New (US) tax plan

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jennypenny
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New (US) tax plan

Post by jennypenny »

There's only a week to figure out things that are worth doing in 2017. Is anyone paying anything early like RE taxes or a mortgage payment? Giving more to charity this year?*

We usually do a lot of year-end medical appointments the week between christmas and new year's, but I'm considering moving them to January. I'm trying to figure out if it's better to have a small deduction this year but off of a higher rate, or have a bigger deduction next year off of a smaller rate. I'm also thinking of paying taxes early. If I do that, I'll leave the medical stuff in this year since then we might be better off with the standard deduction next year. I feel like I'm fretting too much over optimizing this, but if we end up saving a thousand or two it seems worth it.

some articles ...
https://www.bloomberg.com/amp/news/arti ... -right-now
https://www.nytimes.com/interactive/201 ... hacks.html


*another benefit of ERE/FU$ is having options in this kind of situation :)

George the original one
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Re: New (US) tax plan

Post by George the original one »

Being retired with low income, there's no changes that significantly affect me. Losing the SALT deduction is potentially the biggest issue and I can't prepay, so... <poof>.

Fish
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Re: New (US) tax plan

Post by Fish »

Here's a summary of the changes: https://www.bloomberg.com/news/articles ... rhaul-plan

We don't itemize our deductions, so no change in behavior for us. What I am curious about is with the elimination of personal exemptions, whether there will still be a mechanism in the W-4 form to help adjust tax withholding so that it is closer to the actual tax bill. The current system is very clunky and requires me to go to IRS Publication 15 to look up the tables for tax withholding so I can determine the best filing status and exemption combination that gets the correct amount of tax withheld.

OTCW
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Re: New (US) tax plan

Post by OTCW »

Fish wrote:
Wed Dec 20, 2017 10:04 am
Here's a summary of the changes: https://www.bloomberg.com/news/articles ... rhaul-plan

We don't itemize our deductions, so no change in behavior for us. What I am curious about is with the elimination of personal exemptions, whether there will still be a mechanism in the W-4 form to help adjust tax withholding so that it is closer to the actual tax bill. The current system is very clunky and requires me to go to IRS Publication 15 to look up the tables for tax withholding so I can determine the best filing status and exemption combination that gets the correct amount of tax withheld.
Very good question. I usually try to project and just have an additional amount per paycheck withheld to cover the correct differential. I don't worry about the exemptions being correct.

If you are the other way and are overpaying, not sure how to handle that without adjusting exemptions.

Riggerjack
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Re: New (US) tax plan

Post by Riggerjack »

So I have mainly just ignored this, assuming it would fail. Then yesterday I had a friend ask what I thought, and I had nothing. So I looked for some kind of news article to tell me all about it. I should have known better.

After a few articles, and a few clicks at the tax policy institute, it was clear that all the summaries we're going to avoid anything specific, and shout about proposed changes in the examples they made up, for the purpose of having something to shout about.

Eventually, I just went to the Wikipedia page for the bill. It doesn't look that bad. Not ideal, not the way I'd do it, and not done with the intent to make the current party in power stay that way, from what I can tell. It looks like I, and most folks I know, won't change the tax bill much. Lower rates, and lower deductions seems reasonable.

If your mortgage is over 750k, and your mortgage interest deductions are limited, I can deal with that. Lower corporate tax rates are a good idea. Nobody with a clue would even complain about this, but we do have lots of folks who are happy to have an opinion, regardless of what they know. SALT limited to 10k seems reasonable.

There's some issue about a trillion or so of deficit per decade, but I am unclear if that is a projected deficit, which would be an improvement, or an additional trillion in deficit, which is just a sign that math education was just a failure, and we sould replace arithmetic training with "like symbols" and emoji design.

Long story is that this takes effect next year, the information is... sketchy. I would deal with this year as always, and then next year, I'll read up on the changes in the early spring. But this doesn't seem to be a huge change for me.

jacob
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Re: New (US) tax plan

Post by jacob »

@Riggerjack - Well, in the strange math of political economics, where words don't really mean what they normally mean, the "cost" of the plan is defined as the difference between current tax law and the new tax law, IOW, the "cost" is the loss of tax revenue from adopting a different tax revenue scheme. Since the cost is a loss and we've been running a deficit with the exception of a couple of years during end-stage dotcom/Clinton, this will increase the total debt (which is mostly owed to China and Japan). We're currently at negative 21T(*) ... and making it more negative all the time.

(*) I'm not counting all the political promises (which are subject to change). Just outstanding naked financial debt (treasuries, which would require a default resulting in rearranging the financial world order which is harder to change => change is more consequential).

Depending on which economic authority, you ask (CBO, Wharton, Tax think tanks ...), the "naked debt cost" or nominal cost is ~$1.5-2.0T => increased deficit by 2027 cf leaving things unchanged. Since a trillion is a weird number (which also might confuse some Europeans due to that whole million, milliard, billion, trilliard thing), lets keep everything in millions, so 1,500,000-2,000,000 million (so twelve zeros total) USD more in debt than otherwise. That's the cost per decade, so between now and 2027 when I'll be 52 yo. All these fine institutions automagically presume that there will be continued economic growth that will positively counteract the total cost because as the economy is growing, more tax revenue will be brought in, so the eventual/net cost is lower than the gross cost. (Also note that the current plan comes with sunset provisions that kick in several years from now so they can be blamed on the next administration.)

Once you add in the "growth correction" and ask the same institutions, you end up with cost numbers between 1,000,000 and 1,400,000M per decade.

This, then, will make the 2027 debt tally about 1-1.5T higher than business as usual ... so ~5% difference relative to current debt. Relatively speaking, it's not a bigly deal in the grand scheme of things.

The reigning/prevailing politicians seem to have developed some collective amnesia when it comes to being categorically opposed to deficit spending (recent memories from last year when the otherParty was in power) and quickly convinced themselves that the growth effect will be 4x higher than what economists think, so that the net result will be near zero. Nice! Conversely, opposing votes seem to have developed a sudden aversion towards deficit spending.

Curses ... I think I sound entirely too cynical now... please ignore.

The US population is 323M humans, so the simple division translates into $309--433 (four hundred bucks ...) in increased government debt per year per person on average relative to the current plan ... which of course already is increasing that number with the current plan. Now it's just a bit faster down the hole. IOW, this is a mere tweak corresponding to about 1/3--1/2 of what the average American spends on xmas ... probably by overdrawing their credit cards anyway, so "plus ca change", this won't change much and the financial engineering is ironically identical. Realistically, the new tax plan is as if everybody upgraded to the newest 58"+ TV from Samsung et al. each year on credit. An attractive proposition in any polling, I'm sure.

Also, the "Fed" (federal reserve) is independently going for a long run (for them, long is more than 3 years out) funds rate at 2.8-3.0%/year ... so this refund party will be funded at an eventual cost of "only" $130/year/American in additional interest costs. Recall, it's only a 5% difference relatively to what we'd already be paying if the funds rate actually goes that high!

@OP/all - To me this may be interesting because it might mean that those of us who mostly collect money by sitting on our asses may benefit from restructuring our business arrangements. That's on top of the already generous deductions and favorable treatment of people who get their income from being prudent savers or generally wealthy already. We've (ERE HQ) been sitting between the 15% and 25% bracket (there's not much in the 25% at our AGI point due to the many (5!) tax deferred accounts we max out ... so that whole pass-through deal seems to be a wash for me---something that I'll look into but isn't scrambling to do. We're nowhere near being able to itemize and if this goes through Schedule-A will never happen for us.

You can all be damn well sure that whatever tax savings I might obtain WILL NOT translate into additional spending on increasingly larger TV screens. Instead, it'll go right into the stratosphere along with the rest of my CAPE10>30 assets #equitylord :roll:

This whole folksy "qui bono"-narrative reminds me of watching a quiz show or any person who goes momentarily happy from winning $50,000 or $200 ... on a lottery ticket. I'm probably turning into a NW snob .. but 3-5 figures just don't excite me all that much anymore. Six, yeah ... but that'll probably pass too once I start focusing on seven or eight.

Color me not impressed. The average American could and would make a greater difference for their personal finances by opening an IRA and maxing it out. I realize that most people would need to make some tough (for them) decisions to do so, but my point is that option has been there for a long time.

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jennypenny
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Re: New (US) tax plan

Post by jennypenny »

Yeah, just a little cynical. :P

I'm going to have to learn how to maximize the new tax code anyway so I might as well do it now and save what I can.

FYI ... The new tax tables for withholding will be put in February.

Riggerjack
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Re: New (US) tax plan

Post by Riggerjack »

Yeah.

I'm trying to remember that I've sworn off debt/deficit hawk status. We have been hearing variations on "deficits don't matter" from the party in power since at least the Reagan years, regardless of which party that is. And the party out of power is suddenly concerned.

Neither party is EVER going to balance the budget, and there are risks for me there. So I have come up with a plan to deal with it, and try to remember not to stress over it.

Nobody has any real interest in chasing down the poor to separate them from their last dime for taxes. Just finding a few very public examples to keep up the fear of the IRS, and keep the middle class from any fantasy of freedom. Gotta keep the sheep in the pasture until time to shear.

So, my goal here is to move from the pasture, to the hillside, and pretend I am a mountain goat. That, for me, is the essence of ERE.

I try to remember that focusing on tax optimization helps that. Focusing on fiscal policy, while appealing to my contrarIan nature, does not.

I have been itemizing for about 15 years, and it was down to being only a slight advantage. It looks like this plan will simplify my taxes, as itemizing won't be worth it.

That seems like a booby prize for having the Cheeto in Chief for 4 years. But I will take it, and focus on my own goals.

IlliniDave
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Re: New (US) tax plan

Post by IlliniDave »

Nothing for me to do (can't prepay property taxes in the relevant states). After this year I probably won't be itemizing. I don't spend money just to get tax breaks. The calculator linked the other day implies the changes will be fairly slight for me. In line with what Jacob said above, my savings won't hit the consumption side of the economy anytime soon, it'll just get pitchforked into the stash. But the youngsters at work were already planning how they will spend their newfound money next year.

Lucky C
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Re: New (US) tax plan

Post by Lucky C »

Seems like the standard deduction bump to $24k would help the Roth conversion ladder strategy for a newly FI household who wouldn't have had many deductions.

If we're only getting say $5k in investment income from our taxable accounts, with lots of our investments tied up in retirement accounts, we can convert $24k-$5k = $19k of traditional IRA funds to Roth IRA for the year tax free. That would be enough for our needs but we may want to do a little more each year at only 10% tax while the current tax law lasts.

This should help build up our withdrawable Roth contributions faster / with lower taxes. I just hope I'm understanding all this properly...?

taemoo
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Re: New (US) tax plan

Post by taemoo »

Lucky C wrote:
Wed Dec 20, 2017 7:23 pm
If we're only getting say $5k in investment income from our taxable accounts, with lotwe can convert $24k-$5k = $19k of traditional IRA funds to Roth IRA for the year tax free.
If the 5k investment income is from dividends or capital gains and you plan to be in the 10% bracket, couldn't you convert all of 24k tax free?

Dream of Freedom
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Re: New (US) tax plan

Post by Dream of Freedom »

"Current law: The U.S. taxes multinationals on their global earnings at the corporate rate of 35 percent, but allows them to defer taxes on those foreign earnings until they bring them back to the U.S., or “repatriate” them.

Proposed: U.S. companies’ overseas income held as cash would be subject to a 15.5 percent rate, while non-cash holdings would face an 8 percent rate. Companies can make the payments in eight annual installments."

WOW! They really want them to repatriate that cash. I thought they would just give them a tax holiday for bringing the cash back, but this is a little more aggressive, aimed at fixing the the problem long term. I like it.

Farm_or
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Re: New (US) tax plan

Post by Farm_or »

Same old:
Democrats= tax + spend
Republicans= don't tax + spend
= unfathomable debt

We need a balanced budget amendment + term limits, and let's do tort reform too!

Same old: the middle class pays more than their fair share.

IlliniDave
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Re: New (US) tax plan

Post by IlliniDave »

Farm_or wrote:
Thu Dec 21, 2017 8:08 am

Same old: the middle class pays more than their fair share.
By my quick math, a couple with 3 kids earning $72K will have zero federal tax liability. After the standard deductible they'll have 48K taxable income, which for simplicity assume all is at the at the 12% rate meaning $5,760 owed in income tax less the $6,000 in child tax credit. So this doesn't seem to "shift the burden" to at least mid-middle class families. People like me on the other end (upper half middle class single filers) pay a pretty significant amount of tax even after maximizing tax-advantaged savings, and I expect maybe a token reduction in my taxes but mostly it's a wash.

The way things are, it's really difficult to do anything with federal income tax in this country (in either direction) that does not disproportionately affect the very wealthy. The red shirts are gambling that the people who have shown themselves adept at creating wealth (those that run successful business enterprises primarily) will do the mutual self-interest thing and use the additional after-tax revenue to increase overall economic growth. Time will tell whether it was a good gamble or bad. If the super wealthy simply start gilding their toilet paper or filling shells with diamonds for an afternoon of trap shooting, then obviously it was a bad move. The only other real choice is to go back to the pre-WWII model and really soak the wealthy. I wasn't alive then but from relatives that were, I've heard that was not the best of times economically for the "little guy" either.

I do get a smile watching all the Blue Shirts suddenly become deficit hawks while the Red Shirts just sort of hand wave at it. Not much different than immigration where even in the Clinton era the Blue Shirts staked the anti-immigration turf and the Red Shirts took the pro-. That's why I tend to believe at the core it's all about shirt color and issues are adopted and discarded at the service of the Great Dye War.

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Chris
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Re: New (US) tax plan

Post by Chris »

jennypenny wrote:
Wed Dec 20, 2017 7:40 am
Is anyone paying anything early like RE taxes or a mortgage payment? Giving more to charity this year?*
I'm front-loading charitable contributions via a donor-advised fund, since it will be "worth it" from a tax perspective in 2017. I contributed appreciated stock instead of cash to eliminate future capital gains tax.

Lucky C
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Re: New (US) tax plan

Post by Lucky C »

taemoo wrote:
Thu Dec 21, 2017 1:57 am
If the 5k investment income is from dividends or capital gains and you plan to be in the 10% bracket, couldn't you convert all of 24k tax free?
The conversion from Traditional to Roth IRA is taxable income since it wasn't previously taxed. If we had 5k dividend income, I believe anything above 19k traditional to Roth conversion would be taxed at 10%, up to the next ~$19k at which point the 15% bracket would kick in. For example $5k dividends + $24k conversion would cost us $500 in federal taxes.

Though this isn't that big of a boost as I initially thought. Now we would get the $24k standard deduction with no exemptions, whereas before we would get the $12.6k standard deduction plus $8.1k personal exemptions for my wife and I, a total of $20.7k... $24k of income this year in this simple example would result in tax of $330.

George the original one
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Re: New (US) tax plan

Post by George the original one »

Farm_or wrote:
Thu Dec 21, 2017 8:08 am
Same old:
Democrats= tax + spend
Republicans= don't tax + spend
= unfathomable debt

We need a balanced budget amendment + term limits, and let's do tort reform too!

Same old: the middle class pays more than their fair share.
Yup.

Trump administration gets their tax bill passed, thus guaranteeing reduced federal income, then introduces spending bills for "The Wall" and "TSA" and "Infrastructure" and "Military Refurbishment" and "Moon/Mars Mission" which increases spending. You can then expect bills to eliminate spending on "Public Land", "Health", "Environment", "Public Education", and "Social Programs" because of the excuse "oh, yeah, we don't have to trim the budget".

Meanwhile, Ivanka Trump is touting how the tax bill will reduce the federal deficit because, yeah, the federal income is lower now.

And nobody mentions how the feds trimming programs affects the states...

The Old Man
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Re: New (US) tax plan

Post by The Old Man »

I am popping the champagne corks. I couldn't have timed it better. Next year I will be beginning my t-IRA->Roth IRA conversions. Right at the time when tax rates go down and will stay down for eight years. When the lower tax rates sunset would be when I complete the conversions. Yippee!

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jennypenny
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Re: New (US) tax plan

Post by jennypenny »

good article describing the changes ... https://www.kitces.com/blog/final-gop-t ... trategies/

specifically on non-sole proprietor business income ... https://www.watsoncpagroup.com/SubS.pdf

If you decide to switch your side hustle from an SP to an LLC because of the tax changes, you have two months to do it. If you want all of 2018's income to count, you have to switch by the end of February.

note: this is my personal understanding, I'm not an accountant, blah blah

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jennypenny
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Re: New (US) tax plan

Post by jennypenny »

Searchable copy of the new tax bill ... https://www.scribd.com/document/3672840 ... l-tax-bill

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