Author Topic: When will there be preliminary 2018 1040 info to help tax planning?  (Read 950 times)

BTDretire

  • Handlebar Stache
  • *****
  • Posts: 2053
 I want make some changes this year if it's feasable tax wise.
 When will we have enough info to start planning?
 I wonder how the 20% passthrough will help me and if I can do some ROTH conversions at the 12% rate.


  In March when I had my taxes done, my regular tax man was ill and another guy did my taxes, he was
going to take over the business. Just got a letter yesterday that my tax man passed away, and the new guy
left and not take over the business. So, all records have been transfered to another excisting company.
 I get to start with a new firm after about 15 years.

Sibley

  • Magnum Stache
  • ******
  • Posts: 2966
  • Age: 32
  • Location: Chicago, IL
Re: When will there be preliminary 2018 1040 info to help tax planning?
« Reply #1 on: June 19, 2018, 12:50:44 PM »
Well, that's not necessarily a bad thing to have a new tax firm. New people will look at things with fresh eyes. Make an appointment and go in to discuss how things will impact you, etc. If you don't like them, then you've got time now to find someone else.

terran

  • Handlebar Stache
  • *****
  • Posts: 1250
Re: When will there be preliminary 2018 1040 info to help tax planning?
« Reply #2 on: June 19, 2018, 07:59:33 PM »
To answer you other question, I think provisional drafts of tax forms tend to come out late fall (november maybe?), but with all the changes this year I wouldn't be surprised if things are delayed.

MDM

  • Walrus Stache
  • *******
  • Posts: 8158
Re: When will there be preliminary 2018 1040 info to help tax planning?
« Reply #3 on: June 19, 2018, 10:51:01 PM »
I wonder how the 20% passthrough will help me and if I can do some ROTH conversions at the 12% rate.
As far as I know no reasonably comprehensive tax calculator has implemented the 20% pass through, not least because there are so many unknowns about how it will be implemented.

Other than that, you might try your numbers in the "what if?" worksheets of TurboTax, TaxAct, etc., the case study spreadsheet, etc.

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1183
  • Age: 58
  • Location: Redmond, WA
    • Evergreen Small Business
Re: When will there be preliminary 2018 1040 info to help tax planning?
« Reply #4 on: June 20, 2018, 08:08:16 AM »
Most of my writing about Sec. 199A has been for other tax accountants and attorneys, but we actually have a lot of actionable information at my blog for taxpayers too:

How Sec. 199A Changes Investment Portfolio Construction


How Sec. 199A Changes Retirement Planning


The Sec. 199A Sec. 1031 (like kind exchange) Conundrum


The Real Estate Investor Sec. 199A Deduction


And a bunch more posts too. If you have questions about any of this sort of stuff, you can post your question here and I'll try to answer. (I'd be especially interested in answering questions that might applicable to other readers.)
My blog Evergreen Small Business
My free downloadable ebook: Thirteen Word Retirement Plan

terran

  • Handlebar Stache
  • *****
  • Posts: 1250
Re: When will there be preliminary 2018 1040 info to help tax planning?
« Reply #5 on: June 20, 2018, 08:28:02 AM »
And a bunch more posts too. If you have questions about any of this sort of stuff, you can post your question here and I'll try to answer. (I'd be especially interested in answering questions that might applicable to other readers.)

The biggest remaining question I have that I haven't been able to find an answer to (which I may have asked you about before) is how it will interact with self employed retirement plans for people with "low" income (well under the $315k service business cap) who also have plenty of non-business income? Basically, if a person will definitely get the full deduction because they're under the income cap and have enough other income to "use up" the deduction, will contributions to a SEP IRA or Solo 401k lower QBI thereby lowering the deduction? If so, would employee vs employer deductions effect things differently (perhaps employer would lower QBI and employee wouldn't)? If employee contributions do lower QBI, would it make sense to consider Roth solo 401k contributions?

Just to clarify for anyone closer to the $315k cap (something around half that for single filers) or without non-business income, there is quite a bit of information out there about how retirement plan contributions can change things significantly. In the case of someone close to the limit, tax deferred retirement plan contributions could be an even better idea since you could bring you back down below the limit, giving you back the deduction. For someone with no/little non-business income tax deferred retirement plan contributions could be a bad idea since the limit to the deduction is actually total income, not QBI, so even something that doesn't change QBI could reduce the deduction if it reduces other income.

So assuming all other things are equal and the only thing that effects the deduction for a person is the amount of QBI, will any part of a self employed retirement plan contribution reduce QBI thereby reducing the deduction? Not necessarily expecting you to have an answer to this yet as I've been trying to stay up on this, but you've definitely taken a deeper dive on this than I have, so if you've come across anything new I'd love to know. If not, then I guess I'll just have to wait and hopefully it will become clearer in the fall.

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1183
  • Age: 58
  • Location: Redmond, WA
    • Evergreen Small Business
Re: When will there be preliminary 2018 1040 info to help tax planning?
« Reply #6 on: June 20, 2018, 10:56:17 AM »
I think the retirement deductions will work the way that other similar deductions work: SE health insurance, SE taxes, etc. Let me give you an example to illustrate and then provide a handful of reasons explaining why I think what I think.

EXAMPLE:

Suppose someone married earns $100K as a sole proprietor, has a spouse that earns $24K in W-2 wages, and deducts $10K for SE health insurance and another $10K for SE taxes and then takes the standard $24K deduction.

This taxpayer's taxable income equals $80K ($100K+$24K-$24K-$10K-$10K) and this taxpayer's qualified business income (QBI) equals $100K...

But what the Sec. 199A deduction equals is lessor of 20% of the $80K or 20% of the $100K... so $16K.

Now if the taxpayer also does a $20K pension, I think that just plugs in like SE health insurance and SE taxes. I.e., it doesn't impact the QBI. But the $20K of pension drops the taxable income to $60K, so now the Sec. 199A deduction equals $12K.

In summary, pensions don't matter to a sole proprietor's or partner's QBI but because they reduce taxable income, they impact the ultimate Sec. 199A deduction.

WHY I THINK THIS:

To know for sure how these items will be treated, I think we want to see what guidance IRS provides next month. But five reasons stand behind my reasoning:

1. The taxable income limitation already "accounts" for the pension stuff for many folks.
2. For S corporations, the pension deductions (and also SE taxes and SE health insurance BTW) do get deducted from QBI given the form where they appear. So what you're really talking about are some sole proprietorships and partnerships.
3. Congress in the statute did specifically indicate that certain items were not part of QBI... for example, S corp shareholder wages, partner guaranteed payments, etc. If they had wanted to exclude pensions, SE health insurance, SE taxes from QBI of sole proprietors and partners, they could have done that.
4. Making the deductions dependent on each other would be complicated. And Congress and IRS opt for simplicity in the accounting in other situations. E.g., SE taxes get applied to 92.35% of SE income. That basically lets self-employed person not pay SE taxes on the employer half of SE taxes but without having to make a circular calculation.
5. In my "Maximizing Sec. 199A Deductions" monograph, which thousands of CPAs and attorneys have read over the last few months, no reader has disagreed with my description above. BTW, some readers have disagreed with my description of whether or not Sec. 199A applies to real estate investors. This isn't a super weighty factor... but it suggests many other accountants learning the new law agree with me.
My blog Evergreen Small Business
My free downloadable ebook: Thirteen Word Retirement Plan

terran

  • Handlebar Stache
  • *****
  • Posts: 1250
Re: When will there be preliminary 2018 1040 info to help tax planning?
« Reply #7 on: June 20, 2018, 12:56:13 PM »
I think the retirement deductions will work the way that other similar deductions work: SE health insurance, SE taxes, etc. Let me give you an example to illustrate and then provide a handful of reasons explaining why I think what I think.

EXAMPLE:

Suppose someone married earns $100K as a sole proprietor, has a spouse that earns $24K in W-2 wages, and deducts $10K for SE health insurance and another $10K for SE taxes and then takes the standard $24K deduction.

This taxpayer's taxable income equals $80K ($100K+$24K-$24K-$10K-$10K) and this taxpayer's qualified business income (QBI) equals $100K...

But what the Sec. 199A deduction equals is lessor of 20% of the $80K or 20% of the $100K... so $16K.

Now if the taxpayer also does a $20K pension, I think that just plugs in like SE health insurance and SE taxes. I.e., it doesn't impact the QBI. But the $20K of pension drops the taxable income to $60K, so now the Sec. 199A deduction equals $12K.

In summary, pensions don't matter to a sole proprietor's or partner's QBI but because they reduce taxable income, they impact the ultimate Sec. 199A deduction.

Thanks!

So let me see if I understand this with an example that's a little closer to what I have in mind.

MY EXAMPLE:

Suppose someone married earns $28.5K as a sole proprietor, has a spouse that earns $100K in W-2 wages and has employer sponsored family health insurance (or both spouses together earn $100k in W-2 wages), and deducts $4.5K for SE taxes for a total SE income of about $24k and then takes the standard $24K deduction.

This taxpayer's taxable income equals $100K ($100K+$28.5K-$24K-4.5k) and this taxpayer's qualified business income (QBI) equals $28.5K...

But what the Sec. 199A deduction equals is lessor of 20% of the $100K or 20% of the $28.5K... so $5.7K.

So basically I'm wondering about someone with a side gig, or a small-small business where QBI is the only limitation since taxable income is plentyh high enough to not become the limit, but also not high enough for the deduction to phase out.

I think what you're saying, though, is that you think self-employed retirement plans won't reduce QBI?

To know for sure how these items will be treated, I think we want to see what guidance IRS provides next month.

So you expect clarification from the IRS next month? When and in what form (what should I be on the lookout for)?


SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1183
  • Age: 58
  • Location: Redmond, WA
    • Evergreen Small Business
Re: When will there be preliminary 2018 1040 info to help tax planning?
« Reply #8 on: June 20, 2018, 01:17:00 PM »
Yes, I think you're making the calculations tax returns will use.

The "end of July" timing of the guidance comes from public announcement the acting commissioner of IRS made a week or two or three ago.

Regarding the format of guidance, some people talk about treasury regulations but I would guess something more like an IRS notice. I would be shocked if the guidance was something for taxpayers. It'll be for practitioners I think...
My blog Evergreen Small Business
My free downloadable ebook: Thirteen Word Retirement Plan

BTDretire

  • Handlebar Stache
  • *****
  • Posts: 2053
Re: When will there be preliminary 2018 1040 info to help tax planning?
« Reply #9 on: June 21, 2018, 09:41:35 AM »
Hi Seattle,
 Here's my situation, I'm 63, wife is 59. Business income about $73k.
 Living on under $50k
I have been funding SEPs and an HSA to keep my taxable income low.
  I have 7 years until I take RMDs, at 6% my tax deferred investment accounts could
be $900k or a $36,000 RMD withdrawal, 4 years later, my wife wll have an RMD of
$22,000.
 I see this as my possible total in 10 years with RMDs.
$58k RMDs, $52k SS*, Mutual Fund dividends and distributions $30K.
 I want to start doing Roth Conversions this year to help relieve us of
as much of the $58k RMD as possible. I'll probably be in the 12% bracket,
at least I'd like to stay in the 12% bracket.  But, it will be hard, because we have always
contributed to SEPs and I don't know that it makes sense to put money in a SEP and convert
money to a ROTH. (I'm open to hear a reason) Maybe contribute just enough to the SEPs to keep us in 12% bracket?
 I see you're not a big Roth guy, but can you see any sense in doing Roth conversions in my situation.
We certainly don't need that much income.



SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1183
  • Age: 58
  • Location: Redmond, WA
    • Evergreen Small Business
Re: When will there be preliminary 2018 1040 info to help tax planning?
« Reply #10 on: June 21, 2018, 11:23:14 AM »
Hi Seattle,
 Here's my situation, I'm 63, wife is 59. Business income about $73k.
 Living on under $50k
I have been funding SEPs and an HSA to keep my taxable income low.
  I have 7 years until I take RMDs, at 6% my tax deferred investment accounts could
be $900k or a $36,000 RMD withdrawal, 4 years later, my wife wll have an RMD of
$22,000.
 I see this as my possible total in 10 years with RMDs.
$58k RMDs, $52k SS*, Mutual Fund dividends and distributions $30K.
 I want to start doing Roth Conversions this year to help relieve us of
as much of the $58k RMD as possible. I'll probably be in the 12% bracket,
at least I'd like to stay in the 12% bracket.  But, it will be hard, because we have always
contributed to SEPs and I don't know that it makes sense to put money in a SEP and convert
money to a ROTH. (I'm open to hear a reason) Maybe contribute just enough to the SEPs to keep us in 12% bracket?
 I see you're not a big Roth guy, but can you see any sense in doing Roth conversions in my situation.
We certainly don't need that much income.

Hi BTD,

So you're right... I'm not a big Roth guy. But just between you and me and the fence post, I think business owners (including you and me) need to seriously look at option of using the deduction space created by the Sec. 199A deduction to shelter Roth conversion income.

E.g., you don't say what your family income is or what your taxable income is, but say your wife works and that her income perfectly offsets your tax deductions. That would mean both your taxable income and your qualified business income equal about $73K. In this sort of situation, it would make great sense to do the math for using your roughly $15K Sec. 199A deduction to "shelter" a $15K Roth conversion. Over the next eight years, that might mean you have roughly $120K less in your taxable tax-deferred accounts and $120K more in your Roth accounts.

BTW, because you're in the 12% tax bracket, if you just save into a taxable account the other additional money you would have otherwise saved into a tax-deferred account, you probably won't pay any additional tax because the qualified dividends and long-term capital gains on those savings will be taxed as the 0% rate.

A caution: You want to do the math carefully for above scenarios. But very possibly rather than $900K in a tax deferred account, you can end up with (say) $100K in taxable, a $120K in Roth and $680K in tax deferred by recognizing the Sec. 199A impact in your retirement planning.

That may be enough to largely remove RMD worries.

P.S. This blog post, also referenced earlier, does provide a bit more discussion: Sec. 199A changes retirement planning.
« Last Edit: June 21, 2018, 01:01:43 PM by SeattleCPA »
My blog Evergreen Small Business
My free downloadable ebook: Thirteen Word Retirement Plan

teen persuasion

  • Handlebar Stache
  • *****
  • Posts: 1019
Re: When will there be preliminary 2018 1040 info to help tax planning?
« Reply #11 on: June 24, 2018, 02:23:41 PM »
I'm curious to see how the increased CTC will be implemented, especially the refundable vs nonrefundable portions.  My state currently matches the CTC at 30%, so I believe the state credit rules will be rewritten, probably capping the match or limiting it to matching the first $1k, or changing things up entirely.  So it would be nice if the federal rules were decided early enough for all the states to fix the cascading issues.

Also wondering about the $500 credit for dependents over 17 - I've seen discussion that it may effectively be zero for (nearly) everyone due to the wording relying on not exceeding the personal exemption (which is now $0).  Can't recall where I saw the discussion, I was researching a different topic at the time and stumbled across it.  They were hoping it was an oversight that would get fixed, eventually...

MDM

  • Walrus Stache
  • *******
  • Posts: 8158
Re: When will there be preliminary 2018 1040 info to help tax planning?
« Reply #12 on: June 24, 2018, 04:48:38 PM »
I'm curious to see how the increased CTC will be implemented, especially the refundable vs nonrefundable portions.  My state currently matches the CTC at 30%, so I believe the state credit rules will be rewritten, probably capping the match or limiting it to matching the first $1k, or changing things up entirely.  So it would be nice if the federal rules were decided early enough for all the states to fix the cascading issues.

Also wondering about the $500 credit for dependents over 17 - I've seen discussion that it may effectively be zero for (nearly) everyone due to the wording relying on not exceeding the personal exemption (which is now $0).  Can't recall where I saw the discussion, I was researching a different topic at the time and stumbled across it.  They were hoping it was an oversight that would get fixed, eventually...
Don't see anything about a personal exemption in SEC. 11022. Increase in and modification of child tax credit, nor in the original section (linked therein).

BTDretire

  • Handlebar Stache
  • *****
  • Posts: 2053
Re: When will there be preliminary 2018 1040 info to help tax planning?
« Reply #13 on: June 26, 2018, 08:52:36 AM »
Hi Seattle,
 Here's my situation, I'm 63, wife is 59. Business income about $73k.
 Living on under $50k
I have been funding SEPs and an HSA to keep my taxable income low.
  I have 7 years until I take RMDs, at 6% my tax deferred investment accounts could
be $900k or a $36,000 RMD withdrawal, 4 years later, my wife wll have an RMD of
$22,000.
 I see this as my possible total in 10 years with RMDs.
$58k RMDs, $52k SS*, Mutual Fund dividends and distributions $30K.
 I want to start doing Roth Conversions this year to help relieve us of
as much of the $58k RMD as possible. I'll probably be in the 12% bracket,
at least I'd like to stay in the 12% bracket.  But, it will be hard, because we have always
contributed to SEPs and I don't know that it makes sense to put money in a SEP and convert
money to a ROTH. (I'm open to hear a reason) Maybe contribute just enough to the SEPs to keep us in 12% bracket?
 I see you're not a big Roth guy, but can you see any sense in doing Roth conversions in my situation.
We certainly don't need that much income.

Hi BTD,

So you're right... I'm not a big Roth guy. But just between you and me and the fence post, I think business owners (including you and me) need to seriously look at option of using the deduction space created by the Sec. 199A deduction to shelter Roth conversion income.

E.g., you don't say what your family income is or what your taxable income is, but say your wife works and that her income perfectly offsets your tax deductions.


 My family income is the $73k mentioned, we both work in the small business. We do have an addirional $12k of interest income, and another $12k of dividends, cap gains, on stocks outside of tax deferred accounts.
 2017 we had a taxable income in the upper $thirties. (tax form not available at the moment)



Quote
That would mean both your taxable income and your qualified business income equal about $73K. In this sort of situation, it would make great sense to do the math for using your roughly $15K Sec. 199A deduction to "shelter" a $15K Roth conversion. Over the next eight years, that might mean you have roughly $120K less in your taxable tax-deferred accounts and $120K more in your Roth accounts.

BTW, because you're in the 12% tax bracket, if you just save into a taxable account the other additional money you would have otherwise saved into a tax-deferred account, you probably won't pay any additional tax because the qualified dividends and long-term capital gains on those savings will be taxed as the 0% rate.

A caution: You want to do the math carefully for above scenarios. But very possibly rather than $900K in a tax deferred account, you can end up with (say) $100K in taxable, a $120K in Roth and $680K in tax deferred by recognizing the Sec. 199A impact in your retirement planning.

Sorry, I left out other taxable money, ~$600k today in stock market, $70k already in Roth, $50k in an HSA,
$155K equity in a sold property, (that generates the $12k of interest metioned above).
Buyer will pay this off in 2 years, lump sum.


[/quote]
That may be enough to largely remove RMD worries.

P.S. This blog post, also referenced earlier, does provide a bit more discussion: Sec. 199A changes retirement planning.
[/quote]

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1183
  • Age: 58
  • Location: Redmond, WA
    • Evergreen Small Business
Re: When will there be preliminary 2018 1040 info to help tax planning?
« Reply #14 on: June 26, 2018, 03:56:34 PM »
OK, so two other thoughts...

1. The Sec. 199A "Qualified Business Income Deduction" is lesser of 20% of your sole proprietorship profits or 20% of your taxable income. So if your taxable income equals, say, $40K, the Sec. 199 deduction equals $8K.

2. I would still wonder if you really need to worry about RMDs. Your dividends and long-term capital gains income will probably be tax-free because you'll be in the 10% or 12% bracket. You'll be able to shelter most of your forecasted $36K RMD just with a standard $24K deduction.

My blog Evergreen Small Business
My free downloadable ebook: Thirteen Word Retirement Plan

MDM

  • Walrus Stache
  • *******
  • Posts: 8158
Re: When will there be preliminary 2018 1040 info to help tax planning?
« Reply #15 on: June 27, 2018, 05:49:49 PM »
Comments on QBI Pass-through deduction in the case study spreadsheet from folks in this thread are particularly of interest. :)

teen persuasion

  • Handlebar Stache
  • *****
  • Posts: 1019
Re: When will there be preliminary 2018 1040 info to help tax planning?
« Reply #16 on: June 29, 2018, 10:33:32 AM »
I'm curious to see how the increased CTC will be implemented, especially the refundable vs nonrefundable portions.  My state currently matches the CTC at 30%, so I believe the state credit rules will be rewritten, probably capping the match or limiting it to matching the first $1k, or changing things up entirely.  So it would be nice if the federal rules were decided early enough for all the states to fix the cascading issues.

Also wondering about the $500 credit for dependents over 17 - I've seen discussion that it may effectively be zero for (nearly) everyone due to the wording relying on not exceeding the personal exemption (which is now $0).  Can't recall where I saw the discussion, I was researching a different topic at the time and stumbled across it.  They were hoping it was an oversight that would get fixed, eventually...
Don't see anything about a personal exemption in SEC. 11022. Increase in and modification of child tax credit, nor in the original section (linked therein).
Thanks for the reference - I'll attempt parsing it later when I have more time to devote to it.  Scanning it quickly I see lots of references to other sections/definitions.  I'm reminded of my CSC profs old admonitions against using/modifying global variables that might be referenced elsewhere, and to never write spaghetti code!