Tax Bills

[gerntz]

I didn't say anyone was forcing you to sell. Rather they are forcing you to sell the oldest shares when you sell. Big difference.

You don't ever have to sell. Basis cost steps up at death. Net, zero taxes.

 

[pb4uski]

I asked this question of Wells Fargo Advisors a couple of weeks ago and their legal dept said they would have to wait for the final law before they would be able to respond. I had a chat with my broker where we speculated about the likely outcome, and he said their lawyers typically use the most conservative interpretation of the tax code, so if there's any ambiguity whatsoever, they would probably disallow recharacterizations of 2017 conversions; and given the timeline, they will not make that decision until the new year when it's already too late. Therefore, I am proceeding as if recharacterizations of any prior conversion will not be possible after January 1.

Good info... it may well go that way... I'm sure that the Vanguard, Fidelity and the like are on top of it but who knows when we will get an answer. While I normally overconvert a little knowing that I can recharacterize I'll probably dial it in more finely this year and live with the 30% tax on the small excess if it ends up that I can't recharacterize.

I guess my followup question with them would be ... assume that the final law is the same as the senate bill....then what is the answer?... but I would fully expect more weaseling by legal.... that is just what they do.

 

[Sunset]

About the comparison of this with the wash sale rule, the wash sale rule applies if you sell and buy the same stocks in a tax-deferred account and a taxable account.

This FIFO rule will most likely be applicable across tax-deferred and taxable accounts the same way.

If you have both types within a brokerage, the broker's computer can easily look for this. It is tough to check across brokerages, and the IRS does not have the computer, nor the info or manpower to do this.

I don't think "they" are planning to remove the tax-deferred properties of IRA's or ROTH's , meaning if you sell within one of those, and there is an older basis in a taxable account, it would be silly to look outside to a taxable account for the basis (from a tax revenue point of view).

I was thinking, one way to prepare for this possible tax change, would be to sell and buy back all stocks/etfs/funds within a tax-deferred account before the end of the year.

This would make all the older basis for stocks in the taxable account only. This might solve 1/2 the problem for some folks, if you have very great gains in tax-deferred accounts.

 

[Golden sunsets]

This is a point I'd like clarification on. In my local newspaper (I live in Susan Collins home state), there was a reference to the fact that Collins managed to save the additional deductions currently available to filers who don't itemize, for those over 65. I looked at the standard deduction language in the links provided to try to find this language re over 65 standard deduction and found nothing. However I am also inclined to think that by not striking the current code language that provides that additional standard deduction, that the addition is thereby preserved. It's relatively small potatoes ($1,250 per person), so if I am correct?, then the standard deduction for a couple over 65 is $26,500.

I'd also like to clarify whether the $500 credit per dependent in the Senate bill includes both individuals for a couple filing MFJ, for a reduction to total taxes of $1,000.

One final thought. Is it my imagination or do the standard deductions and more importantly tax brackets for widows, which will be the same under both house and senate versions, be equal to those applied to MFJ? I think this is a big change and benefit to widows, and is not currently the case.


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I think I'm correct on the additional standard deduction for over 65, not being touched. If you insert the new standard deduction language from the Senate Bill on pages 44 and 45 into the current code, which can be viewed here: https://www.law.cornell.edu/uscode/text/26/63, only Par (c), (2) (B) and (C) are changed toreflect the new standard deduction rate. Paragraph(3) Additional Standard Deduction for Aged and Blind is not touched(and further outlined in f), nor is it deleted.

It also seems pretty clear to me on page 46 of the Senate bill, that the $500 credit applies to each tax filer and not just a dependent, so for two people MFJ there will be a $1,000 reduction in federal taxes.

 

[pb4uski]

.... I was thinking, one way to prepare for this possible tax change, would be to sell and buy back all stocks/etfs/funds within a tax-deferred account before the end of the year. ...

Interesting idea... if only funds would relax their frequent trading restrictions in such cases.... though I guess I could sell the fund and buy the ETF.

I suspect that they will not look through taxable and tax-deferred accounts combined for this FIFO think like they do for wash sales.... but it seem quite possible that they will looks across different brokerage accounts and across individual and joint accounts for MFJ taxpayers.

 

[audreyh1]

You don't ever have to sell. Basis cost steps up at death. Net, zero taxes.

Right - never rebalance. Never sell the equity portion of your portfolio for living expenses while you are alive. Pass all your equity holdings on to heirs.

Of course that solves the problem for everybody.

I suppose some folks with income from other sources can do just that. Hope they like their heirs.

 

[cathy63]

It also seems pretty clear to me on page 46 of the Senate bill, that the $500 credit applies to each tax filer and not just a dependent, so for two people MFJ there will be a $1,000 reduction in federal taxes.

That would be nice. The House bill increases our taxable income by about $16K and the Senate bill by about $11K. With a $1K credit, we'd be looking at a tax increase of only $320 to $920, so not as bad as I'd expected.

 

[catotx]

Interesting idea... if only funds would relax their frequent trading restrictions in such cases.... though I guess I could sell the fund and buy the ETF.

I suspect that they will not look through taxable and tax-deferred accounts combined for this FIFO think like they do for wash sales.... but it seem quite possible that they will looks across different brokerage accounts and across individual and joint accounts for MFJ taxpayers.

It will be messy or impractical to include tax-deferred accounts for the FIFO computation.

Historically, it was never necessary to track tax lots in the IRA. So for most people, they would not have the information when each lot was bought. This would get muddier when you consider that the assets could be rolled over from one custodian to the next, and the transaction details are never passed along.

 

[pb4uski]

I agree that it would be messy and impractical but that didn't stop them from looking at both for wash sale purposes (for which you need to know your basis even if in a tax-deferred account).

 

[Sunset]

It will be messy or impractical to include tax-deferred accounts for the FIFO computation.

Historically, it was never necessary to track tax lots in the IRA. So for most people, they would not have the information when each lot was bought. This would get muddier when you consider that the assets could be rolled over from one custodian to the next, and the transaction details are never passed along.

I just checked one of my brokerages ROTH accounts, and this information is not available for all stocks.
It seems pretty haphazard in the tracking, as one ETF I only started to buy this year has no basis, and some are present for others, and one I've held for a long time with re-investments has 20 entries for the one ETF.

Another odd interpretation of the FIFO , if they go across tax-deferred and taxable, is that you could benefit from a tax loss within the tax-deferred account, as not everything goes up in value.

 

[audreyh1]

I agree that it would be messy and impractical but that didn't stop them from looking at both for wash sale purposes (for which you need to know your basis even if in a tax-deferred account).

You don't need to know your basis in a tax-deferred account for the wash sale rule.

The wash sale rule across tax-deferred really only comes into play when you book a loss in a taxable account (the only place you are allowed to realize a capital loss) and buy back the shares in another account (including tax deferred) within 30 days before or after the loss sale.

 

[gayl]

Right - never rebalance. Never sell the equity portion of your portfolio for living expenses while you are alive. Pass all your equity holdings on to heirs.

Of course that solves the problem for everybody.

I suppose some folks with income from other sources can do just that. Hope they like their heirs.

I love all my grands + my 2 kids which is why I set up a legacy account.

That clearly stated, I am looking for my Schwab guy to get back to me to see if necessary to restructure all 4 accounts. I may have to put all ETFs into Legacy Account & keep only individual stocks + LEAPS in brokerage account .... and by end of year

Not exactly what I planned on as the beneficiary %s are convoluted and if shifting assets want to change ratios (currently grands 14% + kids 2% ea 1 account, kids 50/50 2nd account, IRA + Roth blended to heirs like taxable)

side questions:

• where does it say we bump up standard exemption on reaching 65
• what about EITC as a lot of kids use it their qtr year after graduating and student loan interest deduction is going away

 

[pb4uski]

You got me curious too.

Vanguard does not offer any choices for my t-IRA mutual fund, t-IRA brokerage or Roth accounts... in the cost basis elections for each it simily says "Vanguard's cost basis service offers average cost information only for IRAs established after July 11, 2011."

However, if I look at the cost basis info for those accounts, it says average cost for the t-IRA mutual fund and Roth accounts and each ticker is a single line of "Noncovered shares"... but for the brokerage t-IRA account it says FIFO and lists each lot for each ticker.

 

[Golden sunsets]

Gayl asked: where does it say we bump up standard exemption on reaching 65

This is deduced from my layman's analysis of the existing code in conjunction with the new Senate bill. As I said above, "I think I'm correct on the additional standard deduction for over 65, not being touched. If you insert the new standard deduction language from the Senate Bill on pages 44 and 45 into the current code, which can be viewed here: https://www.law.cornell.edu/uscode/text/26/63, only Par (c), (2) (B) and (C) are changed to reflect the new standard deduction rate. Paragraph(3) Additional Standard Deduction for Aged and Blind(and further outlined in f) is not revised, nor is it deleted."

Also AARP is stating that the Senate bill retains the additional deduction for those over 65 and/or blind. See here: article:http://blog.aarp.org/2017/11/29/senate-bill-millions-of-older-americans-could-see-higher-tax-bills/, the article states: "In some important aspects the two bills diverge. For example, under the SFC bill, a large number of individual tax relief provisions expire after 2025 to comply with a technical Senate rule. In addition, the SFC bill would retain two current-law provisions important to taxpayers 65+: the extra standard deduction for the blind and older taxpayers and the medical expense tax deduction."

 

[pb4uski]

You don't need to know your basis in a tax-deferred account for the wash sale rule.

The wash sale rule across tax-deferred really only comes into play when you book a loss in a taxable account (the only place you are allowed to realize a capital loss) and buy back the shares in another account (including tax deferred) within 30 days before or after the loss sale.

Good point.... I forgot that it works one way but not the other. Luckily I have had very few losses so haven't had to worry about it.

 

[SecondCor521]

Good info... it may well go that way... I'm sure that the Vanguard, Fidelity and the like are on top of it but who knows when we will get an answer. While I normally overconvert a little knowing that I can recharacterize I'll probably dial it in more finely this year and live with the 30% tax on the small excess if it ends up that I can't recharacterize.

I guess my followup question with them would be ... assume that the final law is the same as the senate bill....then what is the answer?... but I would fully expect more weaseling by legal.... that is just what they do.

I called my Vanguard rep a week ago and asked similar questions and got weasel answers. They don't want to be responsible if it is disallowed and also probably don't want to look like they're giving tax advice. Since I'm dealing with a cliff, I'm very carefully calculating my tentative AGI now and will convert up to somewhere a few steps under the cliff.

 

[MRG]

I called my Vanguard rep a week ago and asked similar questions and got weasel answers. They don't want to be responsible if it is disallowed and also probably don't want to look like they're giving tax advice. Since I'm dealing with a cliff, I'm very carefully calculating my tentative AGI now and will convert up to somewhere a few steps under the cliff.

They don't know. The legal teams will review this after it's signed in whatever form and make their decisions. Then that information is passed on to the reps.

As someone mentioned upstream generally fund companies go with the most conservative interpretation possible.

 

[REWahoo]

They don't know. The legal teams will review this after it's signed in whatever form and make their decisions.

+1

The confused asking the uninformed for answers to the unknown. An exercise in futility to seek answers to most of these tax questions when the final law is still subject to many changes.

 

[pb4uski]

I called my Vanguard rep a week ago and asked similar questions and got weasel answers. They don't want to be responsible if it is disallowed and also probably don't want to look like they're giving tax advice. Since I'm dealing with a cliff, I'm very carefully calculating my tentative AGI now and will convert up to somewhere a few steps under the cliff.

I get the not wanting to give tax advice part, but all I want to know if they will allow me to do the recharacterization in February 2018... I'm not looking for tax advice.... it is really a Vanguard transaction processing question of whether they will allow a customer to do a recharacterization on a 2017 conversion in 2018.

If they would allow me to do it while at the same time telling me that it is up to me to defend it with the IRS then that woud be fine with me.

But while I haven't studied it, if I did and concluded that it was ok to do a recharacterization on a 2017 conversion because the law applies to tax years beginning after December 31, 2017 and Vanguard won't allow me to actually do a recharaterization in 2018 then it is all a moot point.

And particularly moot at this point since we don't know for sure if there will be a change in the law and what the changes relating to this particular items will be.

 

[SecondCor521]

+1

The confused asking the uninformed for answers to the unknown. An exercise in futility to seek answers to most of these tax questions when the final law is still subject to many changes.

I am not confused. I am a person subject to ambiguity hopefully seeking clarification from someone who could conceivably answer a fair question with a conditional answer, e.g.: "The law isn't final yet, but if the 1/1/18 effective date language remains, we would plan to allow our clients to recharacterize." Just because my effort failed does not mean it was futile or unreasonable to try.

You may prefer to take a wait and see approach, and I respect your decision. I would appreciate it if you would consider the possibility that other people with different priorities and in different situations may choose a different approach than yours.

 

[REWahoo]

I am not confused. I am a person subject to ambiguity hopefully seeking clarification from someone who could conceivably answer a fair question with a conditional answer, e.g.: "The law isn't final yet, but if the 1/1/18 effective date language remains, we would plan to allow our clients to recharacterize."

You may prefer to take a wait and see approach, and I respect your decision. I would appreciate it if you would consider the possibility that other people with different priorities and in different situations may choose a different approach than yours.

But of course!

I would never stand in the way of an individual's right to ask questions, no matter how futile and frustrating the process.

 

[SecondCor521]

I would never stand in the way of an individual's right to ask questions, no matter how futile and frustrating the process.

I'm not saying you did. I'm objecting to you denigrating (possibly unintentionally) someone (me, in this case) for following a course of action different than the one you would.

How do you assess a priori whether a particular action will be futile? Are you ever mistaken in your assessment?

If a person chooses to attempt something with a low probability of success but high value to them, do you really think they are confused, or do you allow for the possibility that they assess either the probability of success differently or value the unlikely success outcome more highly than you do?

As an example, consider climbing Mount Everest. A low probability endeavor according to all the statistics. But some people succeed, and presumably those who try value that achievement. Not my cup of tea, but I wouldn't call them confused, and I wouldn't describe an effort as futile even if a particular person happened to not make it.

What about the process do you find frustrating? Or are you saying it's frustrating for me (it isn't)?

[ETA: Meh. Maybe I'm overly grumpy or sensitive today for some reason. Still bothered though.]

 

[REWahoo]

On we go...

 

[always_learning]

Wow. The last time I checked this thread, it was only four pages long. It looks like I have some serious catch-up reading to do!

For us, we would benefit somewhat from either the House bill or the Senate bill. For years we have only been able to take the standard deduction & personal exemptions. We will be losing both kids as dependents next year, so yeah, the proposed changes would help us out.

I have not yet delved into the average cost/FIFO fiasco since we have thus far just bought & held, only moving money around in IRA/401k investments, but it sounds like a horrible thing and a paperwork nightmare. I'm almost afraid to look at it. Yuck.

 

[43210]

Why on earth is anyone speculating that possible FIFO rules could involve interactions between taxable and tax-sheltered accounts. It's very silly and pointless. There's no conceivable reason for such interactions (so any analogy to wash-sale rules is irrelevant).