Proposed tax plan

[explanade]

Distributional analysis by Tax Policy Center:

http://www.taxpolicycenter.org/site...nal-analysis-of-the-tax-cuts-and-jobs-act.pdf

 

[audreyh1]

The Tax Policy Center summaries:

The Tax Policy Center has produced preliminary distributional estimates of the “Tax Cuts and Jobs Act” as introduced on November 3, 2017. We find the legislation would reduce taxes on average for all income groups in 2018 and most income groups in 2027. The largest cuts in terms of dollars and as a percentage of after-tax income would accrue to higher-income households. However, not all taxpayers would receive a tax cut under this proposal—at least 12 percent of taxpayers would pay higher taxes under the proposal in 2018 and at least 28 percent of taxpayers would pay more in 2027.

.....

DISTRIBUTIONAL EFFECTS

In 2018, taxes would be reduced by $1,100 on average, increasing after-tax incomes by 1.5 percent (figure 1 and table 1). Taxes would decline on average across all income groups, although higher income taxpayers would generally receive larger cuts on average and as a percentage of income.

Taxpayers in the bottom two quintiles (those making less than about $48,000) would see modest tax cuts of between 0.3 and 0.5 percent of after-tax income (figure 1). Taxpayers in the middle income quintile (those making between about $48,000 and $86,000) would receive an average tax cut of $700 or 1.2 percent of after-tax income. Taxpayers in the top 1 percent (those making more than $730,000) would receive 22 percent of the total tax cut: an average cut of $37,000 or 2.5 percent of after-tax income.

Probably doesn't include the new chained-CPI used for tax brackets. Oh, yes it does:

The Tax Cuts and Jobs Act, introduced as H.R. 1 on November 2, 2017 and amended by Chairman Brady on November 3, 2017, proposes major changes to the individual and corporate income taxes, estate and gift
taxes, and certain federal excise taxes. The Tax Policy Center has produced preliminary distributional estimates of the legislation. We find the following:

• Taxes would fall for all income groups on average in 2018, increasing overall average after-tax income by 1.5 percent. The largest tax cuts would go to higher-income taxpayers.

• Overall, the tax cut would be smaller in 2027, because of the expiration of certain provisions in 2023 (including the new $300 family credit and 100 percent bonus depreciation), the effect of indexing tax parameters to a slower-growing measure of inflation, and the substitution of a child credit that is not indexed for inflation for personal exemptions that are indexed.

• Some taxpayers would pay more in taxes under the proposal. In 2018, slightly more than 12 percent of taxpayers would experience a tax increase relative to current law. That share would rise to slightly more than 28 percent in 2027.

 

[USGrant1962]

Distributional analysis by Tax Policy Center:

http://www.taxpolicycenter.org/site...nal-analysis-of-the-tax-cuts-and-jobs-act.pdf

Thanks for the link. It encouraged me to look at this kind of data. Here's the Tax Foundation's analysis, which shows a decreasing tax break but not becoming a tax increase except for certain high earners without dynamic scoring (Table 5).

https://files.taxfoundation.org/20171106152327/Tax-Foundation-SR239-TCJA2.pdf

And from the horses mouth, the Joint Committee on Taxation, we see the net effect in 2027 versus present law is between zero and a very small cut, and no tax increase, for every income group (Page 5).

https://www.jct.gov/publications.html?func=startdown&id=5029

Bottom line is YMMV - your model may vary.

 

[aja8888]

Loss of Medical Deduction impacts

Here's some medical costs for us this year that are not covered by Medicare or supplemental insurance and are potentially tax deductible on Schedule A:

Medicare insurance premium costs and deductibles
Supplemental medical insurance premium costs and deductibles
Part D premiums
Part D deductibles
Drug costs beyond what Part D doesn't cover
Donut Hole costs
Any dental costs
Any eye ware, exams, etc
Hearing aids, exams
Co pays at doctor offices
"Office Visit' fees imposed by greedy doctors
Auto mileage costs
Parking costs
Non-prescription drug costs
Medical supplies not covered (there can be lots of these)

I'm sure I forgot some.

But this year, my spreadsheet is up to over $42,000 OOP for the above and we may see another $10K spent over the next two months (Dental implants, DW's portable O2 concentrator). Granted, I had some serious dental work done, and DW had two major surgeries. Plus, we will have several thousand of the same charges next year.

This year is a big year for us in that regard. But, even still, there are a lot of costs that Medicare and supplements don't cover. The real issue can be increasing costs for drugs if the drug companies have their greedy way.

 

[explanade]

University of Pennsylvania Wharton school did a model and scored the tax bill as costing $1.7 trillion over the first 10 years and additional $2.6 trillion from 2027 to 2039.

https://www.cnbc.com/2017/11/06/gop...-might-stall-in-senate-new-analyses-show.html

That could endanger the ability to use reconciliation rules in the Senate (passing with 50 votes instead of 60).

 

[SecondCor521]

University of Pennsylvania Wharton school did a model and scored the tax bill as costing $1.7 trillion over the first 10 years and additional $2.6 trillion from 2027 to 2039.

https://www.cnbc.com/2017/11/06/gop...-might-stall-in-senate-new-analyses-show.html

That could endanger the ability to use reconciliation rules in the Senate (passing with 50 votes instead of 60).

With all due respect to Wharton, it would seem to me that the Senate Parlimentarian would use the CBO to decide on reconciliation qualification, wouldn't she?

 

[explanade]

Yes, they don't use outside sources.

 

[Yarnstormer]

I used to live in a suburban sprawl subdivision w home values from $200k to $350k. So many of the young couples that moved in did not stay 5 years. They worked for large industrial corporations or the military and were constantly moving. Granted, they would rarely make money on the deal but requiring a 5 year stay is a bit much.

 

[ERD50]

Distributional analysis by Tax Policy Center:

http://www.taxpolicycenter.org/site...nal-analysis-of-the-tax-cuts-and-jobs-act.pdf

Not so fast...

Retracting Estimates | Tax Policy Center

Retracting Estimates

TPC staff found an error in the preliminary distributional tables and analysis of the Tax Cuts and Jobs Act (TCJA) that we released today. This error involved the additional child tax credit component of the proposed legislation.

TPC staff are in the process of revising the analysis and will release a corrected version as soon as possible. TPC has removed all related analyses from our website. And we urge users to refrain from referring to the incorrect figures. I, and the whole TPC staff, regret this error and we will be providing corrected analyses as soon as we can.

Though I wouldn't expect a Child Tax Credit error to throw things off too much, but we will see.

-ERD50

 

[USGrant1962]

Honestly, one part I like is that Mortgage Interest is being limited. I personally think it should be phased out completely.

I've been thinking about this one and in my mind it would be reasonable to make the deductability limit the same as the FHA jumbo loan limit. The jumbo loan level is adjusted for housing cost in the region and changes with inflation and market conditions, but is still a reasonable limit. Currently, it ranges from a $424K default to $636K in high real estate price areas.

Contrary to conventional wisdom, the mortgage deduction is not a subsidy to buyers versus renters. For rental property all mortgage interest is deducted as a business expense by the owner. So in a free market (not rent controlled NYC for example) renters are paying lower rent because their landlord is deducting the interest and using the savings to lower the rent to compete for their business.

DISCLAIMER - I paid my mortgage off in January so "not my circus, not my monkey".

 

[Sunset]

I've been thinking about this one and in my mind it would be reasonable to make the deductability limit the same as the FHA jumbo loan limit. The jumbo loan level is adjusted for housing cost in the region and changes with inflation and market conditions, but is still a reasonable limit. Currently, it ranges from a $424K default to $636K in high real estate price areas.

Contrary to conventional wisdom, the mortgage deduction is not a subsidy to buyers versus renters. For rental property all mortgage interest is deducted as a business expense by the owner. So in a free market (not rent controlled NYC for example) renters are paying lower rent because their landlord is deducting the interest and using the savings to lower the rent to compete for their business.

DISCLAIMER - I paid my mortgage off in January so "not my circus, not my monkey".

The gov't could change mortgage interest rules and make it like in Canada.
It is not deductible at all to individuals.
As a landlord all expenses like taxes, interest on loans (mortgage interest), repairs, etc are deductible.
Home ownership rates in Canada are as high as in US without the interest deductible incentive.
Canadian's do not tend to refinance their homes to spend on extra things because the debt has no special status over other debts, so Canadian's tend to pay off their mortgage and remain mortgage free.

 

[meierlde]

The gov't could change mortgage interest rules and make it like in Canada.
It is not deductible at all to individuals.
As a landlord all expenses like taxes, interest on loans (mortgage interest), repairs, etc are deductible.
Home ownership rates in Canada are as high as in US without the interest deductible incentive.
Canadian's do not tend to refinance their homes to spend on extra things because the debt has no special status over other debts, so Canadian's tend to pay off their mortgage and remain mortgage free.

Of course that is an unintended consequence of the repeal of the deductablity of other interest in the 1980s.

 

[audreyh1]

DISCLAIMER - I paid my mortgage off in January so "not my circus, not my monkey".

I wanted to point out that you do still have a dog in this fight. Those of us who paid off our mortgages get no lower tax benefit from a mortgage interest deduction, so why should we want the government income reduced and thus the deficit raised because other people get it?

This can be said about any tax break of course, but I just wanted to point out that it does affect everybody whether they have a mortgage or not, simply because taxes are spread among all payers.

 

[Taxman59]

I wanted to point out that you do still have a dog in this fight. Those of us who paid off our mortgages get no lower tax benefit from a mortgage interest deduction, so why should we want the government income reduced and thus the deficit raised because other people get it?

This can be said about any tax break of course, but I just wanted to point out that it does affect everybody whether they have a mortgage or not, simply because taxes are spread among all payers.

+1000

 

[garyt]

Virtually everyone SHOULD be paying higher taxes. In order for the Government to LBYM, there is a lot more revenue that needs to be generated.

I only wish it was a sales tax or a gasoline tax so everyone WOULD actually pay more. They could get rid of the disincentive to work, i.e. income tax.

Hopefully families getting the extra child care credits with eventually produce more taxpayers, but the way I see the future it's just more people I have to pay for...

Taxing more is not the answer. Without meaningful spending cuts we're all screwed, eventually

 

[MichaelB]

Once again, we need to keep the discussion on the tax bill, please.

 

[Tadpole]

My reduction in tax rate is about 2.5%. I'd gladly give it up to get the Medical deduction safety-net back.

 

[audreyh1]

Let's say I'm MFJ at an income between $77,200 and $89,999.

My marginal regular income tax rate of 12% is less than my marginal capital gains rate of 15%.

Is this correct? Am I missing something here? Seems like the intention has always been to have income taxed at a higher rate than capital gains.

Perhaps you are missing that your capital gains tax rate is 0% for most of the 12% tax bracket up to the same level as current tax law. The new plan gives lower ordinary income tax rates for a wider band at the low end, but did not extend the 0% capital gains tax rate, decoupling it from the ordinary income tax brackets. It's a narrow band where cap gains rate is higher.

I suppose the intentions have changed somewhat, but is no "worse" than today in terms of what tax hit capital gains cause. What's really happening is that ordinary income gets a break.

 

[Cobra9777]

Perhaps you are missing that your capital gains tax rate is 0% for most of the 12% tax bracket up to the same level as current tax law. The new plan gives lower ordinary income tax rates for a wider band at the low end, but did not extend the 0% capital gains tax rate, decoupling it from the ordinary income tax brackets. It's a narrow band where cap gains rate is higher.

I suppose the intentions have changed somewhat, but is no "worse" than today in terms of what tax hit capital gains cause. What's really happening is that ordinary income gets a break.

I agree it's no worse than today but I'm not so sure intentions have changed. Has there been any public statement to that effect? I agree with those who earlier characterized this as counterintuitive and probably an unintended departure from conventional practice. Short-term capital gains should not be given preferential treatment over long-term.

 

[audreyh1]

I agree it's no worse than today but I'm not so sure intentions have changed. Has there been any public statement to that effect? I agree with those who earlier characterized this as counterintuitive and probably an unintended departure from conventional practice. Short-term capital gains should not be given preferential treatment over long-term.

They clearly stated in the bill that capital gains rate thresholds were being disconnected from the ordinary income tax brackets and would stand on their own. They weren't willing to raise the 0% capital gains tax bracket all the way to the top of the new 12% tax bracket. So I think that pretty much states the intention.

On average, long-term capital gains are given preferential treatment.

 

[RunningBum]

I agree it's no worse than today but I'm not so sure intentions have changed. Has there been any public statement to that effect? I agree with those who earlier characterized this as counterintuitive and probably an unintended departure from conventional practice. Short-term capital gains should not be given preferential treatment over long-term.

That's an interesting consequence, isn't it, that there's a window where STCGs are taxed at a lower rate than LTCGs. Another thing to keep in mind when selling equities/funds if this passes.

 

[audreyh1]

It is a pretty narrow band. Would you rather have a 15% lowest ordinary income tax bracket rather than 12%? Or have the 12% tax bracket threshold lowered so that it doesn't exceed the cap gains 0% tax bracket?

 

[RunningBum]

It is a pretty narrow band. Would you rather have a 15% lowest ordinary income tax bracket rather than 12%? Or have the 12% tax bracket threshold lowered so that it doesn't exceed the cap gains 0% tax bracket?

I'm staying away from any intent or alternate proposals so I don't get into what could be considered political discussion. I'm just noting the impact. I believe it's a potential $384 difference between STCG and LTCG in that band. Correct my math if it's wrong. There's a lot of hand wringing over lesser amounts on this board.

 

[43210]

One interesting feature of this tax proposal is what it means to realize income (e.g. Roth conversion, withdrawing from Trad, contributing to Trad vs Roth, realizing cap gains etc - i.e. situations where you can control what year income is realized so as to optimize) up to the top of the XXX bracket.

For MFJ, the 12% bracket goes up to $90k, but the 0% rate for LTCG and QDiv just goes up to about $77.2k, and then goes to 15% above that. A commenter on the Kitces blog points out that in the $77.2k--$90k range, it seems that LTCG get taxed at 15% while STCG get taxed at 12% !!

Also there'll still be the phenomenon (with new percentages) where if you go up to the top of the 0% LTCG bracket, and then consider the marginal effect of adding further ordinary income gets taxed at 27%=12%+15% (formerly 30%=15%+15%) since the extra ordinary income gets taxed at 12% (formerly 15%) as expected, but then that same amount of LTCG gets pushed from 0% to 15%, giving another 15% tax on that amount (until all LTCG are pushed into the higher bracket). The phenomenon is not new, but be aware that it happens at $77.2k, not $90k.

Yes, dropping the lowest ordinary income bracket to 12% and keeping cap gains tax at 15% has that effect. No big deal IMO. Would you rather pay 15% on the lowest tax bracket?

I find it counterintuitive that STCG would be taxed at a lower rate than LTCG. It's not a feature one would expect, so it looks like an unintended glitch. It's interesting.

Its simply the effect of the lowest ordinary income tax bracket being lowered to 12% versus 15%.

And you still get 0% on your long-term cap gains up to $77,200 income (actually more like just over $100k when taking into account the $24.4K standard deduction).

I think people are remarking about what seems to be an odd anomaly, rather than analyzing the effect on their personal tax circumstance.

 

[Cobra9777]

It is a pretty narrow band. Would you rather have a 15% lowest ordinary income tax bracket rather than 12%? Or have the 12% tax bracket threshold lowered so that it doesn't exceed the cap gains 0% tax bracket?

I'd rather have the tax code make sense. Things like this do not simplify. It further complicates the tax planning process. If it's a problem of impact, then make it up somewhere else. Sure, one option would be to drop the $90K (top of 12% bracket) just enough to keep the impact the same ($1.5T), while reconnecting CG thresholds and ordinary income brackets. I don't think you'd have to drop it very much. Or better yet, raise the corporate rate to 21%.