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Preparing for 2026 Tax Changes
Old 01-23-2023, 09:37 AM   #1
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Preparing for 2026 Tax Changes

How much scenario planning do you do?

There are different actions that I would take depending on what (if any) of the 2017 tax changes remain after 2026.

For example - the difference in standard deduction and rules on deductions - from 2017 to 2026 shifts strategy away from a high mortgage and property tax. How much of a new home (and/or mortgage) is a consideration when we move to our retirement location - especially from a budget planning perspective.

Another example - the 0% capital gains tax rate strongly pushes towards resetting cost basis each year in brokerage account vs post 2026 a push towards Roth conversions.

There are other strategies as well.

Many are typical tax minimization strategies.

However - some are larger decisions that go beyond a 1-year tax minimization horizon (like $ amount of new home to pursue and/or mortgage with tax implications). This might be a $400k home vs $800k home, for example.

Generally, we have tried to take the most conservative path - not depending on certain tax changes. But, then you might miss on real long term opportunities (like a home, brokerage capital gains vs Roth conversion, etc)

So, how do you scenario plan and make these type of decisions?
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Old 01-23-2023, 10:33 AM   #2
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Old 01-23-2023, 11:05 AM   #3
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Another example - the 0% capital gains tax rate strongly pushes towards resetting cost basis each year in brokerage account vs post 2026 a push towards Roth conversions.
So you're doing more 0% cap gains harvesting now? I thought there was very little change in that with the current tax cuts, but the 3% tax rate difference made conversions more attractive now. Am I misunderstanding what you are saying?

I was already doing conversions, so that's not really a change for me. If that standard deduction reverts back to the lower amount I might send more appreciated MF shares to my DAF rather than hold some of my tIRA out for QCDs. I can't think of anything else I'll do differently.
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Old 01-23-2023, 11:13 AM   #4
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Originally Posted by retire48in2018 View Post
How much scenario planning do you do?

There are different actions that I would take depending on what (if any) of the 2017 tax changes remain after 2026.

For example - the difference in standard deduction and rules on deductions - from 2017 to 2026 shifts strategy away from a high mortgage and property tax. How much of a new home (and/or mortgage) is a consideration when we move to our retirement location - especially from a budget planning perspective.

....
However - some are larger decisions that go beyond a 1-year tax minimization horizon (like $ amount of new home to pursue and/or mortgage with tax implications). This might be a $400k home vs $800k home, for example.
......
I would never buy a home based on tax rules. I buy based on what I want and I can afford.
This entire tax deductible of mortgages is a trap,
  • Doesn't help when the mortgage is low ($100K or less)
  • at a low percentage rate.
  • It encourages people to buy more than they can afford.
  • Finally it really only benefits the very rich buying their $20M mansion.
  • Does not actually encourage home ownership, Canada does not have this deduction and their home ownership rate is the same, while they also have tax benefits for renting.
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Old 01-23-2023, 11:23 AM   #5
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I have no tax plans that many years in the future... there is likely to be changes to the tax code that makes any planning mute...


As an example, when I was in college I took a tax course... the professor said that he could ask the same question over different years and have different answers according to what had changed in the tax laws...


As for deductions... I never do anything to get a deduction... even when they were of benefit... I only got back whatever my tax rate was which let's say used to be around 25%.... so 75% of my money was lost... this means if I did not want whatever it was I was not getting it....



Now, I did do deduction stacking... where I would pay property taxes in Jan of year one and Dec of year one to double my tax deduction, but nothing in year two so standard deduction... stacked again in year 3...
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Old 01-23-2023, 11:25 AM   #6
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So, how do you scenario plan and make these type of decisions?
Not at all. I can afford what I want in life, and in my case that includes a paid off house that I love.

If that should change and I couldn't afford my own home, then I'd probably have to get a mortgage. .
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Old 01-23-2023, 12:02 PM   #7
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Get a mortgage if it is cheap, not for taxes. With lower standard deduction less deduction stacking may be indicated.

Higher future rates mean Roth conversions may be cheaper now.

And the current rules could be extended so stay flexible.
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Old 01-23-2023, 12:17 PM   #8
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My tax planning consists of large Roth conversions to prevent higher tax bills and IRMAA when we’re older, and to simplify things for DW and eventually our kids. My property taxes are high whether there’s a tax deduction or not, and we’ll give to charity no matter what.
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Old 01-23-2023, 01:02 PM   #9
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I would never buy a home based on tax rules. [/LIST]
Outside of TLH, there's nothing I do based upon taxes. Tail wagging the dog.

IMO, make your money, pay your taxes, carry on with your life.
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Old 01-23-2023, 01:11 PM   #10
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Tax Loss Harvesting as possible (regardless).

Some people are doing more Roth conversions ahead of it. Seems smart.

Personally I’m trying to make my taxable investments more tax efficient. Mainly using IRMAA levels as a gage. Tax Gain Harvesting in a way - swapping out legacy funds when their value drops to a lower level.

AMT will probably be back to bite me in the butt. Whatever.

But I would also go back to itemized deductions every other year and funding my DAF with highly appreciated stock.
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Old 01-23-2023, 06:36 PM   #11
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this ^^^^^^^^
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Old 01-23-2023, 06:46 PM   #12
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As others have said, Roth conversions (filling up the 24% bracket for now is my plan). I am in the camp that taxes are probably lower now than they will be in the future. If you run the math and your RMDs plus any other income push you up in today's brackets, Roth conversions are your friend... in addition to other benefits. I am also watching estate taxes, but will make that call when we get a better read.
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Old 01-23-2023, 09:01 PM   #13
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My plan is/was to execute Roth conversions (to the top of the 22% bracket) every year until 2026. But I am thinking of taking a 1-year hiatus this year and harvest capital gains to the top of the 0% cap gains bracket. Then re-evaluate, knowing that I can go to the top of the 24% bracket if need be in the last year(s) of the current tax schedule.
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Old 01-23-2023, 09:31 PM   #14
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I have a spreadsheet that forecast my income for the next 30 years. Generally I try to keep my income level. I want to avoid any income spikes; especially bad if you're over 65. Every year I try to get a $3,000 stock loss. End of the year I'll do a Roth 401K conversion to try to get just under a IRMAA level.

Also on my radar is WA state's capital gains tax. The bill is in flux under court challenge but knowing WA state court system I would be surprised if it isn't instituted. In 2020 & 2021 I generated a huge amount of capital gains in anticipation of this tax.
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Old 01-23-2023, 09:59 PM   #15
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Old 01-23-2023, 10:04 PM   #16
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Just Roth conversions in the 22% tax bracket, and TLH as needed. I cannot predict the tax future beyond that, so just focusing on these current options.
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Old 01-24-2023, 01:49 AM   #17
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Show me the rules and I will play the game. Anything else is a guess, likely to be wrong.
Well said.
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Old 01-24-2023, 06:33 AM   #18
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OP is showing the rules. Current rule is that the tax cuts expire after 2026. The cuts may be extended, but that's just speculation.
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Old 01-24-2023, 06:41 AM   #19
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Only planning based on what is currently known: tax cut reversion and an SS haircut. If/when either of those changes, so will I.

What might it affect if different? For us, mainly amounts and timing of Roth conversions.

Is any of this likely to move the needle much in a meaningful way for our personal situation? Probably not.

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Old 01-24-2023, 06:55 AM   #20
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Roth conversions.
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