New (US) tax plan

[BRUTE]

so should the new tax cut start showing up in paychecks already, or only on April 15th of next year?

[IlliniDave]

Unclear to me Brute, I just got a check on 2/1, but the pay period was all in January. I had changed my 401 deductions which obfuscated things, but a first-order check says they didn't use the new tax tables. My understanding is that withholding is supposed to change starting this month. If my last check was based on the new withholding, then whatever the change is is in the noise for me.

[jennypenny]

More extensions included in the budget deal legislation ... http://prime-policy.com/wp-content/uplo ... asures.pdf

A nice $500 surprise for me.

[Mister Imperceptible]

Apologies if this is answered elsewhere.

I’m beyond any income-based subsidies for marketplace health care plans. Also, I am a consultant so employer-provided insurance is not available.

As I understand it, the individual mandate was still in effect for 2018. I have an exemption because my 2017 provider (with whom my premium was under $200 a month!) went defunct and so I’m eligible to sign up by February 15 for a plan starting March 2.

My state of residence has only one provider who offers an HSA-eligible plan. The Bronze plan is $378 a month and the Silver plan is $472. Would there be any advantages whatsoever from getting the Silver plan from a tax/subsidy perspective? (Note: Single male, 31, no dependents.)

A woman at work recommends a faith-based plan, but it seems duplicitous for someone like me to go along with something like that. Have any high income folks here unqualified for subsidies been able to go without paying the individual mandate?

[Riggerjack]

I ran into this buried in the comments section of SSC, and rather than linking, and letting people try to find one of hundreds of comments, I will paste it here. If you are offended by large quotes, feel free to skip this.

mrjeremyfade says:
March 18, 2018 at 12:36 pm ~new~
This is going to be a long post on my experience with the recent tax reform.

I work in finance for a small global company and needed to understand how the tax reform legislation would affect us. I read the all high status financial press, but the information provided was very low quality for my needs. I found that one big 4 firm and two law firms had good quality material online that gave me the information I needed to have productive discussions with our accounting firm and make informed decisions for our company.

Between my research online and the need to explain things to the boss, owners and other stakeholders, I began to see one of the biggest impacts of the tax reform was the destruction of tax shelters used by many US tech companies. Now, here is a claim, I am less certain about: some firms have been and will be net losers by their use of creative tax strategies in the past. I expected to see this idea expressed more widely or at least investigated.

SSC introduced me to the concept of Gell-Mann amnesia. I’ve felt this very keenly during the discussions of tax reform in the media and in business reporting generally since then. This feeling that a salient point has been missed is part of my motivation for this post. Also, the effort posts by ADBG, being welcomed, even if possibly strange to a mostly STEM group, have inspired me.

This is not about whether the tax reform was good or bad. It’s about what it means to a good chunk of the corporate world, mainly, but not entirely tech companies.

Imagine a thousand tall towers all collapsing simultaneously. Imagine the noise, the pain, the horror of incomprehension, seeing dimly through the dust, ears ringing. That’s what was felt by a subset of tax lawyers, CFOs, CEOs and accounting firms all around the world. The US tax reform did have an impact on individuals, sure, but It was also about blowing up an enormous edifice of tax avoidance. There may not be many of us, but I feel this has been largely overlooked in the media.

For many years, companies have been placing their IP, booking their sales and paying themselves transfer prices to low tax jurisdictions to avoid US taxes. And yet all this was and is illegal unless:
1) There was a real underlying business purpose to it.
2) The business purpose was not merely to reduce taxes.
Sometimes only the thinnest veneer of business purpose was invoked. Then you would get a law firm to write an Opinion Letter which said what you were doing was legal because reasons and you could rely on this Opinion Letter to stay out of jail. Nevertheless, setting up the correct legal framework to avoid taxes was expensive. (A few years ago someone quoted me a price of about $2million to set up something like that for where I worked. I never did it though.)

And now none of this tax strategy works. It’s all over.

US corporate tax at 35% was among the highest in the world, even though effective rates were lower due to tax strategies. The high rate encouraged tax avoidance strategies, that for many companies was borderline (ref. the trouble Caterpillar is in now), and also had significant costs. This incentivized spending that had no real productive purpose. And it encouraged inversions, i.e. moving corporate headquarters out of the US into another tax jurisdiction.
The US also had a weird worldwide system where all a company’s income was taxed together. However, if a foreign subsidiary of a US company kept their profits, those profits were not taxed. The rules here were complex. To highly simplify, if a company kept their foreign profits overseas they would not pay US tax on those profits. The dominant tax avoidance strategy used by US companies involved creating profits in foreign subsidiaries, creatively.

The thing is, these shelters often don’t last forever. Major tax reforms don’t happen often, but they do clear out many abusive shelters.

As a historical example, do you recall seeing video of buildings in Grand Cayman where there are literally thousands of companies registered there? That was the great tax evasion effort of a couple generations ago. Then the application of the rules 1) & 2) destroyed that tax strategy. Corporations could not point to an underlying business reason to have their investment portfolios domiciled in Grand Cayman as opposed to anywhere else. There have been many other geographically based tax avoidance strategies that were eventually blown up by European or US regulators, e.g. Jersey Islands, Malta, Cyprus. And others.

Caterpillar put a formal sales office in Geneva. Many others created profits in Ireland where they had a 12% tax to domicile their IP. Other countries were used as well. These countries had a lower tax rate than the US 35% and as long as they didn’t repatriate profits technically, they had no US tax, even though the US was, in theory taxing all profits worldwide at 35%. These companies’ foreign subsidiaries creatively created foreign profits could then be deposited in a US bank, which could be used as collateral for the parent company. Eventually, this tax avoidance strategy started to become embarrassing to US authorities.

Do I sound cynical? I used to work for Very Big Corporation that exploited tax differences in how derivatives were treated between jurisdictions. As a hypothetical example, let’s say you set up an FX interest rate swap between subsidiaries in two different jurisdictions that treat hedge swaps differently upon termination. Then wait. And wait. Interest rates or FX rates will change. The swap, which was entered into at a zero value, i.e. market rate, will have changed in value. Later, you can terminate the swap or the underlying instrument being hedged and get tax benefits from differential treatment. It’s really complicated, but, If you do this on a scale of billions of notional value….. I worked at one VBC that did this to reduce tax and save on the time value of money without hurting reported profits at all and at another VBC that did something similar to inflate reported profits.

OK. That was a tangent. This is still going on. These strategies can be durable and legal because different jurisdictions can have long lasting, legitimate interests in treating financial instruments differently. It’s just you have to be a VBC to take advantage of it.

Back to US corporate tax. A lot of companies were able to get their effective tax rates down into the low teens. Using the embarrassing strategy I described. The CBO estimated the average marginal rate was 18.6%, others have estimated more like 27%, the truth is nobody really knows.

With the recent tax reform the corporate rate was reduced to 21% from 35%. Kinda average for the developed world, but fabulous for domestic companies that didn’t have good tax strategies available to them.

With the recent tax reform companies have to pay tax, 15.5% on all the profits they previously sheltered from US tax (8% if you invested in real property). That’s why you see stories of companies like Apple paying $38 billion dollars in tax from prior profits of foreign subsidiaries.

And the expensive tax shelters they set up have to keep running. They can’t just shut them down because of 1) and 2) above. If they did just shut them down, it would be close to an admission of guilt for tax fraud. I find this both weird and sort of beautiful.

There has been some bad journalism about this, even in the high status financial press.

Several stories about corporate quarterly earnings calls have featured CEOs explaining that their effective tax rates are going UP, even though the tax rate was lowered, because specific shelters don’t work anymore. Then a journalist asks something like, “so will you shut down the operation in Ireland?” The CEO responds, “No, Ireland is an important part of our business.” The stories never note that the CEO has to say that or the CEO would be almost admitting to fraud.

Eventually, the tax strategies that are now an expensive waste, can be unwound. You have to let enough time go by to let them get “old and cold.” After a couple/three years a company can simply be assumed to be changing business strategy.

This was one of the open threads, so there is more there.
http://slatestarcodex.com/2018/03/18/op ... ent-610907

[jennypenny]

OK, finally finished my 2017 taxes. One thing I absolutely hate about the whole side hustle/multiple income stream part of ERE is that the taxes are so cumbersome. We also diversify our holdings geographically which makes it even worse. Anyway ...

After finishing the taxes, I usually go through the current year and make sure I'm all set up and keeping everything I need. (I still live by paper copies of everything and keep duplicates just for the tax file.) Is there anything different about this year with the tax change? Is anyone doing anything differently in their record keeping?

Has anyone lowered what they are paying in estimated taxes? I usually only ballpark it because I can't be bothered with the quarterly bookkeeping, but after I did March it occurred to me that I might have overpaid.


The first candidate who utters the phrase 'flat tax' -- even a progressive one -- will get my vote regardless of shirt color. It's somewhat satisfying to play the game and manage our taxes as effectively as possible. Still ... it's hours and hours (and HOURS) of my life that I'll never get back.

[jacob]

My 2018 ES is lower but that has probably more to do with the CNBC bump I received in 2016 which caused a penalty(*) in 2017 as well as the resulting higher ES in 2017. Since my ES for 2018 is based on 2017 (which was a normal book sale year), they're lower. I don't know if this is due to the new tax plan (but see Paul Ryan comment below).

(*) Just a few bucks but I was still highly annoyed!

Politics: I did note (when looking at the pro HRB software (was looking over DW's shoulder) that it had a disclaimer that all the ES projections were still subject to change at any point. Consider that the cost of the new tax plan is about $400-450 in extra treasury borrowing/person/per year---that has to show up somewhere. Kinda like taking a home-equity loan and counting it as income. Yay! As Paul Ryan tweeted for a few hours before he wisely deleted it again, his secretary got an extra $1.5 per week after [new] taxes. Thus I expect to get somewhat more since my wealth structure mimics his donors moreso than his secretary.

Practice: Back when I didn't rely on DW(now tax-professional) for my ES, I would take my marginal tax bracket for the fed+SS+Medi* ... and just multiply that percentage with my earnings since last ES quarter ... same for the state bracket. That was anecdotally more accurate than what the fancy pro-software offers. Best way to think of side-income is to think of it as marginal bracket income (state+fed+SS+Medi*). This also allows for easy mental calculations of your effective YMOYL living wage.

In terms of annoying stuff, most of our tax-work comes from FATCA, not schedule C.

[jennypenny]

The most annoying part of the foreign stuff for me was that I slowly sold off a position I held last year and thought I kept good records. It wasn't until I was doing the taxes that I realized everything was in Euros. I had to go back to figure out what the exchange rate was for each trade.

Maybe my issues are more user error than tax code.

[IlliniDave]

Is there anything different about this year with the tax change? Is anyone doing anything differently in their record keeping?

As far as I can tell not much is different except that for someone with a relatively simple situation like mine (salary + investment income w/very little trading, no dependents) I don't foresee itemizing in the future. In principal I probably don't have to keep track of my real estate taxes any more or other miscellaneous things that may irregularly occur because the odds of me exceeding the new standard deduction are virtually nil. I think this year my itemized deductions totaled about $10K and won't change much.

Something I can't blame on Trump/Red Shirts/Tax Plan is that my situation is about to get more complicated because on 4/29 I'll inherit an interest in a rental farm property in Illinois. Despite the tax headache having a token dab of rental real estate in the "portfolio" is probably a good thing, and renting out farm acreage comes with fewer demands than renting out developed property. Hopefully the filing threshold in Illinois will exceed the income so I don't have to file income tax in Illinois as well (property tax is a given).

I dread the day when I might have to start filing estimated taxes. I hope I can avoid it by sacrificing a bigger slice of my retirement annuity to the IRS on an ongoing basis. That's essentially what I do now, have an extra $2.5K or so taken out of my paycheck throughout the year to cover taxable investment income. Most years I get most of it back, but the cost of giving the gov't a free loan is lower to me than the headache of quarterly filing. If I wind up living in Illinois I may not be able to avoid it with state taxes since my retirement annuity wouldn't get taxed by the state. Might even get hit with it starting this year over the < $1K I'll get annually from the farm rent. I guess I'll have to bone up on Illinois tax codes/requirements prior to 30 June. What a joy that will be.

[IlliniDave]

As Paul Ryan tweeted for a few hours before he wisely deleted it again, his secretary got an extra $1.5 per week after [new] taxes.

When did Ryan make that tweet? Looking at the changes it is very hard to believe that is accurate in an apples/apples comparison unless his secretary is an outlier in some way. A lot of people who commented publicly missed (being generous there) the fact that the changes didn't take effect until sometime February (for most people anyway), and drew erroneous conclusions based on January pay stubs. Ryan had never been a candidate for sharpest tool in the shed in my view.

[jacob]

@jp - Instead of finding the exchange rate for each trade, you can alternatively use the exchange rate at EOY for ALL trades. You can choose either method but it has to be consistent.

@iDave - 20180203 .. Google "ryan secretary 1.5". Correction: it wasn't his secretary; it was a secretary at a public school in Lancaster, PA.

[jennypenny]

I should have asked first.

Looking back over the calculations, I think doing each trade separately was probably better in the end anyway. The EUR to USD went from 1.0655 to 1.23579 by the end of the year. I would have reported more than I actually earned on the earlier trades.


Where is that skill thread? I can't find it. I want to ask about this and other skills EREs tend to acquire. I want to figure out at what point it's ok to outsource (at what level of comprehension). Maybe I should start a new one.

[Kriegsspiel]

Instead of outsourcing your complicated taxes, can you just make them simple enough to do yourself?

[IlliniDave]

jacob, okay, my first February paycheck did not use the new tax tables. My understanding is that they were not available until 01 Feb, then typically employers would need time to implement them.