Author Topic: Anyone Else Making Different Decisions Due to Tax Reform?  (Read 944 times)

ReadySetMillionaire

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Anyone Else Making Different Decisions Due to Tax Reform?
« on: December 13, 2018, 10:59:14 AM »
Throughout the year, I have hoarded cash because I was putting off my decision with what to do with the money.  So yesterday, I met with my accountant to (a) estimate my final quarterly tax payment and (b) determine what to do with said cash laying around.

After meeting with my accountant for about two hours, I was absolutely shocked at how big of a tax break we were getting under the new tax reform.  We have always had at least some income in the 25% tax bracket even after almost maxing our entire 401(k)'s and taking other deductions. And then the next bracket below that was 15%, which is what almost all of my income was taxed at.

But this year, we are quite comfortably in the 12% tax bracket due to the much larger standard deduction, as well as the new 20% deduction for business owners. Basically, all we did this year was max HSA and my wife contributed about $7k to her 401(k), but with these new tax rates, we are in the 12% bracket.

I went into the meeting thinking that I was going to put as much as possible into a 401(k).  I left the meeting thinking that the tax rate was so low that it might actually be *higher* when I take this money out later; or conversely, that we might as well take advantage of these tax rates now, because they will eventually phase out and/or be increased.

Thus, and after talking about it with three CPAs now, I'm taking the money now and using it to pay off some higher interest debts.

Side note, of course -- this has nothing to do with politics.  I don't want this to be a political discussion.  I hope we can talk about this tax reform and keep it about the math and its effect on decision making without it turning into a Trump swamp.  Thanks.

Anybody else having similar ideas?

terran

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Re: Anyone Else Making Different Decisions Due to Tax Reform?
« Reply #1 on: December 13, 2018, 11:08:04 AM »
Yes, I'm probably going to do some Roth conversions to capture more of my 199a deduction since that will bring my federal rate low enough that even with state taxes my marginal rate on the conversions will be slightly below 15%. Since the individual tax reform will expire in 2025 I figure even if I establish residency in a no tax state I'll come out slightly ahead by converting a bit now, and it will give me a bit more flexibility in retirement. If I have this same issue after my traditional IRA is all converted I might move my solo 401(k) to a custodian that allows Roth contributions.

sol

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Re: Anyone Else Making Different Decisions Due to Tax Reform?
« Reply #2 on: December 13, 2018, 11:15:54 AM »
I agree that the new tax law will make your taxes higher in the future than under the old tax law. 

In my particular case, we went from the 28% bracket to the 12% bracket but our total federal taxes are staying about the same because we lost the ability to itemize.  Despite the lower marginal rate we actually owe more taxes than before because we're paying it on more income.  Fortunately for us, the increased child tax credit will offset most of the increase and our net bill will be about the same.  Also of note, being in a 12% bracket makes whatever tax deductions you can still take worth a lot less than they were when you were in a higher marginal bracket.

Keep in mind that this year is the lowest tax rates you're ever likely to see for any given income.  The TCJA has your taxes going up every year for the next six years, with this first year being the absolute lowest.  They did it that way to make it look like a better deal to short-time-horizon forecasters, without totally sabotaging the deficits in the long term.  It's still possible they change the tax law again to make this temporary cut permanent, but frankly I'm hoping some future politicican actually cares about long term fiscal solvency.

For most of us, the decision on how to spend/save money this year is locked in by our income and expenses anyway.  There is an optimal strategy at any given total income level, and I'm not sure that the new tax law changes that strategy at any income level.  It changes the payoff for each strategy, certainly, but I don't think it changes which strategy is optimal.  You should still contribute to your 401k up to the employer match.  You should still utilize a Roth IRA if you qualify, and max your 401k or 457 or HSA if you can afford it.  Your taxable account should still hold the lowest dividend-payers in your portfolio, to avoid double taxation.  I'd love to have someone more knowledgeable than me point out if any of this regular community advice is changed under the TCJA.

walkwalkwalk

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Re: Anyone Else Making Different Decisions Due to Tax Reform?
« Reply #3 on: December 13, 2018, 11:22:56 AM »
Your taxable account should still hold the lowest dividend-payers in your portfolio, to avoid double taxation.
I agree with the first half of your sentence, but I am confused by the second half, since it is the companies you're invested in that are paying the other tax for double taxation.

Edit: on second thought, I think I know what you mean, that you shouldn't pay taxes again on post-tax money, but this is income, so you haven't paid the first round of taxes on it. And if you reinvest it, then it is added to your cost basis, never paying taxes on that income again.
« Last Edit: December 13, 2018, 11:25:11 AM by walkwalkwalk »

Catbert

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Re: Anyone Else Making Different Decisions Due to Tax Reform?
« Reply #4 on: December 13, 2018, 12:09:14 PM »
As someone who has  always itemized, the limits on SALT means I'll be taking the standard deduction for the first time since I was 22.   That will lead me to bunch deductions so I'll itemize every 3 years.  I'll donate appreciated stock to DAF every 3rd year and then spread out actual donations to individual charities over 3 years.  I'm also making Roth conversions to fill the 22% bracket and maybe surge a bit into 24% if my math is off.

Not directly related to  latest tax reform, but rather part of ACA I'm now mindful of the Medicare surcharge that starts at 250K for MFJ.  As I understand it, the 250K start is NOT indexed for inflation. So while 250K sounds high now just like AMT of old and taxing of SS at 25K it will apply to more and more people every year due to inflation.  For that reason I'm taking some capital gains now by selling a greatly appreciated mutual fund.  Not completely up to 250K, but more that I would have otherwise.

ReadySetMillionaire

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Re: Anyone Else Making Different Decisions Due to Tax Reform?
« Reply #5 on: December 13, 2018, 12:38:10 PM »
Keep in mind that this year is the lowest tax rates you're ever likely to see for any given income.  The TCJA has your taxes going up every year for the next six years, with this first year being the absolute lowest.  They did it that way to make it look like a better deal to short-time-horizon forecasters, without totally sabotaging the deficits in the long term.  It's still possible they change the tax law again to make this temporary cut permanent, but frankly I'm hoping some future politicican actually cares about long term fiscal solvency.

This is precisely what I was trying to get at but didn't explain that well.  The tax rates are probably not ever going to be lower than they are this year.  And for me, it's a green light to try and pay off some debt whereas in other years it would have been a no-brainer to invest.
« Last Edit: December 13, 2018, 12:46:11 PM by ReadySetMillionaire »

terran

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Re: Anyone Else Making Different Decisions Due to Tax Reform?
« Reply #6 on: December 13, 2018, 12:48:57 PM »
Keep in mind that this year is the lowest tax rates you're ever likely to see for any given income.  The TCJA has your taxes going up every year for the next six years, with this first year being the absolute lowest.  They did it that way to make it look like a better deal to short-time-horizon forecasters, without totally sabotaging the deficits in the long term.  It's still possible they change the tax law again to make this temporary cut permanent, but frankly I'm hoping some future politicican actually cares about long term fiscal solvency.

This is precisely what I was trying to get at but didn't explain that well.  The tax rates are probably not ever going to be lower than they are this year.  And for me, it's a green light to try and pay off some debt whereas in other years it would have been a no-brainer to invest.

Is this in reference to the change in how the brackets are indexed for inflation (chained CPI or whatever) or something else?

BicycleB

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Re: Anyone Else Making Different Decisions Due to Tax Reform?
« Reply #7 on: December 13, 2018, 04:44:22 PM »
Keep in mind that this year is the lowest tax rates you're ever likely to see for any given income.  The TCJA has your taxes going up every year for the next six years, with this first year being the absolute lowest.  They did it that way to make it look like a better deal to short-time-horizon forecasters, without totally sabotaging the deficits in the long term.  It's still possible they change the tax law again to make this temporary cut permanent, but frankly I'm hoping some future politicican actually cares about long term fiscal solvency.

This is precisely what I was trying to get at but didn't explain that well.  The tax rates are probably not ever going to be lower than they are this year.  And for me, it's a green light to try and pay off some debt whereas in other years it would have been a no-brainer to invest.

I'm not paying off my mortgage early regardless. If I had debt at a higher interest rate, I'd pay it off regardless.

That said, I strongly agree that the 12% tax rate is a rare opportunity to get some cash into taxable assets. And if you have higher interest debt, definitely pay it now, rather than avoid a 12% tax rate.

As mentioned in another thread by OP, I have decided until further notice to use any rate under 15% as a chance to maximize taxable investments, and Roth transfers. Over 20%, will still automatically invest pre-tax if I have the chance.