Tax Bills

[Sue J]

For us personally, either the proposed House or Senate bills do not have a huge impact. Our AGI is right around $40,000. The higher Standard Deduction comes close to offsetting the loss of Personal Exemption. If whatever passes has a credit for each taxpayer, that would be nice, but so far I'm not counting on anything.

I'm wondering though, why do all the tax proposals eliminate the Personal Exemption? For us it makes little difference but for a family with more than a couple of kids this will really impact their taxes. I've always understood that if the Federal Govt wants to encourage something they make it a tax deduction - borrowing for a home mortgage, having a family, saving for retirement, etc.

Why this current push to eliminate the Personal Exemption in favor of a larger, but fixed, Standard Deduction?

And none of this looks like "simplification" to me.

 

[explanade]

My father passed away this year so I'll be doing the taxes for my mother.

Their annual property tax bill in CA is over $20k. They paid just over $10k back in April and had at least $10-11k due in December and another $10-11k due in April but I advised my mother to pay both now, to take a huge property tax deduction for the last time.

She does have high income to offset against.

 

[USGrant1962]

I'm wondering though, why do all the tax proposals eliminate the Personal Exemption? For us it makes little difference but for a family with more than a couple of kids this will really impact their taxes. I've always understood that if the Federal Govt wants to encourage something they make it a tax deduction - borrowing for a home mortgage, having a family, saving for retirement, etc.

Why this current push to eliminate the Personal Exemption in favor of a larger, but fixed, Standard Deduction?

And none of this looks like "simplification" to me.

It appears to me that they are replacing the exemptions with dependent tax credits (and expanded child tax credits). These are more valuable for the bottom tax brackets than for the high end because they are flat dollar amounts - you don't get a higher benefit in a higher tax bracket like the exemptions provide.

The major simplification is that a large fraction of people that now itemize will switch to the standard deduction.

 

[43210]

For us personally, either the proposed House or Senate bills do not have a huge impact. Our AGI is right around $40,000. The higher Standard Deduction comes close to offsetting the loss of Personal Exemption. If whatever passes has a credit for each taxpayer, that would be nice, but so far I'm not counting on anything.

I'm wondering though, why do all the tax proposals eliminate the Personal Exemption? For us it makes little difference but for a family with more than a couple of kids this will really impact their taxes. I've always understood that if the Federal Govt wants to encourage something they make it a tax deduction - borrowing for a home mortgage, having a family, saving for retirement, etc.

Why this current push to eliminate the Personal Exemption in favor of a larger, but fixed, Standard Deduction?

And none of this looks like "simplification" to me.

Don't forget the increased Child Tax Credit (CTC), so families with kids are generally still a little ahead with regard to changes to the Deduction/Exemption/CTC combination.

 

[FIRE'd@51]

if done properly the money counts towards an RMD but does not show up on the 1040 in any form

Actually, it does show up on Line 15 of Form 1040, but does not get included in your AGI

 

[HFWR]

I will lose deductibility of mortgage interest and property and sales taxes, but seemingly the increased standard deduction will more than cover it. My income sources (SS, IRA, pension) are all taxed as regular income.

 

[catotx]

My father passed away this year so I'll be doing the taxes for my mother.

Their annual property tax bill in CA is over $20k. They paid just over $10k back in April and had at least $10-11k due in December and another $10-11k due in April but I advised my mother to pay both now, to take a huge property tax deduction for the last time.

She does have high income to offset against.

Do they pay AMT?

 

[bingybear]

I will lose deductibility of mortgage interest and property and sales taxes, but seemingly the increased standard deduction will more than cover it. My income sources (SS, IRA, pension) are all taxed as regular income.

how does the increased standard deduction cover it. Remember the standard deduction does go up, but you loosed the individual exemption. For MFJ the old standard deduction+2 exemptions is just a bit less than the new standard deduction.

 

[FIRE'd@51]

I will lose deductibility of mortgage interest and property and sales taxes, but seemingly the increased standard deduction will more than cover it. My income sources (SS, IRA, pension) are all taxed as regular income.

Don't forget that you are losing your personal exemptions as well, which is a big deal. For MFJ over 65, the current standard deduction plus exemptions is 23.8K, so the effective increase is only $200 for these folks.

 

[explanade]

Do they pay AMT?

I will have to study their tax return. They have Schedule C expenses against their income.

 

[USGrant1962]

I will lose deductibility of mortgage interest and property and sales taxes, but seemingly the increased standard deduction will more than cover it. My income sources (SS, IRA, pension) are all taxed as regular income.

Mortgage interest on primary homes remain deductible in both bills, but limited to $500K on new mortgages in the House bill.

Property taxes remain deductible in both bills, but limited to $10K/year.

 

[bingybear]

Mortgage interest on primary homes remain deductible in both bills, but limited to $500K on new mortgages in the House bill.

Property taxes remain deductible in both bills, but limited to $10K/year.

But now that the standard deduction higher it makes less of your interest and property tax deductible. Thus the reason for effectively combining the standard deduction and exemption from the present system.

 

[FIRE'd@51]

But now that the standard deduction higher it makes less of your interest and property tax deductible. Thus the reason for effectively combining the standard deduction and exemption from the present system.

Exactly. The number people should be comparing to the proposed standard deduction is their itemized deductions plus exemptions.

 

[HFWR]

Apologies, as I had heard the deductions were going away... However, I still think $12k is more than the combined totals of MI, PT, and ST, and the current personal deduction, for me, since I’m just barely above the current standard deduction.

Filing and marital status is single.

 

[aza455]

Does anyone know if the foreign tax credit is eliminated?

 

[USGrant1962]

Does anyone know if the foreign tax credit is eliminated?

It seems to be partially repealed, but looks very complicated. It also interacts with the whole new foreign corporate tax system. From the PWC analysis linked to earlier, under the corporate tax section:

Repeals deemed paid tax credit for
dividends received from a foreign
corporation. Retains deemed paid tax credit
for subpart F inclusions. Proposal
eliminates need for computing and tracking
cumulative tax pools.
No foreign tax credit or deduction
permitted for any taxes paid or accrued
with respect to any dividend subject to the
new deduction for foreign dividends.
Adds separate baskets
for foreign branch
income and GILTI

I'm not sure how this works for personal income taxes and there is no reference to it in the PWC analysis.

 

[pb4uski]

Yes it will because it will affect the size of your capital gain. When you sell shares to rebalance in your taxable accounts, do you pick specific lots to sell to lower the realized capital gains? Or do you sell the oldest shares first by default?

While it will affect the gain... for those who manage gains to pay 0% on LTCG it'll be more of a nuisance than an impediment.

 

[Bryan Barnfellow]

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.

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

Sorry just getting back to this. Thanks, Audrey for the response. BTW, I'm a trained economist--everything in the real world is ugly

-BB

 

[audreyh1]

While it will affect the gain... for those who manage gains to pay 0% on LTCG it'll be more of a nuisance than an impediment.

The big deal is that it might raise someone’s taxable income big time because they may be forced to realize the highest gains. Usually the oldest shares have the highest gains.

For folks who are using the 0% LTCG tax rates, you could be filling up that range much faster with smaller after tax proceeds.

And the realized gain increase shows up in your MAGI for folks who qualify for ACA subsidies or having more of their SS income subject to taxation.

For folks subject to IRMAA on Medicare, higher taxable capital gains income can cause higher Medicare premiums.

I don’t think it’s nearly as innocuous as you suggest.

 

[FIREd]

The big deal is that it might raise someone’s taxable income big time because they may be forced to realize the highest gains. Usually the oldest shares have the highest gains.

For folks who are using the 0% LTCG tax rates, you could be filling up that range much faster with smaller after tax proceeds.

And the realized gain increase shows up in your MAGI for folks who qualify for ACA subsidies or having more of their SS income subject to taxation.

For folks subject to IRMAA on Medicare, higher taxable capital gains income can cause higher Medicare premiums.

I don’t think it’s nearly as innocuous as you suggest.

I agree that it might be a big deal for long time buy-and-holders. If one has to pull a certain sum out of one’s portfolio to cover living expenses, a larger portion of it might be subject to income tax if forced to liquidate the oldest shares first.

 

[43210]

An apparently well-informed comment from another forum
https://www.whitecoatinvestor.com/forums/topic/senate-tax-bill-version-summary/page/5/#post-78772
seems to track down the amendment (SA 1855, replacing SA 1618) where they ostensibly removed the section 13611 “CONFORMITY OF CONTRIBUTION LIMITS FOR EMPLOYER- SPONSORED RETIREMENT PLANS.”

The effect of this is that 457b plans would continue to have their own $18.5k+$6k limit, separate from the 401k/403b $18.5k+$6k limit (so you can do both if you have access). It had seemed as though these would have been put under a single limit, reducing tax deferral space for some by $18.5k (+$6k if >=50yo).

Of course it's not final yet.

 

[audreyh1]

I agree that it might be a big deal for long time buy-and-holders. If one has to pull a certain sum out of one’s portfolio to cover living expenses, a larger portion of it might be subject to income tax if forced to liquidate the oldest shares first.

Exactly!

And many of us rebalance. This likely raises the tax costs of rebalancing as it forces you to recognize larger (potentially a lot larger) capital gains income for the same rebalancing.

Using specific shares has really helped with reducing the tax consequences of rebalancing in taxable accounts because it’s usually shares I bought just a few years ago that can be trimmed to rebalance when an asset class finally turns around and outperforms.

 

[pb4uski]

.... I don’t think it’s nearly as innocuous as you suggest.

Perhaps for some but not for us. I did some gains trading a few years ago so I have very few lots in our taxable accounts and the bases are very similar between lots.

One interesting issue might be that we hold the same ticker in our individual and joint accounts... so is FIFO applied to each account or across all accounts since we file a joint return. I suspect the latter... across accounts. So for example, if I sell the oldest lot in my account but there is an older lot with a lower cost basis in DW's account the the gain would be calculated based on the older lot in her account.

Similar but different than the separate brokerage accounts issue. Could get messy, especially if a MFJ couples trading is not coordinated.

 

[meierlde]

Perhaps for some but not for us. I did some gains trading a few years ago so I have very few lots in our taxable accounts and the bases are very similar between lots.

One interesting issue might be that we hold the same ticker in our individual and joint accounts... so is FIFO applied to each account or across all accounts since we file a joint return. I suspect the latter... across accounts. So for example, if I sell the oldest lot in my account but there is an older lot with a lower cost basis in DW's account the the gain would be calculated based on the older lot in her account.

Similar but different than the separate brokerage accounts issue. Could get messy, especially if a MFJ couples trading is not coordinated.

Given for recent purchases the brokerage house knows the basis, and reports it on the 1099b if you crossed brokerage houses it would make every entry require an adjusted basis. I don't see how that could realistically be enforced. The IRS will know what the 1099b shows and nothing more.

 

[pb4uski]

Given for recent purchases the brokerage house knows the basis, and reports it on the 1099b if you crossed brokerage houses it would make every entry require an adjusted basis. I don't see how that could realistically be enforced. The IRS will know what the 1099b shows and nothing more.

Agree, they would need to rely on voluntary compliance supplemented by audit results... not very different from wash sale compliance today.