Release of final tax bill details

[Another Reader]

I am SO GLAD now that I just refinanced to 15 years, rolling my HELOC into the loan. Started that without this in mind, just got lucky i guess (assuming stays as is).

My first is at 3.125 percent, so a refi does not make sense in my situation. I was going to pay off the remainder of the first HELOC draw anyway, because the interest rate is now floating and it's going over 5 percent with the last bump by the Fed.

 

[Pilot2013]

My first is at 3.125 percent, so a refi does not make sense in my situation. I was going to pay off the remainder of the first HELOC draw anyway, because the interest rate is now floating and it's going over 5 percent with the last bump by the Fed.

I got 3.08% for refinance, and yeah, my HELOC was at 5.5% and probably climbing... My other primary was at 3.75% and still had 19 years. Combining the 2 had a net of about $300 CF per month improvement.

 

[pb4uski]

I understand. But I'm sure you realize you changed the analysis so it's not the same income in both calculations as you posted previously. It's $3,362 less in the current-law scenario. So of course the tax will be higher in the new-law scenario. For taxable income of $77,400 old-vs-new, tax will be lower under the new law. It has to be... every nominal rate is either down or flat.

Again, I understand the analytical logic for holding the Roth conversion equal. No question there is a negative impact from the lower deductions+exemptions that gets masked when you lower the Roth conversion. I'm in the same boat as I posted earlier. In my mind, that negative impact occurs in the future at RMD time, as result of lower conversions today. Your analysis quantifies it now, which is fine. I sort-of implied the same in my original post, where I netted the two impacts.

As a practical matter, most of us with reduced SALT deductions will reduce Roth conversions accordingly to stay at the top of the 12% bracket. The lower rates will drive lower taxes vs current law. But the lower conversions mean higher RMDs and higher taxes in the future, a direct result of reduced SALT deductions today. In the grand scheme, these are pretty small numbers though. The original House version had the 12% bracket topping out at something like $92K, which would have been much better for us converters.

I changed it to make the Roth conversion the same to make it easier to understand the impact of the change in the law (vs post #194). The impacts would be similar as long as the taxable income is in the 12% tax braacket.

The SALT provisions will increase my TI by $3,362 and the loss of those deductions at 12% is $391 more in tax.

OTOH, the change in rates from 15% to 12% will save money. The 12% tax bracket is $58,360 wide ($77,400-$19,050). However, in my case, $53,815 of that uppermost tax bracket is filed with qualified income that gets taxed at 0%, leaving only $4,535 of room for ordinary income. That $4,535 of ordinary income gets taxed at 12% rather than 15%, saving me $136.

So even though the rate is lower, the benefit of those lower rates to me is diluted by the fact that a lot of that lower rate bracket gets filled with 0% qualified income.

If all my income was ordinary income, then I would get a net savings because the rate change savings of $1,751 ($58,360 * 3%) would eclipse the SALT impact of $391.

 

[zedd]

One other change that I have not seen mentioned here that I think is pretty significant and straightforward and potentially important for all of us is the change in standard deduction and the income brackets for widows. Under the current law a widow drops back to the standard deduction, I think after the second year of death and to my knowledge gets no special breaks on tax brackets and is taxed at the singles rate.

Under the law to be voted on the widow keeps the same deduction and tax brackets as when he/she was filing MFJ(although losing one component of the over 65 extra deduction). So where a couple in the new plan will claim a standard deduction of 26,600, upon death that deduction only drops to 25,300 and continues to be taxed on the table for MFJ.

If my interpretation is correct, this is a huge benefit to widows. Yet another reason why making these changes permanent would be a benefit. In our modeling we were always aware that when one of us passes, the other inherits the entire estate, with a corresponding increase in tax burden.

!

Oh great. Now DW has one more reason to expedite MY expiration date

 

[Curmudgeon]

Wow, taking the standard deduction my taxes go up significantly... I have a family of 4 so I lose 4 exemptions, that makes much more of my income taxable. More significantly to me, as I had planned on filling up the 15% (now 12%) tax bracket with cap gains harvesting in order to diversify my holdings, the effective increase in taxable income means several thousand dollars LESS harvesting is now possible.

One note on bunching: I don't think anything in the new law prevents bunching - even of SALT - it just says that you can't bunch in order to stay under the 10K cap. So, say my SALT is 5K/year, I can still bunch that and take it as 10K in one year (presumably to bunch with other stuff to go over the 24K std.) Or, if my SALT is 8K/year, I can bunch it as 10K one year and 6K in the next.

 

[audreyh1]

Wow, taking the standard deduction my taxes go up significantly... I have a family of 4 so I lose 4 exemptions, that makes much more of my income taxable. More significantly to me, as I had planned on filling up the 15% (now 12%) tax bracket with cap gains harvesting in order to diversify my holdings, the effective increase in taxable income means several thousand dollars LESS harvesting is now possible.

One note on bunching: I don't think anything in the new law prevents bunching - even of SALT - it just says that you can't bunch in order to stay under the 10K cap. So, say my SALT is 5K/year, I can still bunch that and take it as 10K in one year (presumably to bunch with other stuff to go over the 24K std.) Or, if my SALT is 8K/year, I can bunch it as 10K one year and 6K in the next.

It looks like bunching is OK for property taxes, but perhaps not allowed for state and local income taxes - they will be treated as paid in each year regardless of when paid?

Also I don't think you can split two years of 8K into one of 10K and the other of 6K unless you actually paid those amounts in the given year.

 

[USGrant1962]

It ain't over til it's over, and my guess is some arm twisting and horse trading over the weekend might result in some adjustments to the final bill. Unless things change dramatically, it looks like my "to do" list consists of two items. First, pay the second installment of the property taxes on the personal residence as soon as the ink is dry. Second, throw a lot of cash at the HELOC until it's gone.

I still think the bank lobbyists have to be after Congress on the HELOC interest issue. The loss of the interest deduction is going to put a huge dent in that business.

I can't find it now, but I though I read something on Friday that said the agreed on compromise tax bill could not be changed again without going back to both the full Senate and House for approval - something highly unlikely due to the upcoming recess.

Further, to put deduction of HELOC back in they would have to take away something else. I would guess that was all already horse traded with keeping a second home mortgage and $750K instead of $500K mortgage limits.

 

[Curmudgeon]

It looks like bunching is OK for property taxes, but perhaps not allowed for state and local income taxes - they will be treated as paid in each year regardless of when paid?

But the language I saw (posted by you earlier in this thread) says taxes "paid or accrued in the taxable year" are deductible. So if I pay them in 2018 they're deductible in 2018, right?

Also I don't think you can split two years of 8K into one of 10K and the other of 6K unless you actually paid those amounts in the given year.

Yes, that's what I meant.

 

[EveryLady]

Starting out, I should end up with taxes about $2000 less annually but I haven't yet seen pertinent details on the definition of head of household that may well be in future rules rather than in the bill itself.

For non-child dependents, the Maxim Lott calculator keeps it simple at "student" under age 24. My college-student daughter just quit her job to go full time year round and pile on some unpaid internships. By the time she does post-graduate work, college will stretch out to beyond age 24 for her.

Under the current rules, I was expecting to be able to continue to claim HOH as long as she didn't earn more than the amount of the personal exemption once she turns 24.

But now there's no more personal exemption so I've no idea how this will play out. The potentially higher taxes are much more than the amount I will initially "save" with the lower brackets.

So I appear to join those in the "who knows" category.

 

[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.

 

[scrabbler1]

It is not likely to happen any more with the SD being increased, but if I pay 4th quarter estimated state income taxes in January of the following year, before the mid-January deadline, they will be deductible in the calendar year I paid them, as under current law, right? And if I pay the 4th quarter of that same calendar year's estimated state income taxes that December, I can "bunch" both state income tax payments within the same calendar year for federal income tax purposes. This is how I sometimes "bunched" my SALT deductions into a single calendar year.

 

[43210]

One other change that I have not seen mentioned here that I think is pretty significant and straightforward and potentially important for all of us is the change in standard deduction and the income brackets for widows. Under the current law a widow drops back to the standard deduction, I think after the second year of death and to my knowledge gets no special breaks on tax brackets and is taxed at the singles rate.

Under the law to be voted on the widow keeps the same deduction and tax brackets as when he/she was filing MFJ(although losing one component of the over 65 extra deduction). So where a couple in the new plan will claim a standard deduction of 26,600, upon death that deduction only drops to 25,300 and continues to be taxed on the table for MFJ.

If my interpretation is correct, this is a huge benefit to widows. Yet another reason why making these changes permanent would be a benefit. In our modeling we were always aware that when one of us passes, the other inherits the entire estate, with a corresponding increase in tax burden.

Where did you see this. Do you have a specific reference?

 

[LOL!]

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.

 

[Texas Proud]

So I want to make sure I understand the standard deduction and exemption...

I think that the new standard deduction for married filing joint is $24,000... but exemptions are cut....

So, last year my standard deduction was $12,600 and exemptions of $16,200 totaling $28,800.... but next year standard is $24,000 and exemptions is zero for a total of $24,000...

I guess to offset this they increased the child tax credit by $1,000 and the refundable portion by $400....

Is my thinking correct?

 

[43210]

So I want to make sure I understand the standard deduction and exemption...

I think that the new standard deduction for married filing joint is $24,000... but exemptions are cut....

So, last year my standard deduction was $12,600 and exemptions of $16,200 totaling $28,800.... but next year standard is $24,000 and exemptions is zero for a total of $24,000...

I guess to offset this they increased the child tax credit by $1,000 and the refundable portion by $400....

Is my thinking correct?

Yes.

 

[PatrickA5]

One other change that I have not seen mentioned here that I think is pretty significant and straightforward and potentially important for all of us is the change in standard deduction and the income brackets for widows. Under the current law a widow drops back to the standard deduction, I think after the second year of death and to my knowledge gets no special breaks on tax brackets and is taxed at the singles rate.

Under the law to be voted on the widow keeps the same deduction and tax brackets as when he/she was filing MFJ(although losing one component of the over 65 extra deduction). So where a couple in the new plan will claim a standard deduction of 26,600, upon death that deduction only drops to 25,300 and continues to be taxed on the table for MFJ.

If my interpretation is correct, this is a huge benefit to widows. Yet another reason why making these changes permanent would be a benefit. In our modeling we were always aware that when one of us passes, the other inherits the entire estate, with a corresponding increase in tax burden.

I assume you're referring to the Qualifying Widow(er) with Dependent Child status. If it is the same as in the past (which I haven't verified), you get to take this for 2 years following the year of death - BUT only if you have a Dependent Child. Just being a Widow doesn't get you the breaks.

 

[ERD50]

So I want to make sure I understand the standard deduction and exemption...

I think that the new standard deduction for married filing joint is $24,000... but exemptions are cut....

So, last year my standard deduction was $12,600 and exemptions of $16,200 totaling $28,800.... but next year standard is $24,000 and exemptions is zero for a total of $24,000...

I guess to offset this they increased the child tax credit by $1,000 and the refundable portion by $400....

Is my thinking correct?

I think so. But also consider that the rates are lower, so some increase is offset.

-ERD50

 

[audreyh1]

But the language I saw (posted by you earlier in this thread) says taxes "paid or accrued in the taxable year" are deductible. So if I pay them in 2018 they're deductible in 2018, right?

I'm not clear. Clearly they are attempting to prevent pre-paying. But what about paying prior and current year?

 

[audreyh1]

One other change that I have not seen mentioned here that I think is pretty significant and straightforward and potentially important for all of us is the change in standard deduction and the income brackets for widows. Under the current law a widow drops back to the standard deduction, I think after the second year of death and to my knowledge gets no special breaks on tax brackets and is taxed at the singles rate.

Under the law to be voted on the widow keeps the same deduction and tax brackets as when he/she was filing MFJ(although losing one component of the over 65 extra deduction). So where a couple in the new plan will claim a standard deduction of 26,600, upon death that deduction only drops to 25,300 and continues to be taxed on the table for MFJ.

If my interpretation is correct, this is a huge benefit to widows. Yet another reason why making these changes permanent would be a benefit. In our modeling we were always aware that when one of us passes, the other inherits the entire estate, with a corresponding increase in tax burden.

Seriously? My Dad who has been a widower for a very long time gets to use the MFJ standard deduction (plus over 65 standard deduction)?

I assume you're referring to the Qualifying Widow(er) with Dependent Child status. If it is the same as in the past (which I haven't verified), you get to take this for 2 years following the year of death - BUT only if you have a Dependent Child. Just being a Widow doesn't get you the breaks.

OK - that makes more sense.

 

[SecondCor521]

I'm not clear. Clearly they are attempting to prevent pre-paying. But what about paying prior and current year?

Are they trying to prevent prepaying just during the transition from current tax rules to the new tax rules, or are they trying to prevent bunching in general? I got the impression it was the former, but I'm not sure.

 

[gayl]

Seriously? My Dad who has been a widower for a very long time gets to use the MFJ standard deduction (plus over 65 standard deduction)?

normally you're an incredible resource but according to the IRS website, if the spouse died prior to 2014 the status reverts to Single in 2016. I just checked their interactive trail and confirmed. So this could be a game changer for a number of widow/ widowers

 

[43210]

One other change that I have not seen mentioned here that I think is pretty significant and straightforward and potentially important for all of us is the change in standard deduction and the income brackets for widows. Under the current law a widow drops back to the standard deduction, I think after the second year of death and to my knowledge gets no special breaks on tax brackets and is taxed at the singles rate.

Under the law to be voted on the widow keeps the same deduction and tax brackets as when he/she was filing MFJ(although losing one component of the over 65 extra deduction). So where a couple in the new plan will claim a standard deduction of 26,600, upon death that deduction only drops to 25,300 and continues to be taxed on the table for MFJ.

If my interpretation is correct, this is a huge benefit to widows. Yet another reason why making these changes permanent would be a benefit. In our modeling we were always aware that when one of us passes, the other inherits the entire estate, with a corresponding increase in tax burden.

Multiple people have responded to this post. I find it astonishing that such a significant change would not have been all over the news for weeks. Could you please explain where you got this from, either in the legislation itself, or at least a link to some source for this claim?

 

[pb4uski]

There is no "game changer" on this front. And as previously noted, most early retirees will not qualify because they will not have dependent children living with them. Absent that you can file MFJ in the year that your spouse dies and single in years after that unless you remarry.

From H&R Block:

Qualifying widow(er)

If you qualify, you can use this filing status for the two tax years after the death of your spouse. However, you can’t use it for the year of death.

To qualify, you must meet these requirements:

• You qualified for married filing jointly with your spouse for the year he or she died. (It doesn’t matter if you actually filed as married filing jointly.)
• You didn’t remarry before the close of the tax year.
• You have a child, stepchild, or adopted child you claim as your dependent. This doesn’t apply to a foster child.
• You paid more than half the cost of maintaining your home. This must be the main home of your dependent child for the entire year, except for temporary absences.

If you file as a qualifying widow(er), you can’t claim an exemption for your deceased spouse. However, you can use the married filing jointly tax table or tax rate schedule. The qualifying widow(er) standard deduction is the same as married filing jointly.

 

[USGrant1962]

One other change that I have not seen mentioned here that I think is pretty significant and straightforward and potentially important for all of us is the change in standard deduction and the income brackets for widows. Under the current law a widow drops back to the standard deduction, I think after the second year of death and to my knowledge gets no special breaks on tax brackets and is taxed at the singles rate.

Under the law to be voted on the widow keeps the same deduction and tax brackets as when he/she was filing MFJ(although losing one component of the over 65 extra deduction). So where a couple in the new plan will claim a standard deduction of 26,600, upon death that deduction only drops to 25,300 and continues to be taxed on the table for MFJ.

If my interpretation is correct, this is a huge benefit to widows. Yet another reason why making these changes permanent would be a benefit. In our modeling we were always aware that when one of us passes, the other inherits the entire estate, with a corresponding increase in tax burden.

Where did you see this? I just searched the Conference Committee's Joint Explanatory Statement that reconciled the House and Senate, and the word "widow" is nowhere in it.

 

[bingybear]

I was wondering if anyone noticed a change in gifting rule. Present law one can gift 14k/per year/per person without having to file a gift tax return. Is there a change to this in the new "potental" law? I did not catch it when I looked.