Release of final tax bill details

[LOL!]

I realize the results of this simplified calculator will vary significantly. But in my own case, it came very close to nailing my actual 2016 tax bill. So I'm going to take its estimate of about a $500 saving as pretty accurate.

And I'll give another view on that: The simplified calculator came up with 4 times my actual 2016 tax bill to start with, so there was no way to trust what it said my 2018 tax bill might be.

 

[43210]

^ I just used that calculator to confirm that it agrees with my understanding of how the new CTC works.

 

[Helena]

.

That Lott calculator doesn't care to ask if you are over age 65.
I hope it's wrong.

 

[pb4uski]

Just completed two calculations... projected 2018 taxes under current law and rates and brackets and under new law. In both cases, including a simulated Roth conversion to the top of the 15%/12% tax bracket.

The $10k limit on SALT will reduce our itemized deductions to a point where we will take the standard deduction under the new law. Overall impact is a reduction in deductions and exemptions of $3,362.

The above has a second order effect of reducing the Roth conversion by $3,362.

In both cases our tax would be $0 before Roth conversion since our other ordinary income is less than deductions and exemptions.... so any tax is a result of adding in the Roth conversions.

The effective tax rate on my Roth conversions is 9.6% under the old law and 9.9% under the new law so a small tax increase for us.

 

[travelover]

Not sure if this has been mentioned, but it appears that alimony will be treated differently.

 

[RockyMtn]

On the individual AMT:

The AMT exemption for MFJ was raised to $109,400. It would have been $86,200 in 2018 otherwise. An increase of $23,200.

AMT is computed on your AGI before standard deduction and exemptions. If you are itemizing, then some deductions are allowed under AMT but others are not.

So depending on how much your standard deduction has increased to make up for the old standard deduction plus exemptions, the AMT exemption increase will be reduced by that.

Still, the $23K increase in AMT exemption should more than make up for a larger standard deduction and loss of personal exemptions.

They didn't say anything about the level at which you are taxed at 28% for AMT (versus 26%). This was $187,800 for 2017. Perhaps that has been left unchanged.

I have see those numbers but several articles that mention the following numbers as well. Anyone know the difference?

Individual AMT: The individual alternative minimum tax (AMT) remains, but the threshold would be tweaked to exclude any taxpayer with income under $500,000 or family below $1 million.

 

[RockyMtn]

I have see those numbers but several articles that mention the following numbers as well. Anyone know the difference?

Individual AMT: The individual alternative minimum tax (AMT) remains, but the threshold would be tweaked to exclude any taxpayer with income under $500,000 or family below $1 million.

Are those the phaseout thresholds?

 

[43210]

There is a new (for us) 6.06% marginal rate bracket where the 21.06% EITC phaseout overlaps with the expanded 15% CTC phasein. It makes sense to go to the top of that bracket by doing more Roth, less Trad, in just the right amount.

The sequence of marginal rates we see (up to the 12% - anything beyond that is irrelevant to our situation) is:

-45%
-60%
-15%
6.06% (new for us)
21.06%
31.06%
33.06% (was 3% higher)
12% (was 3% higher)

(There are also cliffs from the Retirement Savings Contributions Credit)

The rates come from combinations of the 45% EITC phasein, the 21.06% EITC phaseout, the 15% CTC phasein, superimposed on the regular 0%, 10%, 12% tax brackets. It's qualitatively similar to what existed before, except some numbers are different.

Notice that the notion that marginal rates increase with higher income is a total misconception. There are all kinds of phaseins, phaseouts and cliffs that make the situation more complicated.

 

[Cobra9777]

...The effective tax rate on my Roth conversions is 9.6% under the old law and 9.9% under the new law so a small tax increase for us.

This is surprising to me since I would think much of the conversion is now taxed at 12% instead of 15%. Would you mind explaining how the effective rate went up under the new law?

 

[JDARNELL]

Last night I frantically searched for verbiage regarding interest exclusion from taxation if used for qualified educational expenses and was ecstatic that that option will be avialable in the future. Even though income a bit to high to take full advantage of this benefit in 2017, I was ready to move fast in cashing some EE bonds and deposit into a 529 plan.

I agree. I was preparing for the same thing as I am in year 2 of 7 for my kids paying tuition. I was planning on cashing in anyway the next few years but this was gonna accelerate. I only have about a year tuition in EE savings bonds.

 

[Another Reader]

Did HELOC interest become non-deductible? Last mention I saw before reconciliation was that HELOCs were deleted from the tax code in the Senate version, IIRC.

Looks like once this thing is signed, I'm going to be digging into reserves and writing some checks...

 

[audreyh1]

I have see those numbers but several articles that mention the following numbers as well. Anyone know the difference?

Individual AMT: The individual alternative minimum tax (AMT) remains, but the threshold would be tweaked to exclude any taxpayer with income under $500,000 or family below $1 million.

Those don't protect someone below those levels. Those are the levels above which the AMT exemption is phased out which I think means the exemption goes to zero and you are paying the AMT on your first dollar of ordinary income.

You can owe AMT at much lower levels, and still will under the new plan.

Whoever wrote that article doesn't understand how the AMT works. Better to read the language in the bill.

 

[audreyh1]

Did HELOC interest become non-deductible? Last mention I saw before reconciliation was that HELOCs were deleted from the tax code in the Senate version, IIRC.

Looks like once this thing is signed, I'm going to be digging into reserves and writing some checks...

Yes, I believe HELOC interest and interest on a second home mortgage will no longer be deductible under the new bill. I don't think there is any grandfathering either.

 

[audreyh1]

This is surprising to me since I would think much of the conversion is now taxed at 12% instead of 15%. Would you mind explaining how the effective rate went up under the new law?

I think he explained that he is loosing some deductions that would have lowered his total tax bill.

 

[Another Reader]

Yes, I believe HELOC interest and interest on a second home mortgage will no longer be deductible under the new bill. I don't think there is any grandfathering either.

Mine was used for purchasing and fixing up rentals. Interest might be a business expense. Sigh, I guess this is a problem for the CPA.

I don't think the banks are going to be too happy about this. It's going to put a damper on the HELOC business.

 

[audreyh1]

Mine was used for purchasing and fixing up rentals. Interest might be a business expense. Sigh, I guess this is a problem for the CPA.

I don't think the banks are going to be too happy about this. It's going to put a damper on the HELOC business.

Hmm - there are exceptions for business expenses.

Sorry - the HELOC answer I gave you was for individual taxes, not business related. Different set of rules for business.

 

[Another Reader]

Hmm - there are exceptions for business expenses.

Sorry - the HELOC answer I gave you was for individual taxes, not business related. Different set of rules for business.

The HELOC was not a business loan, but was used for rentals. It appears on my taxes.

With interest rates going up, it's probably time to focus on paying it off anyway.

 

[43210]

...The effective tax rate on my Roth conversions is 9.6% under the old law and 9.9% under the new law so a small tax increase for us.

This is surprising to me since I would think much of the conversion is now taxed at 12% instead of 15%. Would you mind explaining how the effective rate went up under the new law?

I believe the term "effective tax rate" here refers to
(total tax)/(total income).
It is not a marginal rate.
It is also a number that depends on both numerator and denominator, each of which can be affected by many factors.

It is easy to think of situations where lower effective tax rate is better, or higher effective tax rate is worse.

 

[pb4uski]

This is surprising to me since I would think much of the conversion is now taxed at 12% instead of 15%. Would you mind explaining how the effective rate went up under the new law?

I'm trying to get my head around it too. Under the new law my deductions and exemptions would be $3,362 less than under current law due to the $10,000 limit on SALT... since my Roth conversion is to the top of the 15%/12% tax bracket, that means that my Roth conversion is $3,362 lower under the new law as well.... the TI in each case is $77,400.

Below is an anslysis of the tax on my conversion. Under current law because there is no limit on my itemized deductions, a greater portion of my Roth conversion is subject to 0% tax (is sheltered by deductions and exemptions). The tax on the portion of the conversion at the 15%/12% bracket is lower, but not enough to overcome the former in looking at the effective rate on the conversion. Wierd... huh?

	Current				Conference
	Roth Conv	Rate	Tax		Roth Conv	Rate	Tax
0% bracket	5,278	0%	-		1,916	0%	-
10% bracket	19,050	10%	1,905		19,050	10%	1,905
15%/12% bracket	7,897	15%	1,185		7,897	12%	948
Total	32,225		3,090		28,863		2,853
Effective rate			9.6%				9.9%

 

[pb4uski]

I believe the term "effective tax rate" here refers to
(total tax)/(total income).
It is not a marginal rate. ....

In this case it is total tax divided by Roth conversion because excluding the Roth conversion the tax would be $0 in each case.... so I'm looking at the effective tax rate that I pay on the Roth conversion that I do.

 

[43210]

^^ That (table) doesn't make sense. Your 0% bracket has to at least include your entire deduction (and previously exemption) amounts, and maybe other things too.

 

[cathy63]

I think a strong argument can be made for that interpretation in California.

The taxes are a lien on January 1st.

They are due when the bill is issued at the beginning of October.

They are payable in installments.

It may depend on which county you're in. My San Diego county tax bill explicitly says that the second installment is "due" on 2/1/2018.

 

[Cobra9777]

I'm trying to get my head around it too. Under the new law my deductions and exemptions would be $3,362 less than under current law due to the $10,000 limit on SALT... since my Roth conversion is to the top of the 15%/12% tax bracket, that means that my Roth conversion is $3,362 lower under the new law as well.... the TI in each case is $77,400.

Below is an anslysis of the tax on my conversion. Under current law because there is no limit on my itemized deductions, a greater portion of my Roth conversion is subject to 0% tax (is sheltered by deductions and exemptions). The tax on the portion of the conversion at the 15%/12% bracket is lower, but not enough to overcome the former in looking at the effective rate on the conversion. Wierd... huh?

	Current				Conference
	Roth Conv	Rate	Tax		Roth Conv	Rate	Tax
0% bracket	5,278	0%	-		1,916	0%	-
10% bracket	19,050	10%	1,905		19,050	10%	1,905
15%/12% bracket	7,897	15%	1,185		7,897	12%	948
Total	32,225		3,090		28,863		2,853
Effective rate			9.6%				9.9%

That makes sense, but it's not a "small tax increase for us". Your tax is down on the same income under the new law. Correct?

 

[pb4uski]

^^ That (table) doesn't make sense. Your 0% bracket has to at least include your entire deduction (and previously exemption) amounts, and maybe other things too.

It does make sense.... you just don't understand it.

My deductions and exemptions in each case exceed my pension and interest and qualified dividends.... so if I had no Roth conversion my taxable income would be negative in each case... those first $ of the Roth conversion effecively get taxed at 0% because they are offset.

 

[43210]

^ Okay you're using a different numerator and denominator for a different ratio. There are many such quantities that one can consider. You were looking at Roth conversion alone rather than all income. Anyway, doesn't matter, it's a side topic.