How to Hack the New Tax Plan

[Peter Parker]

Okay folks.  It's a done deal.  The time for the political discussion is done (my side lost).  Now I want to start a discussion on how to hack this tax plan.  What are some of the creative ways can we game this plan?

My spouse and I are still able to contribute $86K into tax deferred accounts.  I'm still able to deduct all of my property tax and all of my mortgage interest deduction.  But I lost my SALT deduction.

There seems to be a number of loopholes built into this new plan, that I'd like to take advantage of (if it makes sense to do so).  I'd like to hear some of your ideas....

For starters:

     1.  As a governmental lawyer , is there anyway I can (or should) try and utilize the pass through tax loophole?
     2.  Should our portfolio, perhaps, change to include rental properties? 

Any other ideas/questions that we can share, brainstorm, and take advantage of this new scheme (ahem) tax plan?

[MaybeBabyMustache]

Depending on your property tax situation, it definitely makes sense to run the numbers & submit your payment before the end of the year. We're awaiting a supplemental property tax bill (bought house 10 months ago, still haven't received it), but it's a huge chunk of money, and we're going to pay next week. State tax will not be allowed to be pre-paid, but property tax is still in play, AFAIK.

[sol]

It looks to me like residential real estate will not be so helpful.  The new 20% pass through rate only applies to net income after depreciation, and most SFR rentals already show minimal income due to deducting depreciation (and mortgage interest and the rest).

If you have income producing RE like apartment buildings or commercial properties, it might be helpful.  For ordinary landlords, not so much.

[brooklynguy]

I'd say the new "qualified business income" deduction is a pretty significant thumb on the scales in favor of real estate investing.  You will now potentially pay taxes on only 80% of your otherwise-taxable rental income.  Given that real estate investing was already an attractive alternative to the stock market as a path to financial independence (see the case of our resident rebel spy, as one example), this makes the hurdle rate for real estate investing that much lower.  Even we small(er)-time landlords can benefit to the extent of our rental income, such as it is, and the benefit will tend to grow over time as the rent-to-depreciation(-and-other-deductible-expenses) ratio tends to climb.

[VoteCthulu]

Property tax is the main thing, if you can prepay for next year it's likely a good idea to do so.

Also if your mortgage payment for January normally gets deposited the first week of January, you should be able to send it early to get deposited this year and deduct the mortgage interest in this year's taxes.

Disclaimer: I am not a tax professional.

[inline five]

Move to a state with no income tax.

[Bateaux]

Move to a state with no income tax.

Will be upon FIRE.  Florida or Tennessee.

[seattlecyclone]

I'd say the new "qualified business income" deduction is a pretty significant thumb on the scales in favor of real estate investing.  You will now potentially pay taxes on only 80% of your otherwise-taxable rental income.  Given that real estate investing was already an attractive alternative to the stock market as a path to financial independence (see the case of our resident rebel spy, as one example), this makes the hurdle rate for real estate investing that much lower.  Even we small(er)-time landlords can benefit to the extent of our rental income, such as it is, and the benefit will tend to grow over time as the rent-to-depreciation(-and-other-deductible-expenses) ratio tends to climb.

Might this real estate change tilt the incentives in favor of (for example) owning one rental house free and clear rather than a couple of rentals with mortgages?

[secondcor521]

Not particularly creative, but children are better tax shelters now.  $2K tax credit covers a lot of income.

[inline five]

I'd say the new "qualified business income" deduction is a pretty significant thumb on the scales in favor of real estate investing.  You will now potentially pay taxes on only 80% of your otherwise-taxable rental income.  Given that real estate investing was already an attractive alternative to the stock market as a path to financial independence (see the case of our resident rebel spy, as one example), this makes the hurdle rate for real estate investing that much lower.  Even we small(er)-time landlords can benefit to the extent of our rental income, such as it is, and the benefit will tend to grow over time as the rent-to-depreciation(-and-other-deductible-expenses) ratio tends to climb.

Might this real estate change tilt the incentives in favor of (for example) owning one rental house free and clear rather than a couple of rentals with mortgages?

No

[Schaefer Light]

If you contribute to a college athletics program, you might want to see if it's possible to prepay next year's contribution as this will likely be the last year those contributions will be 80% tax deductible.

[freya]

I'm not 100% clear on this but I think the pass-through income deduction applies regardless of whether it's a qualified business, as long as you're under the income limits ($157K single, $315K joint).  The issue with qualified businesses only arises if you are above this threshold, where I expect few people on this forum will be.  Is that correct??

When you combine this with the 20% "profit sharing" deferral that you get with a solo 401K on top of the annual 401K contribution limits, self-employment income becomes a real bonanza.  The "hack" is to convert as much of your wages to self-employment income as possible.  You'd have to compare this with job benefits though, as medical insurance is the obvious wild card.

Another note:  if you're putting all your side hustle income into a solo 401K or SEP IRA, and accordingly reducing contributions to an employer 401K, you'll need to stop doing that.  I have been doing this in order to shift savings to an account where I have complete control over investment choices and fewer hidden fees, and also to avoid having to deal with estimated tax payments.

[mtnman125]

Move to a state with no income tax.

Will be upon FIRE.  Florida or Tennessee.

I'm looking at Tennessee as well.  Note that they do collect income tax on capital gains in case a large taxable account is part of your plan.  There is a proposal out to drop that by 2022 though.

[boarder42]

Everyone who wants to donate to charity should be looking into setting up a DAF this year.  i know i will be setting one up - so our future contributions to charities were at least deductible this year. 

[SwitchActiveDWG]

Private schooling probably isn't the route most people take on this forum, but due to various circumstances my kid goes to private school. Will be funneling money for that through the expanded 529.

[brooklynguy]

I'd say the new "qualified business income" deduction is a pretty significant thumb on the scales in favor of real estate investing.  You will now potentially pay taxes on only 80% of your otherwise-taxable rental income.  Given that real estate investing was already an attractive alternative to the stock market as a path to financial independence (see the case of our resident rebel spy, as one example), this makes the hurdle rate for real estate investing that much lower.  Even we small(er)-time landlords can benefit to the extent of our rental income, such as it is, and the benefit will tend to grow over time as the rent-to-depreciation(-and-other-deductible-expenses) ratio tends to climb.

Might this real estate change tilt the incentives in favor of (for example) owning one rental house free and clear rather than a couple of rentals with mortgages?

I think, as a general matter, it would still pay off to use cheap leverage to boost returns.

Also, the fact that the 20% "qualified business income" deduction (like the individual tax cuts) is scheduled to expire in eight years makes it less relevant as a point to rely on for purposes of long-term planning (especially when coupled with the divisive, partisan basis on which this legislation is being enacted, which makes it even more likely that its contents will be revisited and shift with the political winds in the near future).

[katsiki]

Everyone who wants to donate to charity should be looking into setting up a DAF this year.  i know i will be setting one up - so our future contributions to charities were at least deductible this year.

I have been looking at Fidelity's DAF.  It looks like you can ACH or mail a check until 12/31 (latter must be postmarked by 12/31).  I was surprised to see it could be done so last minute.

[Hvillian]

Not particularly creative, but children are better tax shelters now.  $2K tax credit covers a lot of income.

And it looks like with only $1,400 of the $2,000 refundable, there will be a sizable window of income with 0% marginal tax rate for people with a few kids.  My quick calculations seem to indicate that someone with 3 kids will not pay taxes on gross income between ~$86,000 and $102,000.   I need to look at the State implications, but am considering lowering my 401(k) contribution and increasing Roth IRA contributions.

[dude]

Everyone who wants to donate to charity should be looking into setting up a DAF this year.  i know i will be setting one up - so our future contributions to charities were at least deductible this year.

Why? I thought the deduction for charitable giving did not go away?

[terran]

Everyone who wants to donate to charity should be looking into setting up a DAF this year.  i know i will be setting one up - so our future contributions to charities were at least deductible this year.

Why? I thought the deduction for charitable giving did not go away?

The tax bill's higher standard deduction and fewer eligible itemized deductions means "beating" the standard deduction by itemizing will be harder to do, so you'll need to donate more to charity to make it worthwhile, so more of what you donate will be "wasted" by overcoming the standard deduction hurdle.

[SimpleCycle]

Everyone who wants to donate to charity should be looking into setting up a DAF this year.  i know i will be setting one up - so our future contributions to charities were at least deductible this year.

Why? I thought the deduction for charitable giving did not go away?

It did not, but many people will not itemize given the new larger standard deduction and SALT cap.  You must itemize to claim charitable deductions.

So we give about $5k/year to charity.  We're going to put $25k in a DAF this year, take the full deduction, and not itemize under the new plan.  In five years we'll add more to the DAF and itemize to take the deduction.

[boarder42]

Everyone who wants to donate to charity should be looking into setting up a DAF this year.  i know i will be setting one up - so our future contributions to charities were at least deductible this year.

Why? I thought the deduction for charitable giving did not go away?

It did not, but many people will not itemize given the new larger standard deduction and SALT cap.  You must itemize to claim charitable deductions.

So we give about $5k/year to charity.  We're going to put $25k in a DAF this year, take the full deduction, and not itemize under the new plan.  In five years we'll add more to the DAF and itemize to take the deduction.

yep this is the way to do it. and while charitable didnt go away as stated. here and above very few people will now be itemizing without a large charitable donation. you're looking at having to get to 24k for MFJ before you get to itemize.  so knowing that - with 10k in property/state and local taxes(if you even have this much) - you'd have to be paying 15k in mortgage interest to be able to itemize all taxable donations.  its really shitty and this will hurt charitable orgs if its not moved above the line at some point.

I'm running my calc this weekend to see how much room we have in the 25% bracket and will be opening a DAF with fidelity. - i dont like vanguards minimums.

[SimpleCycle]

Private schooling probably isn't the route most people take on this forum, but due to various circumstances my kid goes to private school. Will be funneling money for that through the expanded 529.

I don't think this made it into the final bill - it violated the Byrd rule.

[BigRed]

Private schooling probably isn't the route most people take on this forum, but due to various circumstances my kid goes to private school. Will be funneling money for that through the expanded 529.

I don't think this made it into the final bill - it violated the Byrd rule.

I know the homeschooling part didn't, but no article I've seen mentions stripping out the private school tuition for 529s.  I think it's still in.

How do you plan to take advantage of this?  Do you have enough savings to prefund multiple years of tuition and invest the money, or is there a good way to make use of the fact that you have a large amount of spending that can be funneled through a tax-exempt account?

[secondcor521]

Private schooling probably isn't the route most people take on this forum, but due to various circumstances my kid goes to private school. Will be funneling money for that through the expanded 529.

I don't think this made it into the final bill - it violated the Byrd rule.

I know the homeschooling part didn't, but no article I've seen mentions stripping out the private school tuition for 529s.  I think it's still in.

How do you plan to take advantage of this?  Do you have enough savings to prefund multiple years of tuition and invest the money, or is there a good way to make use of the fact that you have a large amount of spending that can be funneled through a tax-exempt account?

I'm not SwitchActiveDWG, but:

Many (most?) states give a state income tax deduction for contributions to their 529 plans.  In my state, for example, you can deduct up to $12K per year for MFJ; at a top marginal rate close to 8%, that works out to about $960 in state income tax savings.

Since there is no minimum holding period inside the 529, you can contribute $12K to a 529 in June, pay $12K in qualified expenses in September, reimburse yourself $12K in October, and get a $960 savings the following April.

[GrowingStache]

Nothing new, but long term capital gains and qualified dividends continue to benefit from a preferential tax treatment. Those are my main sources of income. I also have a bit of self-employment income which can be offset by the higher standard deduction (married couple no kids), as well as with HSA and retirement account contributions.

[MrMoneySaver]

I'm not 100% clear on this but I think the pass-through income deduction applies regardless of whether it's a qualified business, as long as you're under the income limits ($157K single, $315K joint).  The issue with qualified businesses only arises if you are above this threshold, where I expect few people on this forum will be.  Is that correct??

When you combine this with the 20% "profit sharing" deferral that you get with a solo 401K on top of the annual 401K contribution limits, self-employment income becomes a real bonanza.  The "hack" is to convert as much of your wages to self-employment income as possible.  You'd have to compare this with job benefits though, as medical insurance is the obvious wild card.

Can you explain this a little more? I was thinking of leaving the the W-2 world to be a consultant, anyway.

[fattest_foot]

Property tax is the main thing, if you can prepay for next year it's likely a good idea to do so.

Also if your mortgage payment for January normally gets deposited the first week of January, you should be able to send it early to get deposited this year and deduct the mortgage interest in this year's taxes.

Disclaimer: I am not a tax professional.

I read something that said that this wouldn't be allowed. I'll try to find a link.

Edit: https://www.cnbc.com/2017/12/18/prepaying-2018-state-income-taxes-is-blocked-in-gop-bill.html

The final version of the tax legislation includes a provision that would disallow a deduction in 2017 for any prepayment of 2018 state and local income taxes.

So that mentions income taxes; not sure if it applies to property as well.

[sol]

So that mentions income taxes; not sure if it applies to property as well.

Initial reports suggested it was both, but now it looks like prepaying property taxes IS allowed, if you can do it in the next eleven days.

[Cpa Cat]

I'm not 100% clear on this but I think the pass-through income deduction applies regardless of whether it's a qualified business, as long as you're under the income limits ($157K single, $315K joint).  The issue with qualified businesses only arises if you are above this threshold, where I expect few people on this forum will be.  Is that correct??

When you combine this with the 20% "profit sharing" deferral that you get with a solo 401K on top of the annual 401K contribution limits, self-employment income becomes a real bonanza.  The "hack" is to convert as much of your wages to self-employment income as possible.  You'd have to compare this with job benefits though, as medical insurance is the obvious wild card.

Can you explain this a little more? I was thinking of leaving the the W-2 world to be a consultant, anyway.

Keep in mind that personal services such as consulting will be excluded from enjoying the 20% pass through income deduction. It is also limited by non-owner W-2 wages.

They're looking at real job-creating businesses with this, not regular self-employed folks.

[robartsd]

I bought my house in June 2016. Not enough itemized deductions to beat the standard deduction (barely) in 2016, but knew with 6 month's more interest, I'd be itemizing in 2017. With the new standard deduction I know I'm not itemizing in 2018. I don't have enough taxable savings to advance much charitable contributions, but have scheduled my January contributions early and may move contributions planned for Feburary up to 2017 as well. I've asked my morgage servicer if they can pay my April installment for property tax early (the escrow account has enough money to do it, I'd happily send a little extra to the escrow account to tip the scale if that helps) and plan to make my January payment early as well. Might be able to get about $2.5k in deductible expenses moved up from 2018 to 2017.

[sol]

I think the simplest way to hack the new tax code is to retire soon. 

The preferred rate on dividends and ltcg remains, and helps me in retirement when that will be most of my income.

The temporary child tax credit will hurt people who have kids under 17 after 2026, but two of mine will be gone by then anyway.  So having older kids now maxes your relative benefit.  I do!

The temporary increase to the standard deduction is going to force millions of people to lose their itemized deductions, but you can still get them for the next eleven days so prepay everything you can (property taxes for 2018 and a lifetime of charitable giving in a DAF).  After that, take the 24k standard deduction and adjust your roth pipeline amounts accordingly in retirement.

Losing the mortgage interest deduction slightly favors paying off your mortgage early, compared to yesterday's math.  It might not change the ultimate decision, but it does reweight the factors a little.

[boarder42]

So that mentions income taxes; not sure if it applies to property as well.

Initial reports suggested it was both, but now it looks like prepaying property taxes IS allowed, if you can do it in the next eleven days.

yeah its BS i called my county and tried to write them a check for 5k and they said no we dont want that til next year at this time.  Idiots.

[Gumption]

I'm not 100% clear on this but I think the pass-through income deduction applies regardless of whether it's a qualified business, as long as you're under the income limits ($157K single, $315K joint).  The issue with qualified businesses only arises if you are above this threshold, where I expect few people on this forum will be.  Is that correct??

When you combine this with the 20% "profit sharing" deferral that you get with a solo 401K on top of the annual 401K contribution limits, self-employment income becomes a real bonanza.  The "hack" is to convert as much of your wages to self-employment income as possible.  You'd have to compare this with job benefits though, as medical insurance is the obvious wild card.

Can you explain this a little more? I was thinking of leaving the the W-2 world to be a consultant, anyway.

Keep in mind that personal services such as consulting will be excluded from enjoying the 20% pass through income deduction. It is also limited by non-owner W-2 wages.

They're looking at real job-creating businesses with this, not regular self-employed folks.

If  your personal income is $157,500 single  or $315,000 joint, then any type of passthrough is eligible...where does this suggest otherwise?

[SimpleCycle]

So that mentions income taxes; not sure if it applies to property as well.

Initial reports suggested it was both, but now it looks like prepaying property taxes IS allowed, if you can do it in the next eleven days.

yeah its BS i called my county and tried to write them a check for 5k and they said no we dont want that til next year at this time.  Idiots.

Weird.  Our county expedited tax bills in anticipation of prepayments.

[Greenstache]

If you were originally told that prepayments of property taxes aren't permitted in your respective county, it's probably worth checking again.  My county immediately offered a way to allow me to prepay, but one of my coworkers was told by his county that he couldn't prepay.  A week later, they called him back and said they had decided to allow it - just wanted the property parcel and address to be on his check in order to correctly apply to his account.  A lot of counties in high tax states are probably going to be revisiting their position on this as many people suddenly clamor to prepay.

[Catbert]

My SALT is 17K so this week I'm paying January quarterly state installment and April property tax bills.

For charitable contributions I may do an every other year or maybe every 3rd year DAF contribution.

I've been doing Roth conversions to fill our 25% bracket.  This was to mitigate a likely massive RMD in 5 years.  With the stock market bull market, this hasn't made much of a dent in the traditional IRA/TSP. (Yeah, I know, first world problems.)  Will need to play with this to decide what brackets I should fill starting next year.   

[Catbert]

Everyone who wants to donate to charity should be looking into setting up a DAF this year.  i know i will be setting one up - so our future contributions to charities were at least deductible this year.

I have been looking at Fidelity's DAF.  It looks like you can ACH or mail a check until 12/31 (latter must be postmarked by 12/31).  I was surprised to see it could be done so last minute.

If you have a Fidelity account with appreciated stock/etfs/mutual funds donate them to avoid capital gains rather than donating cash.

[BigRed]

I'm not SwitchActiveDWG, but:

Many (most?) states give a state income tax deduction for contributions to their 529 plans.  In my state, for example, you can deduct up to $12K per year for MFJ; at a top marginal rate close to 8%, that works out to about $960 in state income tax savings.

Since there is no minimum holding period inside the 529, you can contribute $12K to a 529 in June, pay $12K in qualified expenses in September, reimburse yourself $12K in October, and get a $960 savings the following April.

That's a good one, but it requires a state that allows exclusion from income for 529 contributions.  Mine is one of the 10 states that don't (another 5 states don't have an income tax to allow deductions from).

I was trying to come up with a strategy to take advantage of tax free gains on our tuition sinking fund, which might have anywhere from 0 to 10k in it depending on the time of year, without risking losing it or negatively impacting money saved for college in the 529 as well.

[boarder42]

Everyone who wants to donate to charity should be looking into setting up a DAF this year.  i know i will be setting one up - so our future contributions to charities were at least deductible this year.

I have been looking at Fidelity's DAF.  It looks like you can ACH or mail a check until 12/31 (latter must be postmarked by 12/31).  I was surprised to see it could be done so last minute.

If you have a Fidelity account with appreciated stock/etfs/mutual funds donate them to avoid capital gains rather than donating cash.

So I went with vanguard to open it for a few reasons -

1. if you have appreciated shares with vanguard - as i do i wanted to donate those - fidelity said they could not turn around another brokerage firm shares in this short amount of time.
2. i was going to do around 25k anyways.
3. i talked with a fidelity rep and you can do DAF to DAF transfers at any time.
3a. this will allow me to move some money from vanguard charitable to fid charitable so i can gift at the lower limit - which is really why i was planning to use fidelity

so in summary if you want to use appreciated stock you need to do it with the place holding your money but if you would like to transfer it to another DAF you can after you've funded it. 

[HeadedWest2029]

This is probably niche, but does anyone know if the 20% pass-through rule includes farm rental income (cash rent...schedule E)?
Seems like maybe??? https://www.agweb.com/blog/the-farm-cpa-243/we-have-a-tax-bill-maybe/
Hopefully I don't have to create some shell business to get this 20% deduction

[Catbert]

This doesn't apply to most of you (but maybe your parents or grandparents).  If you are at least 70.5, use your RMD to fund your charitable contributions.  That way you can still get a tax advantage for contributing to charity (doesn't count as income) while taking the standard deduction. 

Google Qualified Charitable Distribution for more info.

[TheAnonOne]

I'm not 100% clear on this but I think the pass-through income deduction applies regardless of whether it's a qualified business, as long as you're under the income limits ($157K single, $315K joint).  The issue with qualified businesses only arises if you are above this threshold, where I expect few people on this forum will be.  Is that correct??

When you combine this with the 20% "profit sharing" deferral that you get with a solo 401K on top of the annual 401K contribution limits, self-employment income becomes a real bonanza.  The "hack" is to convert as much of your wages to self-employment income as possible.  You'd have to compare this with job benefits though, as medical insurance is the obvious wild card.

Can you explain this a little more? I was thinking of leaving the the W-2 world to be a consultant, anyway.

Keep in mind that personal services such as consulting will be excluded from enjoying the 20% pass through income deduction. It is also limited by non-owner W-2 wages.

They're looking at real job-creating businesses with this, not regular self-employed folks.

If  your personal income is $157,500 single  or $315,000 joint, then any type of passthrough is eligible...where does this suggest otherwise?

So I make anywhere from 180k ->200k as a software consultant, but I am currently employed as a w2 hourly employee. (still paid hourly, with no benefits)

Does it make sense to start an SCorp and run it that way? What kind of money is this saving to go that route?

I am really interested in any feedback! Thanks.

[Dancin'Dog]

If you contribute to a college athletics program, you might want to see if it's possible to prepay next year's contribution as this will likely be the last year those contributions will be 80% tax deductible.

That's good news.  I hate hearing that some college coaches are the highest paid public employees.  Roll Tide!

[Dancin'Dog]

Move to a state with no income tax.

Will be upon FIRE.  Florida or Tennessee.

Tennessee has mountains.  Florida is a nice place to "visit".

[TreeTired]

Not particularly creative, but children are better tax shelters now.  $2K tax credit covers a lot of income.

I know it's not politically correct, but I am surprised we have not seen more criticism of this along the lines of,

if you pay people to have more children, you get more children.

[ZiziPB]

Not particularly creative, but children are better tax shelters now.  $2K tax credit covers a lot of income.

I know it's not politically correct, but I am surprised we have not seen more criticism of this along the lines of,

if you pay people to have more children, you get more children.

But you need more children to maintain the Ponzi scheme that is the basis for how our country operates... 

Look at Japan and China - both are facing huge issues in the near future because of their ageing populations.

[By the River]

I know it's not politically correct, but I am surprised we have not seen more criticism of this along the lines of,

if you pay people to have more children, you get more children.

Is this a bad thing? 

[boarder42]

I know it's not politically correct, but I am surprised we have not seen more criticism of this along the lines of,

if you pay people to have more children, you get more children.

Is this a bad thing?

is this sarcasm?

[WhiteTrashCash]

If I was the kind of person who would say that sort of thing, I would say that the proper response to the new tax plan would be doing illegal things, but I'm not that kind of person so I won't say that. All I will say is that if your enemies are bringing guns, then don't bring a knife.