set forth in section 2502(a)(2) if the amount
with respect to which such tentative tax is to be
computed were $10,000,000’ for ‘the applicable
credit amount in effect under section 2010(c) which
would apply if the donor died as of the end of the
calendar year’.
‘‘(2) INFLATION ADJUSTMENT.—
‘‘(A) IN GENERAL.—In the case of any cal-
endar year after 2023, the dollar amount in subsection (a)(1) (after application of this sub- section) shall be increased by an amount equal to—
‘‘(i) such dollar amount, multiplied by
‘‘(ii) the cost-of-living adjustment de- termined under section 1(f)(3) for such calendar year by substituting ‘calendar year 2011’ for ‘calendar year 1992’ in sub- paragraph (B) thereof.
‘‘(B) ROUNDING.—If any amount as ad-
justed under paragraph (1) is not a multiple of $10,000, such amount shall be rounded to the nearest multiple of $10,000.’’.
applied by substituting ‘the amount of the tentative
tax which would be determined under the rate sched-
ule set forth in section 2502(a)(2) if the amount
with respect to which such tentative tax is to be
computed were $10,000,000’ for ‘the applicable
credit amount in effect under section 2010(c) which
would apply if the donor died as of the end of the
calendar year’.

Hmmm - that's not too clear is it.

 

[GrayHare]

I'd guess the % of FIRE members that itemize is higher, perhaps much higher, than the general public. Anyone care to make a poll? Loss of many/most deductions seems likely to increase tax for those who had itemized. Inability to deduct big medical expenses will tend to hit older people. No matter what the changes are there will be some winners and some losers.

 

[audreyh1]

I haven't looked at the bill yet. I believe early discussions of repealing the death tax also eliminated the step up in basis. Anyone know if that is in there?

I posted details about that above your question.

 

[panhead]

If I understand correctly, an individual no longer has a 0% capital gains tax rate. Looks like it's 1/2 of the gain is taxable. I might have to get married....
This actually appears to be quite a difference between an individual and a married couple who apparently get a 0% rate up to $77,200?
Am I reading this correctly?

 

[RunningBum]

A quick calculation shows that our taxes will increase by $58 if this is approved for 2018.

We don't itemize and are currently in the 10% bracket (just a few dollars under the 15% bracket). So the larger standard deduction is offset by the loss of personal exemption and the increase to 12%.

Eh, I can certainly live with that.

I'd probably be similar if I wasn't trying to keep my MAGI lower for the ACA subsidy, which put me at $0 last year because most of my income was qualified dividends. Looks like it'd still be $0 under the new proposal.

Before that I was also in the 10% bracket, now 12%. I itemize now, but with the elimination of the state tax deduction and the larger personal exemptions, I wouldn't itemize and would be a little behind. Take away the exemption makes it a little more. So it'd cost me a little bit, but nothing significant.

 

[RunningBum]

If I understand correctly, an individual no longer has a 0% capital gains tax rate. Looks like it's 1/2 of the gain is taxable. I might have to get married....
This actually appears to be quite a difference between an individual and a married couple who apparently get a 0% rate up to $77,200?
Am I reading this correctly?

I don't think so. I think it was half the limit, so 0% rate up to $38,600. (I closed the docs I was looking at so I'm relying on your numbers, but I remember seeing something like that.

 

[panhead]

I don't think so. I think it was half the limit, so 0% rate up to $38,600. (I closed the docs I was looking at so I'm relying on your numbers, but I remember seeing something like that.

Ahhh, you may very well be correct! I didn't look at it too closely but this would make a lot of sense.


Edited to add:


Yes, you are correct, I read it incorrectly. Thanks for pointing this out!

 

[audreyh1]

Tax foundation.org - https://taxfoundation.org/details-tax-cuts-jobs-act/

 

[audreyh1]

If I understand correctly, an individual no longer has a 0% capital gains tax rate. Looks like it's 1/2 of the gain is taxable. I might have to get married....
This actually appears to be quite a difference between an individual and a married couple who apparently get a 0% rate up to $77,200?
Am I reading this correctly?

Nope - I posted the bill language above, and distilled this:

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.

 

[audreyh1]

I don't think so. I think it was half the limit, so 0% rate up to $38,600. (I closed the docs I was looking at so I'm relying on your numbers, but I remember seeing something like that.

According to the long section I quoted above it looks like it's half of the
MFJ limits that I posted above.

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.

So for singles:

0% up to $38,600
15% up to $239,500
20% above that

 

[panhead]

Considering the statement below, it appears that the backdoor Roth IRA may be gone as well, again, assuming I am reading this correctly.


Sec. 1501. Repeal of special rule permitting recharacterization of Roth IRA
contributions as traditional IRA contributions.

Current law: Under current law, an individual may re-characterize a contribution to a
traditional IRA as a contribution to a Roth IRA (and vice versa). An individual may also recharacterize
a conversion of a traditional IRA to a Roth IRA. The deadline for recharacterization
generally is October 15 of the year following the conversion. When a recharacterization
occurs, the individual is treated for tax purposes as not having made the
conversion. The recharacterization must include any net earnings related to the conversion.

Provision: Under the provision, the rule allowing recharacterization of IRA contributions and conversions would be repealed. The provision would be effective for tax years beginning after 2017.

Consideration: This provision would prevent a taxpayer from gaming the system by, for example, contributing or converting to a Roth IRA, investing aggressively and benefiting from any gains (which are never subject to tax), and then retroactively reversing the conversion if the taxpayer suffers a loss so as to avoid taxes on some or all of the converted amount.

 

[GrayHare]

That looks like it's the undo being axed. No mention of conversion options changing otherwise.