Tax Bills

[Senator]

Looks like chained CPI rears its ugly head:

How is Chained CPI ugly? How does that affect you? Or is that a political opinion?

 

[FIRE'd@51]

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.

It is, assuming the broker you are transferring from has that information. If you have held shares for a long time (before brokers were required to transfer basis information) and have transferred shares, you will probably have lots that don't have basis information. If the basis is a nuisance to figure out (due to splits, mergers, spinoffs, etc), IMO, these lots are good candidates for donating to charities or a DAF, in which case you don't need basis information.

 

[audreyh1]

How is Chained CPI ugly? How does that affect you? Or is that a political opinion?

It reduces the inflation adjustments to tax brackets etc. as compared to using the CPI. As a result, folks get pushed into higher tax brackets more quickly than otherwise.

I suppose it comes down to whether you think chained-CPI is a more accurate tracking of inflation than the regular CPI.

Yes, it affects all of us.

There are fist fights whenever someone pushes for SS COLAs to switch to chained-CPI.

 

[audreyh1]

I think the reason the FIFO thing hasn't been in the news is that it does not apply to retail investors like us even for stocks and ETFs since we all use brokerages that keep track of things. That is, all our investments are held at RICs - regulated investment companies.

As way of seeing this, when one fills out Form 1116 to get the Foreign Tax Credit, one can use "RIC" and does use "RIC" for ETFs, mutual funds, stocks at a broker, etc:

It absolutely does affect you, the retail investor. You won’t get to pick which specific ETF, mutual fund or stock lot is sold when you sell but are forced to sell the oldest. Normally that has the highest cap gain.

Good luck with tax loss harvesting in the future! Or gifting of appreciated shares with the lowest cost basis (if they are not the oldest).

The only ones protected are the funds themselves in their trading, not the investors buying and selling those funds.

It hasn’t been in the regular news much because average Joe never heard of specific shares or cost basis and probably only owns stocks or mutual funds in a tax-deferred account. It has certainly been in the financial news ever since the Senate proposed it!

 

[USGrant1962]

It reduces the inflation adjustments to tax brackets etc. as compared to using the CPI. As a result, folks get pushed into higher tax brackets more quickly than otherwise.

I suppose it comes down to whether you think chained-CPI is a more accurate tracking of inflation than the regular CPI.

Yes, chained CPI was created because of known upward biases in CPI-U and CPI-W. Good discussion here https://www.cbo.gov/publication/44088

But CPI-E, presumably for "elderly" is generally higher than the others due to medical care inflation. Another good discussion from CBO https://www.cbo.gov/publication/44090

 

[FIRE'd@51]

You don’t get to pick which specific ETF, mutual fund or stock lot is sold when you sell but are forced to sell the oldest.

FIFO is the default, but you still have the option to override the default and designate which lots you want to sell.

 

[audreyh1]

FIFO is the default, but you still have the option to override the default and designate which lots you want to sell.

Not in the Senate proposed tax bill, which is what we are discussing here.

That specific lot option should would no longer be allowed for individual investors.

 

[FIRE'd@51]

Not in the Senate proposed tax bill, which is what we are discussing here.

That specific lot option should would no longer be allowed for individual investors.

I stand corrected. I didn't realize that was in there. Thanks for pointing it out. I guess I better take another look at my portfolio to see if I have any losing lots that I can still designate this year and add to my harvested losses.

 

[LOL!]

So far my investigation of the news is that something is very ambiguous about this. Is there a link to the actual text of the bill? So far, the news media does not give me any confidence in their reporting of the facts.

 

[kramer]

The whole FIFO thing limited to the retail investor will only save 0.17% of the 10 year tax revenue drop according to the JCT scoring, so why force this complexity that would have to be implemented starting Jan 1 2018 for such a tiny result?

BTW I read that after the 1986 increase in cap gains rates, realized gains seriously dropped and revenue from that activity came in far less than expected.

This was my thought, also...it just doesn't make sense for the miniscule revenue increase and it's overturning 100 years of tax law. Also, Congress required brokerages to write costly software and systems to track basis for all investors starting a few years ago ... much of that effort will now have been wasted if this passes. My gut feeling is that the FIFO provision will be edited out of the final version. If it does make it, it's probably because it doesn't have strong advocates like many of the other former deductions that have been removed in the latest tax bill.

 

[audreyh1]

So far my investigation of the news is that something is very ambiguous about this. Is there a link to the actual text of the bill? So far, the news media does not give me any confidence in their reporting of the facts.

According to reports I’ve read this was still in the Senate version of the bill when it went to the floor for a vote. https://www.cnbc.com/2017/11/20/senate-tax-bill-ends-this-stock-sale-strategy.html

The links to the text of the bill were given above but is a scan and not searchable. https://assets.bwbx.io/documents/users/iqjWHBFdfxIU/rXqXuQfYbRas/v0

 

[Senator]

This was my thought, also...it just doesn't make sense for the miniscule revenue increase and it's overturning 100 years of tax law. Also, Congress required brokerages to write costly software and systems to track basis for all investors starting a few years ago ... much of that effort will now have been wasted if this passes. My gut feeling is that the FIFO provision will be edited out of the final version. If it does make it, it's probably because it doesn't have strong advocates like many of the other former deductions that have been removed in the latest tax bill.

That is my thought too. It is near impossible for an individual investor to sell in a FIFO manner, across different brokerages, in any reasonable manner.

You have reinvested dividends, different buy dates, splits, reverse splits, paper shares held directly in a safe, etc. There are even forgotten accounts and forgotten positions.

I can see it if it is only at a single brokerage, where the brokerage can track dates, but not across brokerages.

 

[LOL!]

I have e-mailed my US senator asking for clarification. I suggest that you all do the same thing.

 

[catotx]

The links to the text of the bill were given above but is a scan and not searchable. https://assets.bwbx.io/documents/users/iqjWHBFdfxIU/rXqXuQfYbRas/v0

Yes, on page 254 if anyone wants to read it.

 

[LOL!]

Yes, on page 254 if anyone wants to read it.

I read that and it doesn't tell me anything because it refers to other paragraphs. All my sales are done by a regulated investment company, too.

 

[MichaelB]

Additional posts have been removed that were taking the thread off topic. Let’s please stick to proposed changes to tax law in the two bills.

This includes any discussion of individual mandate and ACA. As indicated in the OP, that should be taken up in a separate thread in the healthcare forum.

 

[LOL!]

If you are a family with one child over age 16 (no child tax credit) under current law you get 3 exemptions (3 x $4150) and a standard deduction of $13,000 for a total of $25,450.

Under the proposed law, you get a standard deduction of $24,000.

So your taxable income will increase by $1,450.

 

[VanWinkle]

Some tax plans are good, and some tax plans are bad.

VW

 

[audreyh1]

I read that and it doesn't tell me anything because it refers to other paragraphs. All my sales are done by a regulated investment company, too.

It doesn’t matter if your sales are done by a regulated investment company. Which retail investors are not?

 

[mpeirce]

Thanks for this discussion, I've resolved to call Vanguard Monday to get a DAF setup. I'm meeting with my CPA on the 13th (I was/am hoping the law is final by then) but JoeWras's comment about needing to start the process with Vanguard by the 15th makes me think I need to start this process now.

I've been gifting highly appreciate shares (currently working off a pile of $7 AAPL shares) and with the possible changes to picking which shares to sell (FIFO) I think I'll just send all the $7 shares into the DAF. Just means more ROTH conversions this year...

Again, great discussion so far!

 

[garyt]

I was listening to Kudlow yesterday and he and his guest were very much against the FIFO rule. The guest (who's name escapes me) thought it was put in as a bargaining chip as something that could be given up in later negotiations on the bill.

 

[USGrant1962]

If you are a family with one child over age 16 (no child tax credit) under current law you get 3 exemptions (3 x $4150) and a standard deduction of $13,000 for a total of $25,450.

Under the proposed law, you get a standard deduction of $24,000.

So your taxable income will increase by $1,450.

You are missing the new "non-child dependent" tax credit. $500 in the Senate version, which is worth more than the tax on $1,450 in all but the highest brackets, and that is for just one dependent. It is not clear to me if this applies to taxpayer and spouse too, the $300 version in the House bill does. If the Senate rule is the same, it would be a $1500 tax credit in your scenario.

 

[JoeWras]

Thanks for this discussion, I've resolved to call Vanguard Monday to get a DAF setup. I'm meeting with my CPA on the 13th (I was/am hoping the law is final by then) but JoeWras's comment about needing to start the process with Vanguard by the 15th makes me think I need to start this process now.

Those dates are to be safe, and generally there isn't that much lag at other times of the year. VG and Fidelity Charitables get slammed in December. A new account would probably take priority, but who knows?

With VG Charitable, it is darn near automatic if you gift VG mutual funds. Anything else requires some human which could slow things down, especially during this year end flurry. I suspect the flurry may be more intense this year due to the proposed law.

 

[DAYDREAMER]

Is there info how QDiv and LTCG will be taxed? Currently there is 0 tax up to the 15% bracket of taxable income (combined income-deductions).

 

[kjpliny]

It appears that the final senate bill has removed the Hatch amendment in sec 13611 on page 284 that originally combined the 401k/403b & 457 limits into one aggregate limit, so those who contribute to both should still be able to max both.