Release of final tax bill details

[Texas Proud]

Very useful, and it includes future law.

Reminder: if you get blocked, just google "Republican Tax Plan Calculator" and pick the wsj.com link.

Was still blocked doing it this way....

 

[donheff]

On this particular calculator, where would one put investment income (divvies, interest, etc.)?

No place to enter it. I guess they figure than for most of us CGs are what they are and application of the tax tables to regular income will show us the likely difference we can expect resulting from the tax bill.

 

[audreyh1]

I’ve read several posts where concern was expressed over exceeding the new $10k limit “for state and local property and income taxes”. Doesn’t that limit apply to prop taxes only? I just want to be sure my understanding is correct.
“Sec. 1303. Repeal of deduction for certain taxes not paid or accrued in a trade or business.
Current law: Under current law, an individual may claim an itemized deduction for State and local government income and property taxes paid. In lieu of the itemized deduction for State and local income taxes, individuals may claim an itemized deduction for State and local government sales taxes.
Provision: Under the provision, individuals would not be allowed an itemized deduction for State and local income or sales taxes, but would continue to be entitled to a deduction for State and local income or sales taxes paid or accrued in carrying on a trade or business or producing income.
Individuals would continue to be allowed to claim an itemized deduction for real property taxes paid up to $10,000.”

I'm pretty sure the $10K limits for individuals is a combined limit for state, local and property taxes. Businesses are another matter entirely. Make sure you find the final language from the conference agreement.

Yes - here is the language from the conference agreement:

Under the provision, in the case of an individual, State and local income, war profits, and excess profits taxes are not allowable as a deduction.

The provision contains an exception to the above-stated rule. Under the provision a taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for married taxpayer filing a separate return) for the aggregate of (i) State and local property taxes not paid or accrued in carrying on a trade or business, or an activity described in section 212, and (ii) State and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the taxable year. Foreign real property taxes may not be deducted under this exception.

The above rules apply to taxable years beginning after December 31, 2017, and beginning before January 1, 2026.

So they are clearly aggregating individual (non-business) property taxes and income taxes and applying the $10K limit.

I'm not sure where your language is from?

 

[Tree-dweller]

I'm pretty sure the $10K limits for individuals is a combined limit for state, local and property taxes. Businesses are another matter entirely. Make sure you find the final language from the conference agreement.

Yes - here is the language from the conference agreement:

So they are clearly aggregating individual (non-business) property taxes and income taxes and applying the $10K limit.

I'm not sure where your language is from?

Thanks for this. I must have been looking at an earlier iteration.

 

[Lsbcal]

Was still blocked doing it this way....

Using the Firefox browser I brought up a "New Private Window". Then did the Google term input and clicked on the WSJ link. It now works.

Is WSJ using cookies to lock me out? Now sure why a private window works over a regular one.

But I think that the WSJ calculator is using too much of an aggregate approach. It shows our taxes going up a bit but other more specific calculators show our taxes going down somewhat. Plus it doesn't know that next year we have to do RMD's whereas last year the income level was quite a bit lower. So specifics count here.

 

[donheff]

I keep hearing differing answers on how pass thru income works for attorneys. It is clear that if attorneys earn more than the limit ($350k or so MFJ) they can’t use the 20% deduction. But some folks seem to be saying this may apply form wide in big firms. DW gets a small amount from her LLC firm but it is definitely big. Does the firm have to characterize the earnings as pass thru or is all the partnership K-1 income pass thru but not necessarily qualified depending on total income? In others words will we figure out whether she can claim the deduction or will the firm make an organization wide decision.

 

[MichaelB]

I keep hearing differing answers on how pass thru income works for attorneys. It is clear that if attorneys earn more than the limit ($350k or so MFJ) they can’t use the 20% deduction. But some folks seem to be saying this may apply form wide in big firms. DW gets a small amount from her LLC firm but it is definitely big. Does the firm have to characterize the earnings as pass thru or is all the partnership K-1 income pass thru but not necessarily qualified depending on total income? In others words will we figure out whether she can claim the deduction or will the firm make an organization wide decision.

I spoke with my tax advisor on a separate matter, and asked about this. His response - the pass through deduction applies to person receiving the K-1 income, not the business.

My question was, does pass-through apply to investors of publicly traded partnerships, such as REITS and oil & gas MLPs. His response was maybe, the language is not clear, and we probably need to wait until the IRS has written the instructions to find out.

 

[donheff]

I spoke with my tax advisor on a separate matter, and asked about this. His response - the pass through deduction applies to person receiving the K-1 income, not the business.

thats what I hoped. Thank you.

 

[spncity]

Does this only apply to K-1 distributions from a business? How about a K-1 distribution from a trust (that is made up of a few rented apartments)?

As I learned on this forum, there are many different versions of MAGI. Are there different K-1 rules...?

 

[MichaelB]

Does this only apply to K-1 distributions from a business? How about a K-1 distribution from a trust (that is made up of a few rented apartments)?

As I learned on this forum, there are many different versions of MAGI. Are there different K-1 rules...?

When I asked that the response was “it’s not clear what is included. We need to wait until the specific IRS rules are written, which will probably be sometime around the 2nd or 3rd Q of next year”.

 

[teejayevans]

When do the tax forms become available? I figure it might be prudent to get a head start next year.

 

[phil1ben]

I keep hearing differing answers on how pass thru income works for attorneys. It is clear that if attorneys earn more than the limit ($350k or so MFJ) they can’t use the 20% deduction. But some folks seem to be saying this may apply form wide in big firms. DW gets a small amount from her LLC firm but it is definitely big. Does the firm have to characterize the earnings as pass thru or is all the partnership K-1 income pass thru but not necessarily qualified depending on total income? In others words will we figure out whether she can claim the deduction or will the firm make an organization wide decision.

I understand that the income limit for the pass-through deduction is $315,000.00 for married couples filing joint. I have ownership in many LLCs which issue K-1s. I have the following questions:

1. Whether one loses the entire 20% deduction if income exceeds $315,000.00 (i.e. all or nothing) or is it pro-rata for that portion of the income under $315,000.00? If it is pro-rata, not quite sure how it would work. For example what if one had W-2 income of $150,000 plus total K-1 income of $400,000.00. Does that couple lose the entire 20% deduction? Also would any such deduction be a Schedule E deduction which would then cause one to exceed the new $24,000 standard deduction and require one to itemize if total deductions do not otherwise exceed $24,000?

2. When we say "income" is that income before any applicable deduction (i.e. gross income) or is it taxable income (after applicable deductions)?

3. Am I correct to assume "income" (in calculating the $315,000.00 limitation) would exclude muni-bond interest that is not taxable on the federal level?

I am fairly certain I am a net loser under the plan, but perhaps increases in the market from tax savings realized by US centric companies will even things out.

Happy Holidays to All

 

[cathy63]

When do the tax forms become available? I figure it might be prudent to get a head start next year.

Tax forms for the prior year are typically published in January and February. Expect the 2017 forms to be a bit later than usual because there are some provisions of the new tax law that take effect retroactively, so the whole law has to be reviewed by the IRS and the appropriate 2017 forms adjusted and reviewed internally before publishing.

Forms for the 2018 tax year should be available in Jan and Feb 2019.

 

[Done]

I understand that the income limit for the pass-through deduction is $315,000.00 for married couples filing joint. I have ownership in many LLCs which issue K-1s. I have the following questions:

1. Whether one loses the entire 20% deduction if income exceeds $315,000.00 (i.e. all or nothing) or is it pro-rata for that portion of the income under $315,000.00? If it is pro-rata, not quite sure how it would work. For example what if one had W-2 income of $150,000 plus total K-1 income of $400,000.00. Does that couple lose the entire 20% deduction? Also would any such deduction be a Schedule E deduction which would then cause one to exceed the new $24,000 standard deduction and require one to itemize if total deductions do not otherwise exceed $24,000?

2. When we say "income" is that income before any applicable deduction (i.e. gross income) or is it taxable income (after applicable deductions)?

3. Am I correct to assume "income" (in calculating the $315,000.00 limitation) would exclude muni-bond interest that is not taxable on the federal level?

I am fairly certain I am a net loser under the plan, but perhaps increases in the market from tax savings realized by US centric companies will even things out.

Happy Holidays to All

The limitation on the section 199A Qualified Business Income deduction is based on taxable income (before applying the QBI deduction itself). It includes AGI and all other deductions, including the standard/itemized deduction. Under $315K MFJ, you get the full 20% QBI deduction. Above that, see the limits and decision tree discussed in
https://www.watsoncpagroup.com/section-199a-deduction/

The QBI deduction will be applied on form 1040 (not schedule A) after AGI to reduce taxable income.

 

[Philliefan33]

Maybe I’m missing something, but it looks like the $10K limit on SALT creates a marriage penalty.

Assume a working couple, each with AGI of $100K ($110K -$10K to each 401K). In addition to their main residence they own a vacation home with a mortgage. We will use my rates for SALT. State + local income tax is 3.5%. Real estate taxes total $12K for the two homes. Let’s use $2500 mortgage interest paid and $3K in charitable contributions. If the taxpayers are single they can each itemize as follows:

SALT- $6K real estate + $3850 state & local income tax(don’t get to deduct the 401K contributions) = $9850

Mortgage interest $1250

Charitable contribution $1500

Each taxpayer will itemize $12,600 for a total of $25,200

But if they MFJ, the SALT cap limits the itemized deductions to $15,500 so they will use the standard deduction of $24K. That exposes $1200 more to taxes. It would be taxed at the marginal rate of 24%, costing $288 more in taxes.

 

[USGrant1962]

Maybe I’m missing something, but it looks like the $10K limit on SALT creates a marriage penalty.

Assume a working couple, each with AGI of $100K ($110K -$10K to each 401K). In addition to their main residence they own a vacation home with a mortgage. We will use my rates for SALT. State + local income tax is 3.5%. Real estate taxes total $12K for the two homes. Let’s use $2500 mortgage interest paid and $3K in charitable contributions. If the taxpayers are single they can each itemize as follows:

SALT- $6K real estate + $3850 state & local income tax(don’t get to deduct the 401K contributions) = $9850

Mortgage interest $1250

Charitable contribution $1500

Each taxpayer will itemize $12,600 for a total of $25,200

But if they MFJ, the SALT cap limits the itemized deductions to $15,500 so they will use the standard deduction of $24K. That exposes $1200 more to taxes. It would be taxed at the marginal rate of 24%, costing $288 more in taxes.

Yes that is a penalty, but the law eliminated the frequently worse tax bracket marriage penalty for incomes below $600K. A good summary can be found here https://www.bna.com/final-tax-bill-n73014473351/

 

[spncity]

Background - follow up question below...

Quote:
Originally Posted by spncity
1. I don't think I understand the impact on small sole proprietorships.

2. I've read that half of self-employment taxes are deductible. Does that automatically happen in TurboTax and on what form could I see that it was done?

3. So what does the corporate 35% reduced to 21% do for my sole proprietorship (guessing we would be in a 12% income tax bracket)...?

Thanks in advance or answers, or for somewhere to read up on these basics.

A2. Form 1040 Line 27.

Yes, that automatically happens in tax software like TurboTax.

It's funny how TurboTax removes one from reading the easy to read tax forms. And Form 1040 is only a front-and-back form, so quite easy to read.

A3: Nothing. A sole proprietorship is not taxed as a corporation.

So - does the 20% tax-free pass through do anything for my sole proprietorship as long as we're below the cutoff?

 

[Done]

So - does the 20% tax-free pass through do anything for my sole proprietorship as long as we're below the cutoff?

Yes, sole proprietors filing Schedule C get the 20% Qualified Business Income deduction, so only 80% of that income is taxed. Above the income threshold, deduction limits apply. See Section 199A link above.

 

[Done]

In a state like mine (VA), you can only itemize on the state return if you itemized on the Federal. It may be that if your itemized deductions are close but still under the 24K threshold, you may want to go ahead and itemize on the Federal even though it increases your Federal tax, if you can save more than that on the state. Hopefully, the tax programs will figure this out for you.

This varies by state. From the instructions for California's Form 540, it is possible to itemize for state taxes while taking the federal standard deduction. Whew!

If you did not itemize deductions on your federal income tax return but will itemize deductions for your Form 540, first complete federal Schedule A (Form 1040), Itemized Deductions. Then complete Schedule CA (540), Part II, line 38 through line 44. Attach both the federal Schedule A (Form 1040) and California Schedule CA (540) to the back of your tax return.

 

[ERD50]

At our Christmas Eve and Christmas Day gatherings, I brought up the opportunity of pre-paying 2018 property tax, and explained the savings opportunity to evryone.

It turned into a "teachable moment" for me to address to my own kids later. Two of my three kids are homeowners, they are all financially responsible, and they "got it" when I explained it to them. They said they had heard about it in general, and after my explanation are definitely going to do it.

And my non-LBYM-not-so-financially responsible BIL/SIL (near our ages) snarls "Sure that's great if we had $10,000 laying around, it's no help if you have to borrow the money". I said, well, at 25% back by April, and the tax bills due about mid year anyhow, it actually probably would be worth borrowing the money (but I know they won't/can't).

Later, I reinforced to my kids how having some savings can really help, because you can take advantage of deals like this when they come up. The old "it takes money to make money" approach. W/o naming names (BIL/SIL), I'm pointing out that the people w/o $10,000 of liquidity are the ones that could really benefit from a $2,500 savings in April (or before), and yet, they will be another $2,500 behind, for lack of that liquidity. Just digging deeper in the hole.

I'l make the trip to the county seat tomorrow. This is really far more than a 25% annualized savings, as paying in DEC provides the return just a few months later. And you'd be paying the property tax ~ mid year (varies by county) anyhow. We will also get a deduction on IL state taxes (@ 5%) this year, though that's washed out the following year.

-ERD50

 

[meierlde]

At our Christmas Eve and Christmas Day gatherings, I brought up the opportunity of pre-paying 2018 property tax, and explained the savings opportunity to evryone.

It turned into a "teachable moment" for me to address to my own kids later. Two of my three kids are homeowners, they are all financially responsible, and they "got it" when I explained it to them. They said they had heard about it in general, and after my explanation are definitely going to do it.

And my non-LBYM-not-so-financially responsible BIL/SIL (near our ages) snarls "Sure that's great if we had $10,000 laying around, it's no help if you have to borrow the money". I said, well, at 25% back by April, and the tax bills due about mid year anyhow, it actually probably would be worth borrowing the money (but I know they won't/can't).

Later, I reinforced to my kids how having some savings can really help, because you can take advantage of deals like this when they come up. The old "it takes money to make money" approach. W/o naming names (BIL/SIL), I'm pointing out that the people w/o $10,000 of liquidity are the ones that could really benefit from a $2,500 savings in April (or before), and yet, they will be another $2,500 behind, for lack of that liquidity. Just digging deeper in the hole.

I'l make the trip to the county seat tomorrow. This is really far more than a 25% annualized savings, as paying in DEC provides the return just a few months later. And you'd be paying the property tax ~ mid year (varies by county) anyhow. We will also get a deduction on IL state taxes (@ 5%) this year, though that's washed out the following year.

-ERD50

Note that if your taxes are paid thru escrow it may well be much harder to do this. In particular the escrow amounts will continue so you will have in effect double paid for a while although in 2019 you probably could get the mortgage company to true up. What will happen is that the mortgage company will not know you prepaid and pay the bill when the taxing agency sends it. Eventually someone will get notified of the overpayment and if you get the money back directly you have a problem of the deduction no longer being valid.
If the mortgage company gets the money back it will true up in a lower mortgage payment for 2019.

 

[ERD50]

Note that if your taxes are paid thru escrow it may well be much harder to do this. In particular the escrow amounts will continue so you will have in effect double paid for a while although in 2019 you probably could get the mortgage company to true up.

Well, I figured the escrow companies should be automated enough to see what the balance is and adjust the monthly escrow accordingly. But to be sure, my Son-in-law called this morning while before heading home, and his mortgage company validated that all he had to do was to email a scan of the paid bill, and they will make the adjustment.

I'd be surprised if an escrow company would not do this, if they didn't you'd have a 2x balance by the time taxes are due, and it would continue forever. But I suppose anything is possible.

-ERD50

 

[Yarnstormer]

My accountant says it’s not legal to deduct 2018 taxes on a 2017 return - regardless of when it was paid. Does someone here know differently?

 

[Texas Proud]

My accountant says it’s not legal to deduct 2018 taxes on a 2017 return - regardless of when it was paid. Does someone here know differently?

Only if you are an accrual taxpayer... if you are cash it is legal... why do you think everybody is doing it...

Now, that is if the tax entity will accept it FOR 2018... not all will...

 

[Running_Man]

Only if you are an accrual taxpayer... if you are cash it is legal... why do you think everybody is doing it...

Now, that is if the tax entity will accept it FOR 2018... not all will...

IRS just issued advisory, that in order to be deducted it must be PAID and ASSESSED, in other words the county has to have actually issued the bill and the IRS plans on using the County's date that they say taxes are assessed. In other words you can not pay a bill that has not been issued and you are estimating what the payment will be. In fact prepayment may indeed eliminate the deduction if you were to take it in 2018 since you cannot take the prepayment in 2017 as you will not meet the test of both Paying and being assessed.