Tax Bills

[gayl]

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.

oh crap! So I guess it will impact me more than I thought!

BTW: What does DFA mean here? I know what it means in sports but not in this context.

Typically, a player is placed on waivers after being designated for assignment for the purpose of outrighting him to one of the club's minor league teams. A player who is outrighted to the minors is removed from the 40-man roster but is still paid according to the terms of his guaranteed contract.

 

[catotx]

Here's an article on Morningstar on the FIFO proposal

The Senate's Proposed Investment-Tax Hike Is a Flop

The author seems to think that you can isolate the tax lots by using different brokers.

 

[FIREd]

I don't think that this will affect us much.

Our income consists mainly of qualified dividends, LTCGs, and a small amount of taxable interests.
Low property taxes, low state income tax, no mortgage, no charitable donations (we funded our DAF when we were making good money and now use that fund for making donations) = we usually don't itemize anymore and the slightly higher standard deduction for a couple can only help.

The FIFO rule would be a pain though...

 

[catotx]

oh crap! So I guess it will impact me more than I thought!

BTW: What does DFA mean here? I know what it means in sports but not in this context.

It's DAF, for Donor Advised Fund.

You make a lump sum charity donation into the fund, and you can dole out the donations over the years. You take the charity deduction in the year you make the lump sum donation (up to certain limitations).

 

[gayl]

Would the FIFO only rule be extrapolated from mutual funds (of which I have none) to individual stocks & ETFs? If so I might need to harvest all losses this year instead of spreading them out

 

[catotx]

Would the FIFO only rule be extrapolated from mutual funds (of which I have none) to individual stocks & ETFs? If so I might need to harvest all losses this year instead of spreading them out

The FIFO proposal affects stocks and probably ETFs as well. For mutual funds, you still have the option of average cost basis. It's just that the specific ID method is taken away.

 

[W2R]

I don't think that this will affect us much.

Our income consists mainly of qualified dividends, LTCGs, and a small amount of taxable interests.
Low property taxes, low state income tax, no mortgage, no charitable donations (we funded our DAF when we were making good money and now use that fund for making donations) = we usually don't itemize anymore and the slightly higher standard deduction for a couple can only help.[...]

This is what I am thinking, too. I never itemize any more, and hopefully the higher ($12K) standard deduction for me as a single person will lower my taxes. It's hard to tell for sure until I do my taxes but I am optimistic.

Whatever they are, I'll pay them as usual. As a retiree, my taxes have been surprisingly low thus far compared to the rates I used in my retirement planning years ago.

 

[pb4uski]

Here's an article on Morningstar on the FIFO proposal

The Senate's Proposed Investment-Tax Hike Is a Flop

The author seems to think that you can isolate the tax lots by using different brokers.

IMO the author is wrong because the FIFO rule will apply to the taxpayer, not to each brokerage account that the taxpayer owns. So if a taxpayer owns 100 shares of Apple bought at different times over the years and sells 100 shares, the gain will be based on the earliest bought 100 shares, even if the sale is from the most recently established brokerage.

However, it will indeed be harder for the IRS to find people who are cheating the system by reporting what the broker sends then rather than calculating their proper basis and gain as the law requires.... however, if the IRS audits you and you have been cheating, at the least they will change your returns and assess penalties and interest... at worst, if there is a consistent pattern that leads them to believe that you did this intentionally, the consequences could be more dire... possible with charges of tax fraud since it is the taxpayer's responsibility to file a return consistent with the law (irrespective of what their brokers provide to them). Just my 2 cents.

 

[audreyh1]

I don't think that this will affect us much.

Our income consists mainly of qualified dividends, LTCGs, and a small amount of taxable interests.
Low property taxes, low state income tax, no mortgage, no charitable donations (we funded our DAF when we were making good money and now use that fund for making donations) = we usually don't itemize anymore and the slightly higher standard deduction for a couple can only help.

The FIFO rule would be a pain though...

Don’t you ever rebalance? If you never sell shares it doesn’t affect you.

 

[audreyh1]

The FIFO proposal affects stocks and probably ETFs as well. For mutual funds, you still have the option of average cost basis. It's just that the specific ID method is taken away.

Definitely affects ETFs since they are traded like stocks.

 

[audreyh1]

Would the FIFO only rule be extrapolated from mutual funds (of which I have none) to individual stocks & ETFs? If so I might need to harvest all losses this year instead of spreading them out

It’s totally affects stocks and ETFs. If you have shares to tax lost harvest, you might want to do that this year.

 

[43210]

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.

I don't understand how you came to that conclusion. It wasn't my understanding that the aggregate limit (for 401k/403b & 457) was removed, but that's only due to lack of seeing it in the news (searching internet for that info).

 

[musher]

So if a taxpayer owns 100 shares of Apple bought at different times over the years and sells 100 shares, the gain will be based on the earliest bought 100 shares, even if the sale is from the most recently established brokerage.

Which effectively destroys cost basis tracking.

If I sell shares and they are taxed at a cost basis different than their real cost basis, my next sale will also need to be done at a cost basis different than the one that is tracked for that next lot.

 

[FIREd]

Don’t you ever rebalance? If you never sell shares it doesn’t affect you.

Yes, I generate LTCGs when I do rebalance. It is my understanding that the taxation of LTCGs won't change. I also have the option to rebalance my portfolio within my roth IRA to avoid generating taxable income if need be.

 

[LOL!]

Would the FIFO only rule be extrapolated from mutual funds (of which I have none) to individual stocks & ETFs? If so I might need to harvest all losses this year instead of spreading them out

I harvest all losses each year regardless. I don't understand why one would want to spread them out and have a chance of them going away.

 

[kjpliny]

I don't understand how you came to that conclusion. It wasn't my understanding that the aggregate limit (for 401k/403b & 457) was removed, but that's only due to lack of seeing it in the news (searching internet for that info).

The bill that passed yesterday is here (see page 284):
https://www.wsj.com/public/resources/documents/SENATETAXBILL12012017.pdf

The chairman's mark, which is where the aggregate limit across plans first appeared (see page 179) aka "The Hatch Amendment", apparently didn't make it into the bill that passed:

https://www.finance.senate.gov/imo/media/doc/JCX-51-17 SFC Markup 11-9.pdf

The bill which was after the Chairman's Mark, but before the final passed bill was this one:
https://www.taxreformandtransition....29/2017/11/Senate-Navigator-Text-to-Floor.pdf

You can see in the same section as the final bill that the 457 aggregate limits are no longer there.

Unless someone can show a passed bill which includes the wording in the hatch amendment, I don't see any evidence that the aggregate limits made it into a passed bill.

 

[audreyh1]

Yes, I generate LTCGs when I do rebalance. It is my understanding that the taxation of LTCGs won't change. I also have the option to rebalance my portfolio within my roth IRA to avoid generating taxable income if need be.

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?

 

[catotx]

It’s totally affects stocks and ETFs. If you have shares to tax lost harvest, you might want to do that this year.

I just read this on the Vanguard Cost Basis Elective Form

https://personal.vanguard.com/pdf/c103.pdf

Average cost– This is the default method for
conventional mutual fund shares. This method
calculates the average price for shares sold,
allocating the gains and losses evenly across
all your shares.
Average cost can be applied only to mutual funds,
stocks that have been designated for the Vanguard
Brokerage Services® dividend reinvestment program
(DRIP), and most ETFs structured as regulated
investment companies (RICs). This information
can be found in your company’s prospectus.

Notice ETFs are included as eligible for average cost basis.

 

[RunningBum]

Which effectively destroys cost basis tracking.

If I sell shares and they are taxed at a cost basis different than their real cost basis, my next sale will also need to be done at a cost basis different than the one that is tracked for that next lot.

Well, I guess you could just make sure you sell from the brokerage that has the oldest shares. They will report the correct basis for that sale, and the shares you continue to hold will still have the correct basis.
Seems like a ridiculous limitation, but it is workable, without confusion, if you sell from the correct broker.

 

[catotx]

I just checked. Vanguard provides the average cost basis option for VTI

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[JoeWras]

Well, I guess you could just make sure you sell from the brokerage that has the oldest shares. They will report the correct basis for that sale, and the shares you continue to hold will still have the correct basis.
Seems like a ridiculous limitation, but it is workable, without confusion, if you sell from the correct broker.

The IRS rule makers will have something to do.

Stuff like this is where they usually come out with specific IRS general notices.

 

[LOL!]

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.

Yes, thanks! I certainly don't pay half of my support and consider myself a dependent spouse, so maybe I qualify for a tax credit now, too.

 

[FIREd]

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?

I currently use SpecID for most investments.

Instead of focusing on Roth conversions like many here (as I don't have much in traditional IRAs), I have been diligently harvesting LTCGs in my taxable account over the past few years (at 0% whenever possible) and my cost basis is relatively high. So I can do quite a bit of rebalancing before hitting the top of the 0% bracket, even with FIFO. And as I wrote previously, I can also rebalance within my Roth IRA which is currently invested 100% in equities. So the FIFO rule would have an impact in theory, but I don't expect it to be a major hindrance for us in practice.

The ACA subsidy cliff is placing a stricter limitation on my ability to rebalance than the new tax bill would actually, as the FIFO rule might make it a bit harder to harvest gains while staying below the cutoff.

 

[meierlde]

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:

Anybody agree or disagree with this? Opinions welcome.

If you are at a time when RMDs are a requirement, if you have IRAs consider using the donate directly to the charity from the IRA mode. Giving to Charity From an IRA: What's the Best RMD Strategy? | Money
if done properly the money counts towards an RMD but does not show up on the 1040 in any form. So for folks of an age for RMDs this is the way to do charity now.

 

[43210]

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.

I don't understand how you came to that conclusion. It wasn't my understanding that the aggregate limit (for 401k/403b & 457) was removed, but that's only due to lack of seeing it in the news (searching internet for that info).

The bill that passed yesterday is here (see page 284):
https://www.wsj.com/public/resources/documents/SENATETAXBILL12012017.pdf

The chairman's mark, which is where the aggregate limit across plans first appeared (see page 179) aka "The Hatch Amendment", apparently didn't make it into the bill that passed:

https://www.finance.senate.gov/imo/media/doc/JCX-51-17 SFC Markup 11-9.pdf

The bill which was after the Chairman's Mark, but before the final passed bill was this one:
https://www.taxreformandtransition....29/2017/11/Senate-Navigator-Text-to-Floor.pdf

You can see in the same section as the final bill that the 457 aggregate limits are no longer there.

Unless someone can show a passed bill which includes the wording in the hatch amendment, I don't see any evidence that the aggregate limits made it into a passed bill.

Okay, I definitely see your point.

As of the "11.14.17 Chairman's Modified Mark" some of the proposed 457b changes were stricken, from the "11.9.17 Chairman's Mark_SENATE", but the 403/457 aggregate limits were not stricken at that time, and I'd found this
http://www.ntsa-net.org/News/Browse-Topics/Technical-Competence/457-Plans/pfcatid/281
http://www.ntsa-net.org/News/Browse.../Tax-Reform-Moves-Forward-in-House-and-Senate
from a website that seems focused on 457b plans, so I'd expect they'd soon say what the result was. I was expecting to see news on this one way or another, but I guess it's one those things that doesn't affect many people.

But it certainly seems you're right that it's not in the Senate bill (nor House).