Proposed tax plan

[gerntz]

I figure a big hit to home value due to cap on mortgage interest deduction.

Which makes housing in general more affordable.

 

[gerntz]

An elimination of the step-up in cost basis at death seems like an accounting nightmare for many families. How the heck are the beneficiaries supposed to know what the cost basis for something they didn't purchase?

Perhaps the person who died would have recognized the need to keep records of such versus leaving a mess. It's the responsible thing to do.

 

[audreyh1]

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.

Yes, thanks.

DH starts Medicare in 2020. Premiums will be based on 2018 tax return.

Yes, they are adjusted each year thereafter. Didn't mean to imply forever.

My plan for years, however, has been to finally divest some long held assets by a end of 2017 deadline, with the hope of having lower income thereafter (well, until SS and RMDs start). These are assets I never intended to hold forever.

But I'm also looking at a potential large rebalancing situation due to the huge equity runup and considering pulling some of that into 2017.

 

[USGrant1962]

I just saw a news article saying that Representative Kevin Brady, Chairman of the House tax writing committee, will offer a substantive amendment to the tax bill on Monday. In a quick search I couldn't the actual statement from Brady.

Goes to show you that this is "just a bill, on Capitol Hill..."

EDIT: Here's a link to Reuters http://www.reuters.com/article/us-u...KBN1D3254?utm_source=34553&utm_medium=partner

No content on the amendment.

 

[audreyh1]

Perhaps the person who died would have recognized the need to keep records of such versus leaving a mess. It's the responsible thing to do.

Ha! That would be nice, but in reality often doesn't happen.

I recently found out my Dad didn't have the new basis established on his house and farm when he inherited it from Mom. Just had it resurveyed. And he made a lot of improvements, but only has a folder of aging receipts. If we need to sell his property before he passes, we have some serious work cut out for us and it's going to fall on my shoulders. It's beyond him now.

I'm sure this is a common situation.

 

[Hamlet]

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.

It increases the number of people taking the standard deduction. For those people, it removes the tax incentive to contribute to charities. However, there will still be a lot of people itemizing, so those people still have the tax incentive.

Likewise, if the charitable contributions are large enough to make it worth itemizing, those people will still have the tax incentive.

I suspect some people may start batching their charity for tax reasons. If you were planning to give $10k per year for 5 years, it would make more sense to give $50k in one year instead.

 

[audreyh1]

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)."

And the Pease Amendment is removed against so charitable deduction is not reduced for high incomes.

 

[Nature Lover]

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.

Tax conformity at the State level will likely be a significant issue in 2018 if the current proposal (or something like it) becomes law. Your example is just one of many rules that could result in an unintended consequence at the State level. If the plan (or something like it) becomes law, states who have an income tax will likely have to take up their own tax conformity bills in their legislatures, if they want to address inconsistencies/unintended impacts.

History has taught us that, in the end, tax "simplification" is rarely that. Don't get me wrong: it could be...it just usually isn't.

 

[audreyh1]

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.

It would have us bunching up in several years worth in one year. Since we use a DAF, that works out OK. Can still add on up to $10K in property taxes, which is about two years worth for me.

 

[Nature Lover]

It would have us bunching up in several years worth in one year. Since we use a DAF, that works out OK. Can still add on up to $10K in property taxes, which is about two years worth for me.

+1.

 

[pb4uski]

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.

Not necessarily.... almost 70% of taxpayers don't itemize currently and still make chartiable contributions so the new bill will not change their situation one iota... and the increase in the standard deduction above the current standard deduction/personal exemption will increase those who do not itemize even more... probably to over 90% according to House Ways & Means Committee estimates.

For those who do itemize, the incremental tax benefit of charitable contributions will still be the product of the contribution and the taxpayer's marginal tax rate, though with overall wider brackets and lower rates the tax benefit will be lower.

I think that for most people that the tax benefit of charitable contributions is a by-product and not the major reason why they contribute. We won't change what we contribute as a result of the change in tax benefits

 

[pb4uski]

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. ....

I'm not so sure about that. I went back to the last year that I was working... we had over $200k of earned income and paid over 5% of our earned income in state income taxes.... we live in a New England state that is reputed to have high state income taxes.

I calculated the 2017 tax under the current and proposed tax brackets and rates assuming
SALT were not deductible and the tax was $300 LESS.... IOW, the agragate impact of wider brackets and lower rates essentially offset the disallowance of SALT.

YMMV but I think it is prudent to actually do some test calculations rather than try to intuit the impact as there are many moving parts.

There is an argument to be had that making SALT non-deductible will put pressure on state and local governments to reign in spending since any taxes will hurt more.... not to mention an arguable inequity between similarly situated taxpayers in states with an income tax and states without an income tax.

 

[Calico]

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

Thanks very much for the link! That info is extremely helpful in sorting through the proposed changes.

 

[pb4uski]

+1 absolutely best article that I have seen

 

[TrvlBug]

... ...I think that for most people that the tax benefit of charitable contributions is a by-product and not the major reason why they contribute. We won't change what we contribute as a result of the change in tax benefits

+1. Back of the envelope calcs suggest we'll pay an additional few $Ks in taxes as our SALT deductions are approx. $25K. We do charitable contributions because we can, not because of the deduction. If the deductions were to be eliminated, we would still continue. We have a DAF which we front loaded during our working careers and have just increased by 50% per year, however, next year we'll be looking at increasing our contributions even more via our RMDs, again, because we can and also because it allows us to reduce our taxable income.

 

[USGrant1962]

YMMV but I think it is prudent to actually do some test calculations rather than try to intuit the impact as there are many moving parts.

+1

I'm in Maryland and when I was working and had big deductions from a mortgage and state taxes, the AMT hit me hard. AMT is going away in this bill. Considering AMT and the lower effective rates overall, I don't think the negative impact on high earners in high tax states will be as much as people seem to think. Except maybe for those in the stealth 45.6% bracket.

But I haven't done test calculations either so YMMV.

Lots of moving parts in the tax code.

 

[Philliefan33]

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.

There is the possibility of increasing one's *state* income tax.

In some states (PA is one), items can be deducted on the state return that are not deductible on the Federal return. But (in some states) you can only itemize on the state return if you itemized on the federal return.

So if you end up taking the new, higher, standard deduction on the federal return you may be ineligible to claim some deductions on your state return.

 

[pb4uski]

A couple interesting documents with some details:

https://waysandmeansforms.house.gov/uploadedfiles/tax_cuts_and_jobs_act_section_by_section_hr1.pdf

https://www.pwc.com/us/en/tax-servi...s-chairman-brady-releases-tax-reform-bill.pdf

 

[Pilot2013]

I think that for most people that the tax benefit of charitable contributions is a by-product and not the major reason why they contribute. We won't change what we contribute as a result of the change in tax benefits

I will be the bad guy here. I either will batch charitable giving, or I will change where I provide funds. One thing I will do, since I am not currently maxing HSA, is to change company United Way to maximize HSA and get the tax benefit.

I'll have plenty of "time and talent" I can provide later, once I am at a (much) lower tax bracket.

 

[pb4uski]

How does "change company United Way to maximize HSA and get the tax benefit" work? Do you mean that you reduced or eliminated your company deductions for United Way in favor of higher HSA contributions?

Batching charitable contributions is smart, and will still be smart under the proposed plan in certain situations.

 

[gerntz]

It increases the number of people taking the standard deduction. For those people, it removes the tax incentive to contribute to charities. However, there will still be a lot of people itemizing, so those people still have the tax incentive.

Likewise, if the charitable contributions are large enough to make it worth itemizing, those people will still have the tax incentive.

I suspect some people may start batching their charity for tax reasons. If you were planning to give $10k per year for 5 years, it would make more sense to give $50k in one year instead.

If you have an IRA & you're up to RMD age, it's immaterial as you can contribute as part of the RMD & reduce income with it.

 

[audreyh1]

If you have an IRA & you're up to RMD age, it's immaterial as you can contribute as part of the RMD & reduce income with it.

This is true. You just can't use a DAF but have to go directly to qualified charities.

 

[gerntz]

This is true. You just can't use a DAF but have to go directly to qualified charities.

So why would you?

 

[audreyh1]

So why would you?

Don't understand the question.

 

[TrvlBug]

So why would you?

To reduce your income. We will be doing this next year.