Proposed tax plan

[Pilot2013]

How does "change company United Way to maximize HSA and get the tax benefit" work? Do you mean that you reduced or eliminated your company deductions for United Way in favor of higher HSA contributions?

Batching charitable contributions is smart, and will still be smart under the proposed plan in certain situations.

Yes, I will reduce or eliminate United Way contributions, in favor of higher (tax deferred) HSA contributions. Assuming the proposed changes stay as they are through both houses of congress.

 

[FIRE'd@51]

Don't see the issue. If the new standard deduction is bigger than your itemized deductions, then taking the standard deduction is a better deal. If itemized still exceed new standard, you can still take itemized.

In Virginia, the standard deduction for a married couple filing a joint return is only 6K. Suppose you had 18K of Federal itemized deductions, significantly below the new 24K standard deduction, but well above the current 12.7K standard deduction. If you take the 24K standard deduction on your Federal return, you would have to take the standard deduction on the state return, which would mean you only get the 6K standard deduction rather than 18K of itemized deductions. This would raise your Virginia taxable income by 12K, significantly increasing your state income tax.

 

[pb4uski]

Interesting.... I suspect that you will still be allowed to itemize deductions even if they are less than your standard deduction like you can now in situations like that.

 

[Danmar]

This accomplishes the same as an estate tax, as either way some tax is paid on the holdings during the transfer to the inheriting people.

Agree. But it’s a cap gain tax rather than estate tax. So you have to have actually made a gain to pay any tax. If they eliminate the estate tax and allow the bump up, would there be a deemed disposition at death and resulting gains tax owing at death?

 

[explanade]

Everything that I have seen indicates that it is generaly effective 1/1/18.

I heard that a lot of the tax cut effects for individuals is front-loaded and by year 10, a median household earning $59k would pay more, after initially starting out with a cut.

The corporate tax cuts are permanent though. Corporations are reporting blowout earnings and their balance sheets are flush with cash but they're apparently suffering from the high statutory rate of 35%, which most corporations do not pay.

 

[GrayHare]

Since, unlike individuals, corporations are taxed on profit rather than earnings, the effective tax rate for corporations is already below 35%, in some cases way below 35%. Dropping the rate to 20% may not have as much impact as would appear at first glance.

 

[gerntz]

Don't understand the question.

Why would you use a DAF vs. gifting as part of RMD if the latter is an option?

 

[gerntz]

There is the possibility of increasing one's *state* income tax.

In some states (PA is one), items can be deducted on the state return that are not deductible on the Federal return. But (in some states) you can only itemize on the state return if you itemized on the federal return.

So if you end up taking the new, higher, standard deduction on the federal return you may be ineligible to claim some deductions on your state return.

Thanks. Then why wouldn't one use whichever gives the combined lowest Fed & state taxes? I mean if itemizing both gives lower taxes but the Fed itemizations are less than the standard deduction, still itemize. I'm presuming you will be given the choice on Fed to take the lower deductions.

 

[gerntz]

In Virginia, the standard deduction for a married couple filing a joint return is only 6K. Suppose you had 18K of Federal itemized deductions, significantly below the new 24K standard deduction, but well above the current 12.7K standard deduction. If you take the 24K standard deduction on your Federal return, you would have to take the standard deduction on the state return, which would mean you only get the 6K standard deduction rather than 18K of itemized deductions. This would raise your Virginia taxable income by 12K, significantly increasing your state income tax.

Then itemize the Fed deductions even if below new standard $24K. I presume that will be possible.

 

[gerntz]

Interesting.... I suspect that you will still be allowed to itemize deductions even if they are less than your standard deduction like you can now in situations like that.

That's what I'm guessing too. State taxes could rise only if YOU CHOOSE the Fed standard deduction. If that means the Fed taxes rise more than the state savings, You CAN CHOOSE higher state taxes to avoid the higher Fed tax, but that's on you.

 

[audreyh1]

Why would you use a DAF vs. gifting as part of RMD if the latter is an option?

It's less complicated and it's anonymous. You don't have to keep or file any contribution records beyond the DAF donation. From a single DAF donation in one year you can create grants to multiple charities over multiple years.

For the direct gifting from IRA, you've got to get a tax records type acknowledgement from the charity, and since the check is coming from the IRA administrator you have to let them know that it's actually from you. If you gift to multiple charities it's a lot more tax paperwork.

 

[pb4uski]

I heard that a lot of the tax cut effects for individuals is front-loaded and by year 10, a median household earning $59k would pay more, after initially starting out with a cut.

The corporate tax cuts are permanent though. Corporations are reporting blowout earnings and their balance sheets are flush with cash but they're apparently suffering from the high statutory rate of 35%, which most corporations do not pay.

You heard, huh? Care to back that up with facts or some sort of citation? Even if you did "hear" it, are the sources credible or did you "hear" it at the barbershop?

The only thing that I have heard that phase out are the $300 family tax credits (see Kitces link earlier in this thread).

However, this is mitigated by an increase in the Child Tax Credit from its current $1,000 to $1,600 (though only $1,000 remains refundable for low-income individuals). In addition, the new rules provide for a new $300 credit for non-child dependents (e.g., college-aged children, or even elderly parents), and the taxpayer themselves (and his/her spouse) will each receive their own $300 “Family Flexibility Credit” as well (though both of these new $300 credits phase out after 5 years in 2023).

The main reason that most corporations don't "pay" 35% is because a lot of their earnings are in more friendly tax-jurisdictions so they "pay" the local rate and would only pay the excess of the 35% U.S. rate over the local rate if the earnings are repatriated back to the U.S. Every public company discloses a reconciliation of what they accrue to the 35% statutory rate and also disclose what they pay.

 

[cathy63]

You heard, huh? Care to back that up with facts or some sort of citation? Even if you did "hear" it, are the sources credible or did you "hear" it at the barbershop?

The only thing that I have heard that phase out are the $300 family tax credits (see Kitces link earlier in this thread).

I believe he's referring to this analysis that's been in my Google news feed today: https://medium.com/@kamin_83016/how-a-tax-cut-turns-into-a-tax-increase-960c32d1ba82

I have no prior knowledge regarding Kamin's credibility or biases, but he does show the math that leads him to arrive at this chart:

edit: Sorry, I'm not sure why that image isn't displaying correctly.

 

[Travelfreek]

I just saw a news clip of Gary Cohn announcing that this tax plan will not be effective till 2018! I hope he's right! We will have lower income in 2018. Also, being a California family, we paid $12k to state of CA in 2016 for state taxes plus $7k for property tax to our local county for a total of $19k. We also had roughly $6k in mortgage interest on $190 k house loan. We would lose ability to write off $12k in state taxes plus $8k personal exemptions. The "gain" would be with 12% income tax on up to 90k taxable income and the rest at 25%. Our AGI will be $135k in 2018 plus any IRA withdrawals we take.

 

[pb4uski]

I can't spend time digesting that Kamin article right now, but one very odd thing is that the family income doesn't increase at all for the 10 years in the analysis? and the kids never leave home? perhaps the are currently very young!

I notice that he is an academic... I doubt that he has an axe to grind.

 

[Fermion]

Just as a side note, do you find it annoying when a news article uses actual dollar figures in tax savings for someone when they want to present something as marginal but uses percentages when they want to sound drastic?

I was reading today where a person with a $75k income would only save about $84.50 per paycheck (the article assumed paid twice a month). To phrase it like that makes it sound very small.

They could have said a person with a $75k income would see a 17% decrease in the amount of federal tax owed, which sounds quite a bit better but I guess would not align with whatever point the article was trying to make.

 

[pb4uski]

....Also, being a California family, we paid $12k to state of CA in 2016 for state taxes plus $7k for property tax to our local county for a total of $19k. We also had roughly $6k in mortgage interest on $190 k house loan. We would lose ability to write off $12k in state taxes plus $8k personal exemptions. The "gain" would be with 12% income tax on up to 90k taxable income and the rest at 25%. Our AGI will be $135k in 2018 plus any IRA withdrawals we take.

And assuming no IRA withdrawals your federal tax bill will be ~$1,400 less. Add in $50,000 of IRA withdrawals and your tax bill will still be ~$1,400 less.

Your taxable income will be higher but the impact of broader brackets and lower rates and the $600 in family credits end up with a lower tax bill. With that income you'll be solidly in the 25% tax bracket under either the current or proposed tax schedules which why the addition of $50k of IRA withdrawals doesn't change the savings... your tax increase by the same amount.

Note that the above assumes all income is ordinary, if some is preferenced then the amount of savings might change. You might want to run some calculations to see the impact rather than jump to conclusions.

 

[USGrant1962]

I believe he's referring to this analysis that's been in my Google news feed today: https://medium.com/@kamin_83016/how-a-tax-cut-turns-into-a-tax-increase-960c32d1ba82

I read the article and he freezes income but inflates everything else. Then admits later that, well, there is still a tax cut (but smaller) if you inflate the income too.

So the article headline is "How a Tax Cut Turns Into A Tax Increase", but the last paragraph says if you realistically inflate gross income, "the tax cut would dissipate but not entirely disappear."

Forecasting tax impacts/policy 10 years out is nonsense anyway.

 

[RE2Boys]

For those of us with college students, there are major changes in the education benefits. For me, this was a very costly change. The use of US Savings Bonds as an educational savings vehicle has been rescinded, along with the deduction for student loan interest. I had half of my son's projected college costs in US Savings Bonds, the other half in 529 plan. I could move the money into the 529 plan, but that pushes up my AGI and with this change so late in the year, I've little wiggle room and will be running into the phase out of the interest deduction.

 

[audreyh1]

I just saw a news clip of Gary Cohn announcing that this tax plan will not be effective till 2018! I hope he's right! We will have lower income in 2018. Also, being a California family, we paid $12k to state of CA in 2016 for state taxes plus $7k for property tax to our local county for a total of $19k. We also had roughly $6k in mortgage interest on $190 k house loan. We would lose ability to write off $12k in state taxes plus $8k personal exemptions. The "gain" would be with 12% income tax on up to 90k taxable income and the rest at 25%. Our AGI will be $135k in 2018 plus any IRA withdrawals we take.

The bill explicitly states the new tax proposals are effective in 2018. Or after Dec 31, 2023 for estate taxes.

 

[laurence]

I go away for a day and two softball games and I'm way behind on my reading! My initial analysis was this puts the hurt on middle and upper middle income households to help the people on either side. [Mod Edit]. I just dropped 70k to build a pool/firepit/hardscape backyard remodel so losing another 5-10k is annoying, but we'll adjust. Elimination of AMT might help us, but I just went part time a year ago so we may have dropped out of that category already.

 

[explanade]

You heard, huh? Care to back that up with facts or some sort of citation? Even if you did "hear" it, are the sources credible or did you "hear" it at the barbershop?

The only thing that I have heard that phase out are the $300 family tax credits (see Kitces link earlier in this thread).



The main reason that most corporations don't "pay" 35% is because a lot of their earnings are in more friendly tax-jurisdictions so they "pay" the local rate and would only pay the excess of the 35% U.S. rate over the local rate if the earnings are repatriated back to the U.S. Every public company discloses a reconciliation of what they accrue to the 35% statutory rate and also disclose what they pay.

Someone mentioned it on CNBC, an NYU professor apparently posted it.

Whom do you find credible? The people pushing this policy?

They're the ones claiming US corporations aren't competitive because of tax policy. They're also saying with repatriated cash, they will create more jobs and pay people more.

We're at 4.1% unemployment. Previous repatriation holidays didn't lead to more jobs or higher wages so history doesn't back these claims.

So the people making these claims, to advocate for these tax cuts, aren't terribly credible. You'd probably get more credible sources at a barber shop.

 

[skipro33]

100% of my dad's income goes to his medical expenses. He is completely medically dependent for everything from feeding to the toilet. For now, he can deduct his entire income and not pay any federal income tax because of this. He has a pension, Social Security and a VA stipend for his income. If this deduction goes away, it will cost him about $500 a month. Meaning he'll be at least $6,000 a year short on making his expenses. What's he supposed to do when his expenses now exceed his income because he's now unable to deduct his medical expenses?

 

[43210]

A reminder - this is just a bill. It still needs to

- be passed by majority vote in the House
- another tax bill needs to be written, then passed in the Senate
- the two bills need to be reconciled
- both chambers need to pass the new reconciled bill
- then it needs to be signed by POTUS.

Lots of things will change during that process - if it makes it that far.

Can I remind everyone that this is not law yet. Michael outlined the steps it needs to go through... Running through your tax calculations seems premature to me. Who knows what the final version will be. I'd rather do other things than calculate "what if" taxes on something that is several steps away from law.

Personally I enjoy looking at the "what ifs" and pre-thinking and penciling in strategies. Even if this is far from final, at least then plan is more explicit and detailed, so you have something to work with.

Now we see that parents' exemptions are being replaced by increased deduction, whereas kids' exemptions are being replaced by increasing the Child Tax Credit with a refundable and non-refundable part. I wasn't aware of that full picture before.

Year 2018 is almost here, so I like to be tax-planning by now anyway to decide when to contribute to IRAs, how to split 403/457/IRA between Trad and Roth and various other things. If recharacterization is going, I'll wait to contribute to IRAs so I can control AGI as needed.

If there are changes, I'll adjust accordingly, but it's important to think it through now, so I can quickly adapt decisions that need to be made soon.

What is clear to me now is that in my scenario, and for a wide range of plausible tax changes, the only sensible options for 403/457 contributions either to be 100% Trad or else to be 100% Roth, so I encounter a big decision fork very early in the year. I need to be ready.

 

[FIRE'd@51]

Then itemize the Fed deductions even if below new standard $24K. I presume that will be possible.

Of course! Whether you choose to itemize or not will depend on your marginal Federal tax rate vs your marginal state tax rate on the respective $ involved. The only point I was trying to make is that, for those who itemize, it is possible (likely?) that your state income tax increase will offset part of the Federal tax savings. The optimal choice in terms of minimizing your total taxes requires some additional analysis.