Tax Bills

[gayl]

Waiting for the dust to settle before making any planning, decisions or further discussions .

+1

 

[RunningBum]

I forgot another obvious one. No recharacterizations (in both bills), so you'll need to be sure of your Trad/Roth decisions when you make them.

Thanks. That's a big deal to know early in the year, since some of us do a large conversion (and perhaps a horse race between multiple conversions) early in the year, and now we'll need to be more conservative, and either wait or do a final conversion after year end mutual fund distributions.

 

[JoeWras]

It is nearly a "no-brainer" for charity donors to go this year. I don't want to wait. I'm already past the standard deduction for this year, so why not donate and get the benefit?

In future years, I'll likely bunch 3 years together using my DAV to distribute them out over 3 years.

 

[vtd0918]

I'm watching the changes to retirement plans. I believe the Senate bill combines the 457b limit with the 401k/403b limit so I could now contribute $24.5k=$18.5k+$6k total, instead of $24.5k to 403b and another $24.5k to 457b (total $49k). (These are on top of 401a, IRAs, HSA - I tax defer most of my income).

In response I would totally change how I contribute to Trad, Roth, taxable. I've looked at the numbers, and planned accordingly, so I'm just waiting to see what the final tax law is.

There were other proposed changes to retirement plans, e.g. they were going to impose the 10% early withdrawals penalty on 457b plans, but that was stricken. So (as things stand) 457b plans will still be a penalty-free source of funding for early retirees below age 55.

I am waiting to know this piece as well. I max out my 457b and 401k for a total of $36k ($37k next year) but if it’s combined with this new tax bill that would be a total bummer for me. I guess I would max the 457b and whatever I would’ve contributed to the 401k would go into a taxable but it wouldn’t help with lessening the taxes during my working years. I still have another 20 years or so to go before I retire.

 

[pb4uski]

I forgot another obvious one. No recharacterizations (in both bills), so you'll need to be sure of your Trad/Roth decisions when you make them.

Any idea when the prohibition on recharacterizations is effective? IOW, does it prohibit 2018 recharacterizations of conversions made in 2017? or just 2019 recharacterizations of conversions made in 2018?

 

[RunningBum]

It is nearly a "no-brainer" for charity donors to go this year. I don't want to wait. I'm already past the standard deduction for this year, so why not donate and get the benefit?

In future years, I'll likely bunch 3 years together using my DAV to distribute them out over 3 years.

Right, and I am taking more income this year and less next year anyway, so it should be a 30% deduction this year, and 0% next year. I just hope those charities realize they are getting about 4 years worth at once, and not to count on the larger amount each year! If I can I'm going to note that on my donations.

 

[Amethyst]

So far I have not found a calculator that fits our situation.

Primary income from 1099Rs
Some W-2 income
Dividends, CG distro's and interest, including muni bond interest
RMD
Usually pay AMT
High-tax state and county

I found this site helpful.
Tax Plan Calculator by Maxim Lott

maybe too simplistic for some.

The Standard Deduction, dropping the ACA requirement and giving a break on pass through llc, will all be big savings for me.

 

[catotx]

If the FIFO stock sale requirement makes it into the final bill, tax loss harvesting would not work unless the loss is in the first tax lot, or if the loss is large enough that you can sell through the earliest lots to reach the lots with losses.

Alternatively, this could encourage investors to invest in a different ETF for each asset class, e.g. for US LargeCap: VV, VOO, SCHX, IVV, SCHK, MGC, VONE, IWB, SPLG, SPY. The idea is to switch to a new ETF whenever there is major advancement in the asset class. E.g. if I am investing in VV, after a 10% rise in VV, I would switch to the next ETF VOO when I have new funds for investment. In this way, when there is a fall in US LargeCap, I can sell VOO to tax loss harvest without needing to sell the earlier VV shares.

The TLH features touted by the robo advisors like Wealthfront or Betterment would not work easily anymore.

 

[Sunset]

At 66 and retired, I have relatively little income and have been relying on selling appreciated assets in an after tax account which is down to about $80K with annual spending of ~$50K. Not yet drawing SS but considering whether or not to do so. The bulk of my net worth apart from the house is in traditional IRAs (~1.1M) and Roth (~$200K) so I'm thinking this may be an opportunity to pull out extra IRA funds (via Roth conversion and/or into after tax account.) It may pay to do this sooner than later if these tax cuts are only temporary. i-orp now includes a calculation based on the House bill so hopefully they'll have one soon for the Senate and then final bills.This will probably be good for stocks at least in the short run so maybe should consider upping the equity asset allocation.

I would think you could withdraw or convert IRA amounts this year equal to the deduction you take without paying any taxes, without waiting for the new tax bill.

 

[scrabbler1]

I found this site helpful.
Tax Plan Calculator by Maxim Lott

maybe too simplistic for some.

The Standard Deduction, dropping the ACA requirement and giving a break on pass through llc, will all be big savings for me.

Way too simplistic. No way to enter Qualified Dividends or LTCG which are taxed at lower rates, sometimes zero.

 

[RunningBum]

Any idea when the prohibition on recharacterizations is effective? IOW, does it prohibit 2018 recharacterizations of conversions made in 2017? or just 2019 recharacterizations of conversions made in 2018?

I can't find anything that addresses this. I see a couple of earlier articles that think 12/31/2017 might be the deadline, but I don't know if they are just guessing. bold in the following quotes is mine.

https://www.cnbc.com/2017/11/09/last-call-the-clock-is-ticking-on-these-tax-breaks.html

On the other hand, if you've already fouled up a conversion in 2017, you may be running out of time to undo that transaction. The GOP's bill will eliminate these Roth "do-overs."
"You might want to consider that recharacterization," said Levine of BluePrint Wealth Alliance. "Your last shot might be Dec. 31."

https://www.thestreet.com/story/143...ill-can-hurt-your-retirement-investments.html

Luscombe [Mark Luscombe, a principal analyst with Wolters Kluwer] noted that the most significant proposed change in the retirement area, from his perspective, is the elimination of recharacterizations of Roth contributions and conversions effective after 2017. "This could mean that an individual who thought they had until October 2018 to do a recharacterization might have to do it before year-end 2017," he said.

If I don't hear anything definitive, I'm going to recharacterize this month.

 

[Senator]

I found this site helpful.
Tax Plan Calculator by Maxim Lott

maybe too simplistic for some.

The Standard Deduction, dropping the ACA requirement and giving a break on pass through llc, will all be big savings for me.

When I run it for me, It's a wash. I pay slightly more in the senate version, slightly less in the house version.

If it's simpler, it's better.

 

[Philliefan33]

The Sched A medical deduction that was to have gone away appears to not only be retained, but also available to more people because the qualifying threshhold is dropping from 10% AGI to 7.5%, but just for 2 years.

This is just rolling the law back to where it was in 2016.

For TY 2016, only medical expenses beyond 7.5% AGI were deductible. The threshold went up to 10% for TY 2017.

 

[audreyh1]

Right, and I am taking more income this year and less next year anyway, so it should be a 30% deduction this year, and 0% next year. I just hope those charities realize they are getting about 4 years worth at once, and not to count on the larger amount each year! If I can I'm going to note that on my donations.

Set up a DAF and portion it out equally over the four years? Or are you gifting directly from the IRA (which can't go to a DAF)?

 

[audreyh1]

This is just rolling the law back to where it was in 2016.

For TY 2016, only medical expenses beyond 7.5% AGI were deductible. The threshold went up to 10% for TY 2017.

Not quite. The 10% requirement was in place for people under 65 several years ago.

 

[audreyh1]

If the FIFO stock sale requirement makes it into the final bill, tax loss harvesting would not work unless the loss is in the first tax lot, or if the loss is large enough that you can sell through the earliest lots to reach the lots with losses.

Alternatively, this could encourage investors to invest in a different ETF for each asset class, e.g. for US LargeCap: VV, VOO, SCHX, IVV, SCHK, MGC, VONE, IWB, SPLG, SPY. The idea is to switch to a new ETF whenever there is major advancement in the asset class. E.g. if I am investing in VV, after a 10% rise in VV, I would switch to the next ETF VOO when I have new funds for investment. In this way, when there is a fall in US LargeCap, I can sell VOO to tax loss harvest without needing to sell the earlier VV shares.

The TLH features touted by the robo advisors like Wealthfront or Betterment would not work easily anymore.

Ultimately this is exactly what some people will do - buy slightly different versions of an asset class so that they have some control over the basis.

And since they only apply this rule to the retail investor, and not to any of the professionally run investment funds, the amount in taxes they are gaining can't be very large at all. Many, many individuals own equities though tax-deferred accounts. What's left has got to be small potatoes.

 

[Philliefan33]

Not quite. The 10% requirement was in place for people under 65 several years ago.

Thanks for the correction. I've only done the medical deductions for the fine folks who come to the senior center, so didn't know this distinction.

 

[Lsbcal]

Next year is RMD time for us. That means about 30% marginal rate for us under current tax law. But under the new tax law proposals, our marginal rate would be around 12%. BTW, I don't think our overall tax bill will be much different so nothing to envy here.

So how to handle charitable donations? For cash donations I'll wait until later in the month. For donations of items (sitting in our garage now), I have to make a decision pretty soon as some of this has to be picked up by a truck.

I think some blended version of this tax law will pass and the marginal rates will be a lot lower then now. So my guess: donate in 2017 assuming you fall in the lower rate areas. Tax rates I've seen (link at: Here's what's in the Senate tax bill - Dec. 2, 2017 ) are:

The Senate bill also calls for seven brackets but changes the rates on taxable income to:
- 10% (income up to $9,525 for individuals; up to $19,050 for married couples filing jointly)
- 12% (over $9,525 to $38,700; over $19,050 to $77,400 for couples)
- 22% (over $38,700 to $70,000; over $77,400 to $140,000 for couples)
- 24% (over $70,000 to $160,000; over $140,000 to $320,000 for couples)
- 32% (over $160,000 to $200,000; over $320,000 to $400,000 for couples)
- 35% (over $200,000 to $500,000; over $400,000 to $1 million for couples
- 38.5% (over $500,000; over $1 million for couples)

The House bill, by contrast, only calls for four brackets: 12%, 25%, 35% and 39.6%.

Anybody agree or disagree with this? Opinions welcome.

 

[pb4uski]

I'm thinking that since the majority in the Senate is slimmer than the majority in the House that the political reality is that the final bill after conference will be closer to the Senate bill than the House bill.

 

[RunningBum]

Set up a DAF and portion it out equally over the four years? Or are you gifting directly from the IRA (which can't go to a DAF)?

Hmmm, that's a really good idea. I've been lazy in my gifting and just do it from my checking account or credit card. I'm taking a large LTCG this year, maybe I should put some of that in a DAF and disburse it over a few years. That shouldn't be too hard to set up in the next 3 weeks, should it? I'd probably use VG since that's where my account and the fund I'm liquidating is. I'm going to check it out.

 

[43210]

I'm not sure how the FIFO, no SpecID, thing would work in practice. It seems you could shift assets between brokerages, so no brokerage could know your when all purchases were made, so they practically couldn't report for FIFO.

 

[audreyh1]

I'm not sure how the FIFO, no SpecID, thing would work in practice. It seems you could shift assets between brokerages, so no brokerage could know your when all purchases were made, so they practically couldn't report for FIFO.

Yes, that too.

 

[pb4uski]

Why wouldn't the lot level cost basis information just get transferred between brokerages along with the shares? That shouldn't be hard to do.

 

[audreyh1]

Of course. But you can buy a new set of shares at a different broker, and then sell whichever group has the higher basis later by choosing which brokerage has those shares.

 

[JoeWras]

Hmmm, that's a really good idea. I've been lazy in my gifting and just do it from my checking account or credit card. I'm taking a large LTCG this year, maybe I should put some of that in a DAF and disburse it over a few years. That shouldn't be too hard to set up in the next 3 weeks, should it? I'd probably use VG since that's where my account and the fund I'm liquidating is. I'm going to check it out.

I first learned of DAFs here, on ER.org and have been using them for 3 years now. Just fantastic on so many accounts. I can also say as a treasurer of a small 501(c)3, it was also nice being on the other side too. Nice to get a check instead of a stock.

DAFs allow this "lumping" which will be more important with a larger standard deduction. But aside from that, the other benefits are much easier management of stock or MF donations, and the ability to control your balance in the fund regarding investments. Donating appreciated securities is, and looks like it still will be, a huge win for all involved (except the tax man).

I will give this little warning. VG Charitable has a $25K minimum opening donation. After that, the minimum is $5k per donation. Fidelity Chariable has a $5k initial donation and may work better for some people.

Our fund is at VG charitable. Their process has been very good and I've had no problems recommending donations to a number of qualified charities.

You still have time, especially if you want to start with a VG mutual fund. An initial donation with anything else may take a bit more time. I suggest if you want to do this, start now, this week. Either VG or Fidelity Charitable should have no problem if you start the opening process this week.

To give you an idea of VG Charitable year end deadlines, here's a snippet of what they sent me regarding deadlines:

We strongly suggest making your grant recommendations and contributions as soon as possible to avoid any potential delays.

Security held outside of Vanguard December 15, 2017
Assets held at Vanguard December 21, 2017
Wire or Electronic Bank Transfer December 26, 2017
Check or Stock Certificate December 31, 2017