Release of final tax bill details

[pb4uski]

But the credit to equity goes through the P&L! It is going to mess up comparability for many years to come but I'm sure they wil find some way to report... they always do.

It's also wreak havok with CAPE-10 and other ratios.

 

[PatrickA5]

I'm not sure I entirely understand the pass-through deduction. It doesn't currently affect me, since I don't have any pass-through income.

But, am I correct in understanding that if I have some future side income stream - say, I start writing a blog, or selling trinkets - I should organize as (say) an LLC, and then the first 20% of income from the venture is not taxed?

How about real estate income - say I flip a house, or buy one and rent it out - is the income from this also subject to the 20% deduction? Do I need to organize as a business in order to claim it?

It will be interesting to see if you need to be a "real estate professional" to get the deduction or would just owning 1 rental house be enough?

 

[donheff]

I keep hearing news folks speculating on the advantages of waiting till the new year to sign the tax bill. But my memory from civics is that the President has 10 days to sign or the Bill is automatically passed (pocket vetoed if Congress recesses). Ten days from now is the 30th.

 

[Philliefan33]

I’m not understanding the rationale behind the pass-through deduction. Or maybe I’m not reading the rules correctly.

We own a house that we rent to full-time tenants. The house is in our names, not a business name. For 20years we have been reporting the rental income and expenses on Schedule E and claiming the net rental income on our personal 1040.

If I’m reading correctly, we will now get to deduct 20% of the net rental income? So if we net $5000 from the rental, we deduct $1000?

That will benefit us, but why? Why do we get that income for free? Is it to reward business owners so they (in theory) reinvest/grow the business and boost the economy?

I don’t want to be political. If someone can give me the Economics 101 answer that’s fine.

Moderators: if you think this question will drag the thread into forbidden territory, please remove it and accept my apologies.

(

 

[Running_Man]

But the credit to equity goes through the P&L! It is going to mess up comparability for many years to come but I'm sure they wil find some way to report... they always do.

It's also wreak havok with CAPE-10 and other ratios.

Yes and perhaps investors deserve a bit more credit than they are given with respect to continue to buy stocks despite the high Cape-10. Suddenly corporations that had a 25 PE now have a 20 PE.

 

[oneill225]

I would expect home prices overall to decline, because mortgages just effectively got more expensive, and most home buyers rely on a mortgage for the majority of the purchase price.

I also would expect higher end home prices to decline more with the $1M -> $750K limit reduction.

When will this happen? It really depends on how quickly home buyers understand the impact on affordability. I would expect some, maybe many, people will buy without understanding the impact and the find out at tax time that they made a mistake. But those with good honest realtors should be notified in the buying process.

I have never purchased a home because of the mortgage deduction and I bet very few do.

If your comments are directed at mortgages over $500,000, I am more agreeable. Especially in states impacted by the loss of the SALT deduction. That being said, homes in big cities like S.F., NY, etc... are way too high, so maybe a downward correction could be a good thing for future buyers.

 

[Done]

But am I correct in understanding that if I have some future side income stream - say, I start writing a blog, or selling trinkets - I should organize as (say) an LLC, and then the first 20% of income from the venture is not taxed?



How about real estate income - say I flip a house, or buy one and rent it out - is the income from this also subject to the 20% deduction? Do I need to organize as a business in order to claim it?

No need to form an LLC. If you’re a sole proprietor (yourself and/or your spouse filing jointly) earning non-employee business income reported on Schedule C, you can qualify for the 20% pass-through deduction. There are limits to the deduction if you exceed an income threshold.

Rental income reported on Schedule E would also qualify for the deduction. Flipping a house would be capital gains, not business income, so this deduction would not apply.

Take a look at the link posted by jetpack, which is full of examples.

 

[CardsFan]

I keep hearing news folks speculating on the advantages of waiting till the new year to sign the tax bill. But my memory from civics is that the President has 10 days to sign or the Bill is automatically passed (pocket vetoed if Congress recesses). Ten days from now is the 30th.

I did a quick search on this. One source indicates that Sundays do not count in the 10 day period, so maybe this can stretch it into the new year?

 

[Curmudgeon]

I’m not understanding the rationale behind the pass-through deduction.

GOP wanted to cut the corporate tax rate. Doing just this would look bad, as it favors 'big business' over 'small business', and might also not be as good at stimulating the economy as an across-the-board business tax cut. So, non-corporation businesses were given the 20% pass-through deduction.

Probably giving the cut to property owners, single-person businesses, etc. is just an unintended consequence.

 

[USGrant1962]

I have never purchased a home because of the mortgage deduction and I bet very few do.

If your comments are directed at mortgages over $500,000, I am more agreeable. Especially in states impacted by the loss of the SALT deduction. That being said, homes in big cities like S.F., NY, etc... are way too high, so maybe a downward correction could be a good thing for future buyers.

Same here.

And the limit is a $750K mortgage, which with 20% down is a $937K house. Heck, jumbo loans top out at $636K (which BTW is what I think they should have used for the limit - that way it varies somewhat by local real estate costs).

So the mortgage limit might cool off a few overheated housing markets a little bit, but I think the combined property tax and income tax limit in SALTy states might have a bigger impact on home prices in those states. In the other 40 or so states I would be surprised if there is a noticeable difference in the real estate markets.

 

[Winemaker]

But everyone loses the $8100 exemption so to me that's immaterial to the deductions issue. And if your exemptions were $22700 & the std is $24000, you now have have $1300 less taxable income. Seems like you're conflating two separate issues. As for limitations on SALT deductions, that's the intent as I see it.

You may be losing the $8100 exemption, but you are gaining a $500 credit for every adult dependent in the house hold. So, $8100 x .12=$972 under old law, 2 x$500= $1000, so almost a wash.

Child tax credit is $2000 each but is decreased depending on income. AND only a portion of that is refundable in cash or refund.

https://www.nytimes.com/interactive/2017/12/15/us/politics/final-republican-tax-bill-cuts.html

 

[scrabbler1]

I did a quick search on this. One source indicates that Sundays do not count in the 10 day period, so maybe this can stretch it into the new year?

Might major holidays such as Xmas and New Years also be excluded from the 10-day countdown?

 

[ChrisC]

You can also imagine situations where someone under the old law had $30,000 or $40,000 in itemized deductions and under the new law would not have deductions as high due to the SALT limitation or other changes.

Now -- as to whether your taxes would go up or down for 2018 it will depend on how all of that shakes out for you and you have to factor in changes in tax brackets and tax rates.

It gets even more complicated for people with kids who lose the personal exemptions but there are changes in child tax credits.

This describes my tax filing for 2016, with itemized deductions around $27K, and my soon-to-be tax filing for 2017, with itemized deductions I project of around $35K, most of the increase due to higher charitable donations. Though I'm not in a SALT area, I will probably lose 2-3K of state income/real property tax deductions -- and my state income tax is mainly a function of Roth conversions. I'm not sure how we'll come out for our tax filings for 2018 if we continue the same level of charitable giving, which appears unlikely. We were hoping to increase Roth conversions but now I'm not so sure about that either.

I am grateful that they kept the medical expense deduction -- this might have been a financial disaster for many who rely on that deduction to manage their financial affairs when undergoing major medical issues. My BIL is in assisted living with MS and his medical condition will only get worse; he can manage to pay for his medical care from his pension and social security disability payments, but without the deduction his tax bill would put him in dire financial circumstances and he could not afford his current level of care.

 

[CRLLS]

I keep hearing news folks speculating on the advantages of waiting till the new year to sign the tax bill. But my memory from civics is that the President has 10 days to sign or the Bill is automatically passed (pocket vetoed if Congress recesses). Ten days from now is the 30th.

From a quick Google, Sunday's do not count. And if congress adjourns before those 10 days, it becomes a "Pocket Veto" and dies. So when does Congress adjourn for the year? I think Congress is already on an extension to the original schedule meaning the Pres needs to sign now before they adjourn for the year. Jan 3rd starts a new "Session". Can this be right? Sorry, I'm poor on congressional procedures.

 

[Lsbcal]

I'm assuming you can itemize this year and are not in AMT territory.

If you prepay it and then the bill then falls apart, would you still be able to itemize next year? If the answer is yes, then you should pay the prop tax in 2017 as you'll get roughly the same benefit either way, it just comes a year sooner.

If the answer is no, then you have to figure the probability of the new law not going into effect vs the amount of the benefit you would be giving up by prepaying the tax. I personally think the probability of the bill failing at this point is very low, so I would take the risk of not being able to itemize next year.

First, I am assuming that if the bill isn't signed in 2017 that even an early 2018 signing means the tax law will change for all of 2018.

We itemize now but wouldn't in 2018 if the bill becomes law. Our income will be higher next year due to the start RMD's. So I'd rather not prepay the first part of our property taxes in 2017 if the tax laws did not change. It is a large sum for us.

But it looks like almost a no-brainer that the law will be signed in. I'm just looking for confirmation this tax law is maybe 99.9% probable in 2018. The New York Times is saying that the tax bill is passed. Maybe that is all the confirmation I need.

 

[ChrisC]

Thanks, just what I needed to confirm that sole proprietor landlords get the 20% pass-through business deduction. For me, this more than makes up for the limit on SALT deductions, and (because of reduced taxable income) might allow me to continue doing Roth conversions going forward.

This is a small bonus to me too, as I'm in a mult-member LLC generating real estate income from a building owned by family members. But despite having a high rent roll, the income (after real estate expenses) spit 3 ways on our K-1s is modest so the deductions will be modest too -- it will barely exceed the loss of the personal exemptions -- had they made this deduction a below the line deduction with a straight hit before you get to AGI this would have been more helpful for conversions and for Medicare IRMAA payment tiers.

 

[Cobra9777]

Makes sense. Deferred income taxes are based on stautory tax rates... I can see that wit the signing being so late that it might throw some chaos into corporate year ends (and quarter ends for fiscal year companies). But I would think that the net impact will be quite positive as deferred tax liabilities previously computed based on 35% are recomputed at 21%.... so all else being equal a $1 billion deferred tax liability will become $600 million, releasing $400 million to earnings and equity. That's a big deal.

And what about deferred tax assets? They have to be written down. No?

 

[Running_Man]

And what about deferred tax assets? They have to be written down. No?

Yes the most common are warranties and tax loss carryforwards, these will all be worth less in the future causing those to be written down.

 

[donheff]

From a quick Google, Sunday's do not count. And if congress adjourns before those 10 days, it becomes a "Pocket Veto" and dies. So when does Congress adjourn for the year? I think Congress is already on an extension to the original schedule meaning the Pres needs to sign now before they adjourn for the year. Jan 3rd starts a new "Session". Can this be right? Sorry, I'm poor on congressional procedures.

thisvstuff is so arcane who knows what’s up. If Sundays don’t count we would get to the beginning of the year. If they don’t enroll the bill and send it today maybe we get another day. A new session of Congress doesn’t start until the new Congress is elected next year.

 

[PatrickA5]

You may be losing the $8100 exemption, but you are gaining a $500 credit for every adult dependent in the house hold. So, $8100 x .12=$972 under old law, 2 x$500= $1000, so almost a wash.

Child tax credit is $2000 each but is decreased depending on income. AND only a portion of that is refundable in cash or refund.

https://www.nytimes.com/interactive/2017/12/15/us/politics/final-republican-tax-bill-cuts.html

The taxpayer (and spouse taxpayer if MFJ) are never considered "dependents" and don't qualify for the $500 credit. If you have older kids in college or perhaps support a parent that you can claim as a dependent - those would count for the credit.

 

[Cobra9777]

Yes the most common are warranties and tax loss carryforwards, these will all be worth less in the future causing those to be written down.

That's what I thought. So it's not all positive. Depending on the specific make-up of each company's tax balance sheet, this could also have a large negative P&L impact for 2017.

 

[Texas Proud]

That's what FOX Business news said just now. That Trump might not sign the bill until Tuesday because of the inability to get a copy of it to him quickly. Yet Trump previously said he wanted to sign it before Christmas, so it would be a Christmas gift.

I actually heard someone say they might wait until Jan 1st for some strange reason I did not get... also did not go back to listen to it again as I really did not care...

 

[RetireAge50]

My “postcard” for next year:
Pension $22,121
Pension $12,671
Interest $540
Total Income $35,332
Standard Deduction $24,000
Taxable Income $11,332
Tax $1,133

Nothing else in this thread is applicable to me. [emoji3]

 

[Texas Proud]

Way too much to read every post IMO...

But, I saw where there was a comment on what is going to happen to companies with the new tax rate...

Well, one commentator said that some will take a huge hit as they now have to write down their deferred taxes based on the new tax rate... I think they said one company will have to book $2 bill expense...

 

[pb4uski]

And what about deferred tax assets? They have to be written down. No?

Yes, because the tax benefits will be lower at 21% than at 35% so they a less valuable.