The Money Mustache Community
General Discussion => Welcome and General Discussion => Topic started by: Peter Parker on December 19, 2017, 12:01:33 PM
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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?
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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.
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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.
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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.
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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.
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Move to a state with no income tax.
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Move to a state with no income tax.
Will be upon FIRE. Florida or Tennessee.
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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?
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Not particularly creative, but children are better tax shelters now. $2K tax credit covers a lot of income.
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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
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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.
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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.
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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.
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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.
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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.
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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).
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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.
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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.
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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?
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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.
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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.
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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.
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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.
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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?
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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?
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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.
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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.
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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.
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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.
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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.
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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.
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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/ (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
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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.
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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.
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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!
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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".
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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.
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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.
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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?
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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?
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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.
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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?
I recommend buying a golf course.
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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.
Probably the intended effect
http://www.newsweek.com/paul-ryan-wants-you-have-more-kids-749328
“This is going to be the new economic challenge for America: people. Baby boomers are retiring—I did my part, but we need to have higher birth rates in this country,” Ryan told reporters on Thursday.
Ryan, the Wisconsin Republican and current Speaker of the House, “did [his] part” by having three children.
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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.
Probably the intended effect
http://www.newsweek.com/paul-ryan-wants-you-have-more-kids-749328
“This is going to be the new economic challenge for America: people. Baby boomers are retiring—I did my part, but we need to have higher birth rates in this country,” Ryan told reporters on Thursday.
Ryan, the Wisconsin Republican and current Speaker of the House, “did [his] part” by having three children.
There tends to be a certain element of American society that is obsessed with increasing the birth rate of white babies. This tends to be the same segment of society that grew up playing a little too much Wolfenstein 3D.
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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.
1000% yes. If you're not getting benefits at all you should switch to a pass through entity ASAP. It doesn't have to be an S corp to get the 20% deduction but an S corp will save you on FICA. It will also allow you to set up a section 105 HRA, which will let you pay for a large list of medical expenses including copays and deductibles pre-tax.
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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.
1000% yes. If you're not getting benefits at all you should switch to a pass through entity ASAP. It doesn't have to be an S corp to get the 20% deduction but an S corp will save you on FICA. It will also allow you to set up a section 105 HRA, which will let you pay for a large list of medical expenses including copays and deductibles pre-tax.
I guess I am a bit confused, the regular tax rates put me in the 24% zone under the new plan, so this one will put me in the 20% zone instead?
Is it a 20% tax RATE, or a 20% tax DEDUCTION?
I don't need health coverage, my wife handles that (for now). FICA is a "maybe" as my income will be WELL over the FICA max, I doubt I could architect my income under that number.
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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.
1000% yes. If you're not getting benefits at all you should switch to a pass through entity ASAP. It doesn't have to be an S corp to get the 20% deduction but an S corp will save you on FICA. It will also allow you to set up a section 105 HRA, which will let you pay for a large list of medical expenses including copays and deductibles pre-tax.
I guess I am a bit confused, the regular tax rates put me in the 24% zone under the new plan, so this one will put me in the 20% zone instead?
Is it a 20% tax RATE, or a 20% tax DEDUCTION?
I don't need health coverage, my wife handles that (for now). FICA is a "maybe" as my income will be WELL over the FICA max, I doubt I could architect my income under that number.
It's a 20% deduction from your qualified business income. For example, let's say you pass $100k of net profit through after paying your S corp reasonable salary and contributing to a solo 401K. You can deduct $20k of that net profit from your joint taxable income after all other deductions apply.
You can definitely figure out a salary number that's less than what you get paid. There are lots of ways to do it and you should talk with a CPA about how to figure out something justifiable, but I guarantee it'll be less than what your W2 says now.
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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.
1000% yes. If you're not getting benefits at all you should switch to a pass through entity ASAP. It doesn't have to be an S corp to get the 20% deduction but an S corp will save you on FICA. It will also allow you to set up a section 105 HRA, which will let you pay for a large list of medical expenses including copays and deductibles pre-tax.
I guess I am a bit confused, the regular tax rates put me in the 24% zone under the new plan, so this one will put me in the 20% zone instead?
Is it a 20% tax RATE, or a 20% tax DEDUCTION?
I don't need health coverage, my wife handles that (for now). FICA is a "maybe" as my income will be WELL over the FICA max, I doubt I could architect my income under that number.
It's a 20% deduction from your qualified business income. For example, let's say you pass $100k of net profit through after paying your S corp reasonable salary and contributing to a solo 401K. You can deduct $20k of that net profit from your joint taxable income after all other deductions apply.
You can definitely figure out a salary number that's less than what you get paid. There are lots of ways to do it and you should talk with a CPA about how to figure out something justifiable, but I guarantee it'll be less than what your W2 says now.
Interesting.... let me see if I got this...
$200,000 total income
-$100,000 Salary
- $20,000 401k match(I assume this comes from the company side of things, using a round number, but it will be maxed.)
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80k total business income (getting passed through)
So I would pay taxes on....
82k ( 100k salary (minus 18k for my 401k contribution))
64k (80k - 20%)
For a total taxable income of $146,000.
Does that look generally right?
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Interesting.... let me see if I got this...
$200,000 total income
-$100,000 Salary
- $20,000 401k match(I assume this comes from the company side of things, using a round number, but it will be maxed.)
--------------
80k total business income (getting passed through)
So I would pay taxes on....
82k ( 100k salary (minus 18k for my 401k contribution))
64k (80k - 20%)
For a total taxable income of $146,000.
Does that look generally right?
The business also owes the employer half of FICA taxes on the salary (about $8k) and should be able to contribute $36k to 401k. So the business side is about $44.8 ($56k - 20%).
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Interesting.... let me see if I got this...
$200,000 total income
-$100,000 Salary
- $20,000 401k match(I assume this comes from the company side of things, using a round number, but it will be maxed.)
--------------
80k total business income (getting passed through)
So I would pay taxes on....
82k ( 100k salary (minus 18k for my 401k contribution))
64k (80k - 20%)
For a total taxable income of $146,000.
Does that look generally right?
The business also owes the employer half of FICA taxes on the salary (about $8k) and should be able to contribute $36k to 401k. So the business side is about $44.8 ($56k - 20%).
Right, actually I would get/bill for the FICA side in the first place, so I think not counting it is fair.
....that being said, its a 20% deduction on what's leftover after benefits (401k) and FICA. So I think I understand now.
This could be a major change for everyone in the IT consulting world. Right now there are many W2(HOURLY) contractors, and I could see a mass change.
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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.
Singapore and some other countries facing a demographic crisis in coming decades are offering cash to mothers to have children. It's structured in various ways but essentially many countries are now paying people to have children. I recently read about a remote Swiss village that would pay young families to move there to try and introduce some economic growth. It was per child and for a family of four worked out to something like $60-70,000 for a 10-year commitment.
http://www.straitstimes.com/business/economy/singapore-budget-2016-parents-to-get-3000-in-child-development-account-of-babies
https://www.npr.org/sections/money/2011/11/03/141943008/when-governments-pay-people-to-have-babies
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Not particularly creative, but children are better tax shelters now. $2K tax credit covers a lot of income.
Sure, but doesn't the new system eliminate deductions (or do I mean exemptions?) per household member? So that per-kid amount is gone, which I think is a net cost, per kid per household.
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Not particularly creative, but children are better tax shelters now. $2K tax credit covers a lot of income.
Sure, but doesn't the new system eliminate deductions (or do I mean exemptions?) per household member? So that per-kid amount is gone, which I think is a net cost, per kid per household.
The Child Tax Credit is a credit, not a deduction or exemption. It’s worth $2000 divided by your marginal rate in taxable income. For example, if you’re in the new 22% bracket the credit effectively acts as an additional $9091 deduction. It’s better than the old exemption if you fall within the income limits which are also vastly increased.
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Posting to follow.
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Posting to follow.
(It would be nice if there was a 'subscribe' button but I'm not finding one.....)
(https://i.imgur.com/aNmYqIk.png)
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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.
The changes to the personal exemption means the new tax changes might penalize larger families, even after taking into account tax credit?
Is there a concise example of who and what kind of businesses will be eligible for the new pass through tax deduction?
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Not particularly creative, but children are better tax shelters now. $2K tax credit covers a lot of income.
Sure, but doesn't the new system eliminate deductions (or do I mean exemptions?) per household member? So that per-kid amount is gone, which I think is a net cost, per kid per household.
Exemptions are eliminated but that $4,050 per child is basically offset by the $1,000 increase in the child tax credit. Unless you're in a 25% or higher tax bracket, an extra $1,000 credit is worth more than a $4,000 exemption/deduction. I'm not sure what the phase outs are for the child tax credit but it's certainly over $100,000 if married filing jointly.
As an example with a household income of $70,000 - married filing jointly and 3 kids if you used the standard deduction your taxes would look like this:
Income = $70,000
Standard Deduction = -$12,700
Personal Exemptions (5 @ $4,050 each) = -$20,250
Taxable Income = $37,050
Taxes = $1,865 + 15% over $18,650 = $4,625
Child Tax Credit = +$3,000
Actual Taxes = $1,625 (4.4% of taxable income)
With the new tax code it will look like this
Income = $70,000
Standard Deduction = -$24,700
Personal Exemptions = $0
Taxable Income = $45,300
Taxes = $1,905 + 12% over $19,050 = $5,055
Child Tax Credit = +$6,000
Actual Taxes = -$945 (-2.1% of taxable income)
So, in this case a family of five making $70,000 a year would go from owing $1,625 (effective tax rate of 2.3%) to getting a refund of $945 (effective tax rate of -1.4%) or a total savings of $2,570.
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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?
Edited: Not sure I had the interpretation correct.
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Posting to follow.
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(https://i.imgur.com/aNmYqIk.png)
Sweet! Thanks, it was different from the other forums I'm on.
Is there a concise example of who and what kind of businesses will be eligible for the new pass through tax deduction?
I'm betting thats going to require the IRS to fully write their guidelines and publish which probably won't be until end of January.... Does anybody know how long they took in the Bush tax cuts to redefine their rulebook?
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As an example with a household income of $70,000 - married filing jointly and 3 kids if you used the standard deduction your taxes would look like this:
Income = $70,000
Standard Deduction = -$12,700
Personal Exemptions (5 @ $4,050 each) = -$20,250
Taxable Income = $37,050
Taxes = $1,865 + 15% over $18,650 = $4,625
Child Tax Credit = +$3,000
Actual Taxes = $1,625 (4.4% of taxable income)
With the new tax code it will look like this
Income = $70,000
Standard Deduction = -$24,700
Personal Exemptions = $0
Taxable Income = $45,300
Taxes = $1,905 + 12% over $19,050 = $5,055
Child Tax Credit = +$6,000
Actual Taxes = -$945 (-2.1% of taxable income)
So, in this case a family of five making $70,000 a year would go from owing $1,625 (effective tax rate of 2.3%) to getting a refund of $945 (effective tax rate of -1.4%) or a total savings of $2,570.
Your math is right for 2017. It's slightly off for 2018.
I ran it through my calculator sheet and created one for you. You have the deduction wrong for 2018. Here's your analysis (https://docs.google.com/spreadsheets/d/1iyS_lVAO-X4SybzYnzzzzK7G5QmL90Bs97RmiJAShqM/edit?usp=sharing).
Here's the thread (https://forum.mrmoneymustache.com/welcome-to-the-forum/2018-republican-tax-plan-impact-calculator/msg1816573/) with my template calculator, for anyone interested.
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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?
It's true that there is a phase in, but they are still limited to 50% of non-shareholder W-2 wages.
So a doctor working independently who makes $350,000 is eligible, but no deduction due to no employees. A doctor running a doctor's office with a bunch of employees would qualify based on non-owner W-2 wages and the income phase in.
Instead of 50% of wages, you can do 25% of wages + 2.5% depreciable property, which has some potential.
I think we might all be saying the same thing? 199A(b)(3)(A) says that the wage and property limits don’t apply if your taxable income is less than the threshold plus $50k, and they phase in over that $50k.
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The new tax plan helps people who have a full-time job and a side-hustle (Amazon, eBay, Etsy, etc.).
Let’s say your primary W2 job pays enough to meet the annual social security contribution limits. Therefore, no social security taxes are required from the side hustle. A SEP account can be used to shelter approximately 20% of the side-hustle income. The new pass-through provision allows another 20% of the side-hustle income to be reduced. I believe the 20% pass-through is based on income after the SEP is taken out (not 100% sure on this - one source shows it).
In a situation where the side-hustle brings $25,000 per year, the SEP reduces the taxable income to approximately $20,000. The new pass-through provision reduces the income an additional $4,000 ($20k - $4k) to bring the income down to $16,000. This assumes the 20% income deduction is post SEP contributions. The tax bracket for "joint income" filers with an income range of $165k to $315k is 24%. As previously mentioned, there are no additional social security taxes taken out in this scenario because it was met with the W2 job. So, the federal tax rate on the $25,000 side-hustle is $3,840 ($16k x 24%) which represents 15.3% tax on the original $25k in income.
There is now a stronger case for a side-hustle when the actual federal tax rate is in the 15% range. In the past, I questioned how effective a side-hustle would be because the additional income is taxed at the highest rate. If you are in a state with no state income taxes, you are even in a stronger position.
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The Child Tax Credit is a credit, not a deduction or exemption. It’s worth $2000 divided by your marginal rate in taxable income. For example, if you’re in the new 22% bracket the credit effectively acts as an additional $9091 deduction. It’s better than the old exemption if you fall within the income limits which are also vastly increased.
Oh, gotcha. Right, so I guess it's pretty much a wash. Thanks.
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I think we might all be saying the same thing? 199A(b)(3)(A) says that the wage and property limits don’t apply if your taxable income is less than the threshold plus $50k, and they phase in over that $50k.
To be honest, I'm not sure what I'm saying anymore. I swear I've read the text of the tax bill ten different ways. I think I had it backwards.
Here's what the Journal of Accountancy says:
A limitation on the deduction is phased in based on W-2 wages above a threshold amount of taxable income. The deduction is disallowed for specified service trades or businesses with income above a threshold...
The exclusion from the definition of a qualified business for specified service trades or businesses phases out for a taxpayer with taxable income in excess of $157,500, or $315,000 in the case of a joint return...
“Qualified business income” does not include an S corporation shareholder’s reasonable compensation, guaranteed payments, or — to the extent provided in regulations — payments to a partner who is acting in a capacity other than his or her capacity as a partner.
I was thinking it was saying that reasonable comp wouldn't count toward the 50% W-2 limit, but now I don't see it anywhere.
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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?
Enlighten me, why would more American kids be a bad thing?
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Not particularly creative, but children are better tax shelters now. $2K tax credit covers a lot of income.
Sure, but doesn't the new system eliminate deductions (or do I mean exemptions?) per household member? So that per-kid amount is gone, which I think is a net cost, per kid per household.
Exemptions are eliminated but that $4,050 per child is basically offset by the $1,000 increase in the child tax credit. Unless you're in a 25% or higher tax bracket, an extra $1,000 credit is worth more than a $4,000 exemption/deduction. I'm not sure what the phase outs are for the child tax credit but it's certainly over $100,000 if married filing jointly.
As an example with a household income of $70,000 - married filing jointly and 3 kids if you used the standard deduction your taxes would look like this:
Income = $70,000
Standard Deduction = -$12,700
Personal Exemptions (5 @ $4,050 each) = -$20,250
Taxable Income = $37,050
Taxes = $1,865 + 15% over $18,650 = $4,625
Child Tax Credit = +$3,000
Actual Taxes = $1,625 (4.4% of taxable income)
With the new tax code it will look like this
Income = $70,000
Standard Deduction = -$24,700
Personal Exemptions = $0
Taxable Income = $45,300
Taxes = $1,905 + 12% over $19,050 = $5,055
Child Tax Credit = +$6,000
Actual Taxes = -$945 (-2.1% of taxable income)
So, in this case a family of five making $70,000 a year would go from owing $1,625 (effective tax rate of 2.3%) to getting a refund of $945 (effective tax rate of -1.4%) or a total savings of $2,570.
Perhaps, but the tax difference also depends on how old the kids are. Last I looked, the new tax credit ends when your child turns 17. If I remember correctly, the exemptions of the prior tax scheme allowed you to claim students through college. That's a big difference to those of us with older teens in college/headed to college.
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Last I looked, the new tax credit ends when your child turns 17.
Yes, that was the whole point of Rubio's deal. He made the child tax credit larger each year, but available for fewer years, so that it actually costs the government less money.
Think about that for a second. While telling Americans that he was lobbying for a change to help working class families, he literally REDUCED the amount of money the government gives to working class families.
I am rapidly losing faith in humanity.
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Maybe it will be incentive for the young adult to work and get off the parents return earlier?
Never really followed the rules since we do not have kids but I would think when they are 18 they can file their own taxes?
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Not particularly creative, but children are better tax shelters now. $2K tax credit covers a lot of income.
Sure, but doesn't the new system eliminate deductions (or do I mean exemptions?) per household member? So that per-kid amount is gone, which I think is a net cost, per kid per household.
So, in this case a family of five making $70,000 a year would go from owing $1,625 (effective tax rate of 2.3%) to getting a refund of $945 (effective tax rate of -1.4%) or a total savings of $2,570.
Perhaps, but the tax difference also depends on how old the kids are. Last I looked, the new tax credit ends when your child turns 17. If I remember correctly, the exemptions of the prior tax scheme allowed you to claim students through college. That's a big difference to those of us with older teens in college/headed to college.
The child tax credit can be claimed until kids turn 18 under the new bill. This is a change from before when college age children could be claimed as dependents up to age 24 so long as they were full time students and didn't earn more than half their living expenses (not including tuition).
On the other hand, the child tax credit doesn't phase out until $400,000 whereas before the limit was much lower at around $110,000.
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Minors can file taxes. I had to file long form 1040 with schedule SE for my first tax return at age 14 or 15. I had taken on a newspaper delivery route as a "Independent Contractor".
For working families where the children enter the full-time workforce from high school the new child tax credits are better. A refundable tax credit instead of an exemption makes the tax more progressive as well, so for many families at the lowest income levels the new rules are better (assuming they are renewed).
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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.
One point regarding the refundability of the expanded child tax credit that I have not seen discussed but that will be noteworthy for mustachians with neither significant federal tax liability nor significant earned income:
The refundable portion of the expanded child tax credit, like the refundable portion of existing child tax credit, is subject to a limitation based on the taxpayer's earned income. To the extent the child tax credit exceeds the taxpayer's federal tax liability, the taxpayer is eligible for a refundable credit (up to the amount of such excess, but not to exceed $1,400) only to the extent the taxpayer's earned income exceeds $2,500 (this figure is reduced from the $3,000 figure that applies under current law), in which case the refundable credit will only be equal to 15% of the amount of earned income in excess of $2,500 (again, up to the unused amount of the child tax credit, and capped at $1,400) (see subsections (5) and (6) of the new subsection (h) being added to Section 24 of the tax code by the new legislation, which can be found starting on page 51 of this pdf (https://www.congress.gov/115/bills/hr1/BILLS-115hr1eas2.pdf)). For taxpayers with three or more children, there is an alternative formula that would allow a larger refundable credit if the taxpayer's social security taxes exceed the taxypayer's earned income credit, and this alternative formula is not being changed by the new legislation (except for the imposition of the $1,400 cap).
So the quintessential mustachian retiree with zero federal tax liability and zero earned income will not benefit at all from the child tax credit (except to the extent it is used to generate additional income (such as through Roth conversions) without incurring incremental federal tax liability).
This post, like all of my posts in the forum, does not constitute tax or legal advice.
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To the extent the child tax credit exceeds the taxpayer's federal tax liability, the taxpayer is eligible for a refundable credit (up to the amount of such excess, but not to exceed $1,400) only to the extent the taxpayer's earned income exceeds $2,500, in which case the refundable credit will only be equal to 15% of the amount of earned income in excess of $2,500.
So for a family with one child, the marginal tax rate from $2,500 to $11,833 of earned income is negative 15% ($2,500 to $21,166 for married couple with two children). Beyond that the marginal tax rate is 0% until the remaining $600 credit is used.
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[/quote]
The child tax credit can be claimed until kids turn 18 under the new bill. This is a change from before when college age children could be claimed as dependents up to age 24 so long as they were full time students and didn't earn more than half their living expenses (not including tuition).
On the other hand, the child tax credit doesn't phase out until $400,000 whereas before the limit was much lower at around $110,000.
[/quote]
Oh, it gets better and better. So, for my 19yo full-time student whose expenses I am paying...no deduction or child tax credit?
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The child tax credit can be claimed until kids turn 18 under the new bill. This is a change from before when college age children could be claimed as dependents up to age 24 so long as they were full time students and didn't earn more than half their living expenses (not including tuition).
On the other hand, the child tax credit doesn't phase out until $400,000 whereas before the limit was much lower at around $110,000.
[/quote]
Oh, it gets better and better. So, for my 19yo full-time student whose expenses I am paying...no deduction or child tax credit?
[/quote]
Technically no exemption, but yes that's correct. Now they can get a job and claim themselves on their taxes. I'm not sure about the other tax credits for education if those require them to still be claimed as a dependent though. I've got another 9 years before I need to worry about that so I haven't really looked into it.
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As an example with a household income of $70,000 - married filing jointly and 3 kids if you used the standard deduction your taxes would look like this:
Income = $70,000
Standard Deduction = -$12,700
Personal Exemptions (5 @ $4,050 each) = -$20,250
Taxable Income = $37,050
Taxes = $1,865 + 15% over $18,650 = $4,625
Child Tax Credit = +$3,000
Actual Taxes = $1,625 (4.4% of taxable income)
With the new tax code it will look like this
Income = $70,000
Standard Deduction = -$24,700
Personal Exemptions = $0
Taxable Income = $45,300
Taxes = $1,905 + 12% over $19,050 = $5,055
Child Tax Credit = +$6,000 [Limited to the $5,055 Taxes owed, with up to $4,200 Refundable]
Actual Taxes = -$945 (-2.1% of taxable income) [$0]
So, in this case a family of five making $70,000 a year would go from owing $1,625 (effective tax rate of 2.3%) to getting a refund of $945 (effective tax rate of -1.4%) or a total savings of $2,570.
I think since the new Child Tax Credit is only refundable up to $1,400, your actual 2018 taxes would be reduced to $0, but you would not receive a refund of the additional $945.
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As an example with a household income of $70,000 - married filing jointly and 3 kids if you used the standard deduction your taxes would look like this:
Income = $70,000
Standard Deduction = -$12,700
Personal Exemptions (5 @ $4,050 each) = -$20,250
Taxable Income = $37,050
Taxes = $1,865 + 15% over $18,650 = $4,625
Child Tax Credit = +$3,000
Actual Taxes = $1,625 (4.4% of taxable income)
With the new tax code it will look like this
Income = $70,000
Standard Deduction = -$24,700
Personal Exemptions = $0
Taxable Income = $45,300
Taxes = $1,905 + 12% over $19,050 = $5,055
Child Tax Credit = +$6,000 [Limited to the $5,055 Taxes owed, with up to $4,200 Refundable]
Actual Taxes = -$945 (-2.1% of taxable income) [$0]
So, in this case a family of five making $70,000 a year would go from owing $1,625 (effective tax rate of 2.3%) to getting a refund of $945 (effective tax rate of -1.4%) or a total savings of $2,570.
I think since the new Child Tax Credit is only refundable up to $1,400, your actual 2018 taxes would be reduced to $0, but you would not receive a refund of the additional $945.
I believe the $1,400 refundable portion means that if you had a very low tax burden to begin with you can't receive more than $1,400 per child in refunds. So a single-mother with 3 kids making $24,000 a year who would have essentially no tax would get a check for $4,200, not the full $6,000 (plus EITC in that case).
The current child tax credit is non-refundable although there's the additional child tax credit which is at least partially refundable. Looking back at an older tax return where I was making less money we had four child tax credits but had only had about $2,500 in taxes taken out due to setting my W-9 exemptions very high. In addition to getting that $2,500 back we also received $1,500 in additional child tax credit for a total refund of $4,000.
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Has anyone looked at how this will effect your state income tax yet. My AGI will go up as a result of this but the state taxes stay the same unless they alter their standard of using the federal AGI, so while my federal tax burden decreased my state taxes increase.
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Has anyone looked at how this will effect your state income tax yet. My AGI will go up as a result of this but the state taxes stay the same unless they alter their standard of using the federal AGI, so while my federal tax burden decreased my state taxes increase.
Why is your AGI going up? Most above the line deductions stayed in the end.
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Has anyone looked at how this will effect your state income tax yet. My AGI will go up as a result of this but the state taxes stay the same unless they alter their standard of using the federal AGI, so while my federal tax burden decreased my state taxes increase.
Why is your AGI going up? Most above the line deductions stayed in the end.
Last year I could deduct about 33k, with personal and dependent exemptions, mortgage interest, state tax, and charity. Next year I will only get to deduct the standard 24k. I will pay taxes on the extra $9k as a result of this bill.
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Has anyone looked at how this will effect your state income tax yet. My AGI will go up as a result of this but the state taxes stay the same unless they alter their standard of using the federal AGI, so while my federal tax burden decreased my state taxes increase.
Why is your AGI going up? Most above the line deductions stayed in the end.
Not for people with kids they didn't.
Last year I could deduct about 33k, with personal and dependent exemptions, mortgage interest, state tax, and charity. Next year I will only get to deduct the standard 24k. I will pay taxes on the extra $9k as a result of this bill.
The temporary child tax credit will make up the difference on federal taxes, but not on state taxes.
Yeah, but your AGI is before deductions, and at least in my state (and every other state I've looked at) that's what your state taxes are based on.
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Has anyone looked at how this will effect your state income tax yet. My AGI will go up as a result of this but the state taxes stay the same unless they alter their standard of using the federal AGI, so while my federal tax burden decreased my state taxes increase.
Why is your AGI going up? Most above the line deductions stayed in the end.
Not for people with kids they didn't.
Last year I could deduct about 33k, with personal and dependent exemptions, mortgage interest, state tax, and charity. Next year I will only get to deduct the standard 24k. I will pay taxes on the extra $9k as a result of this bill.
The temporary child tax credit will make up the difference on federal taxes, but not on state taxes.
Yeah, but your AGI is before deductions, and at least in my state (and every other state I've looked at) that's what your state taxes are based on.
AGI is line 37, and the only allowed deductions are things like retirement contributions and moving expenses (lines 23-36). So it looks like the new tax law should not raise AGI for most people, it will only raise their taxable income.
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I just prepaid my property taxes for 2018. Should save me about a grand on my taxes this year and have no impact next year thanks to the higher standard deduction (or the SALT cap if I’m somehow able to itemize more than 24k). Pretty sweet.
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The child tax credit can be claimed until kids turn 18 under the new bill. This is a change from before when college age children could be claimed as dependents up to age 24 so long as they were full time students and didn't earn more than half their living expenses (not including tuition).
On the other hand, the child tax credit doesn't phase out until $400,000 whereas before the limit was much lower at around $110,000.
The Child Tax Credit can be claimed until the year before the year in which the child turns 17. It is that way under current law and the new tax bill does nothing to change that.
I don't believe the rules for claiming a child as a dependent have changed either. We do lose the personal exemptions for any dependents we do claim.
The phaseout limits have increase for the Child Tax Credit; I think those vary based on filing status but the above numbers seem plausible for MFJ status.
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Prepaid my property taxes
Pre-donated to my favorite charities
Maxed out the HSA
Maxed out the 403(b)
I'll be filing ASAP. Gonna be a banner year for effective tax rate
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With the reduced corporate rate, are there situations where you might want to now have side hustle taxed as c corp (an LLC can elect to be taxed as a c corp right?) and keep money in the corporation to keep personal income lower? (if this is is allowed)
I'm thinking if you are retired, or have an adequate stash and don't need the profits immediately. In the former case, you might want to keep personal income low for ACA purposes etc, and in the latter due to higher personal than corporate rates. If it's irregular profits, you could then pay out slowly as dividends in other years?
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With the reduced corporate rate, are there situations where you might want to now have side hustle taxed as c corp (an LLC can elect to be taxed as a c corp right?) and keep money in the corporation to keep personal income lower? (if this is is allowed)
I'm thinking if you are retired, or have an adequate stash and don't need the profits immediately. In the former case, you might want to keep personal income low for ACA purposes etc, and in the latter due to higher personal than corporate rates. If it's irregular profits, you could then pay out slowly as dividends in other years?
I haven’t been able to make the math work yet. With the new personal 22% bracket being as big as it is and the corporate rate being a flat 21% the tax rate arbitrage is awfully narrow unless your side hustle is roughly the same as your main gig and combined they’d be pushing you into the top personal brackets. Plus, eventually you’re going to run into the Personal Holding Company and Accumulated Earnings Tax rules which blows your tax rate arbitrage.
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I haven’t been able to make the math work yet. With the new personal 22% bracket being as big as it is and the corporate rate being a flat 21% the tax rate arbitrage is awfully narrow unless your side hustle is roughly the same as your main gig and combined they’d be pushing you into the top personal brackets. Plus, eventually you’re going to run into the Personal Holding Company and Accumulated Earnings Tax rules which blows your tax rate arbitrage.
I was speculating and hadn't realized there were specific rules designed to stop you from accumulating earnings in a corporation, it makes sense that there are. At first read, it seems that is only assessed as a penalty, so is it right that you would only be afoul if audited and assessed the penalty, are are you afoul even if not penalized?
In the case where you are retired / self-employed, and relying on ACA health plans, you might have a lot to lose by having more income than planned in one year, so I'd see advantages to paying corporate taxes and pushing unplanned income ahead to other years, if it was allowed and legal.
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With the reduced corporate rate, are there situations where you might want to now have side hustle taxed as c corp (an LLC can elect to be taxed as a c corp right?) and keep money in the corporation to keep personal income lower? (if this is is allowed)
I'm thinking if you are retired, or have an adequate stash and don't need the profits immediately. In the former case, you might want to keep personal income low for ACA purposes etc, and in the latter due to higher personal than corporate rates. If it's irregular profits, you could then pay out slowly as dividends in other years?
There are a lot of fringe benefits that are only available to owners if they're employees of a C-Corp. If the person can make use of excessive fringe benefits, then there could be a place for a C-Corp.
1. W-2 owner up to what reasonable compensation would be if they were a passthrough
2. 401(k) with profit sharing
3. Health insurance and a healthcare reimbursement plan
4. Tuition reimbursement
5. Dependent care savings plan
6. Stuff I'm not thinking about
But at the end of the day, you're still stuck with a 21% tax rate and then (probably) 15% on dividends when any extra churns out. But excess earnings don't really kick in until they've reached $250,000. If you could somehow time it right where you're maximizing your fringe benefit output, accumulate your earnings, and then retire - then you could churn out the earnings at a 0% dividend tax rate. Even better if you plan to move to a no-income tax state in retirement.
And if it's a Personal Service Corporation, the rules get wacky. Plus the excess earnings potential is lower.
Still - in theory, I think the math could work if the timing was right and you were in a really high individual tax bracket now, but not during your first couple of years of retirement.
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I just prepaid my property taxes for 2018. Should save me about a grand on my taxes this year and have no impact next year thanks to the higher standard deduction (or the SALT cap if I’m somehow able to itemize more than 24k). Pretty sweet.
Does prepaying 2018 property taxes only make sense if they are above 10k ? The 10k SALT cap is on top of the standard 24k deduction correct? or am I missing something here?
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I just prepaid my property taxes for 2018. Should save me about a grand on my taxes this year and have no impact next year thanks to the higher standard deduction (or the SALT cap if I’m somehow able to itemize more than 24k). Pretty sweet.
Does prepaying 2018 property taxes only make sense if they are above 10k ? The 10k SALT cap is on top of the standard 24k deduction correct? or am I missing something here?
No, as it is now, the $10k SALT deduction is itemized, so you have to pick between it and the standard deduction. With the standard deduction going up (some of which is just getting rid of the personal exemptions and making them part of the standard deduction), and itemized deductions going down it will make sense for more people to claim the standard deduction instead of itemizing.
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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.
That proposal became law a couple of years ago. The rate is decreasing each year until the eventual complete phase-out starting in 2021.
Source: https://revenue.support.tn.gov/hc/en-us/articles/202989875-What-is-the-Hall-income-tax-rate-
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[/quote]
No, as it is now, the $10k SALT deduction is itemized, so you have to pick between it and the standard deduction. With the standard deduction going up (some of which is just getting rid of the personal exemptions and making them part of the standard deduction), and itemized deductions going down it will make sense for more people to claim the standard deduction instead of itemizing.
[/quote]
Right, thanks. Been reading too much of this stuff and now confused myself! However, since I use a home office deduction on an SK-1 it would not necessarily benefit me to prepay. Also am not sure the county allows this unless they've changed their mind about it.
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I just prepaid my property taxes for 2018. Should save me about a grand on my taxes this year and have no impact next year thanks to the higher standard deduction (or the SALT cap if I’m somehow able to itemize more than 24k). Pretty sweet.
Does prepaying 2018 property taxes only make sense if they are above 10k ? The 10k SALT cap is on top of the standard 24k deduction correct? or am I missing something here?
No, as it is now, the $10k SALT deduction is itemized, so you have to pick between it and the standard deduction. With the standard deduction going up (some of which is just getting rid of the personal exemptions and making them part of the standard deduction), and itemized deductions going down it will make sense for more people to claim the standard deduction instead of itemizing.
It makes sense to prepay for anyone who 1) Currently itemizes but will likely take the $24k standard deduction next year (This is me and probably a ton of people, not just in high-tax states. I think that's being underreported); and/or 2) Is over the $10k SALT cap which includes local income taxes not just property taxes (this is also me, thanks to relatively high income taxes in my jurisdiction).
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It makes sense to prepay for anyone who 1) Currently itemizes but will likely take the $24k standard deduction next year (This is me and probably a ton of people, not just in high-tax states. I think that's being underreported); and/or 2) Is over the $10k SALT cap which includes local income taxes not just property taxes (this is also me, thanks to relatively high income taxes in my jurisdiction).
And 3) does not fall under the AMT for 2017 and therefore does not get the deduction (but will start getting [part of] it next year with the new AMT rules)
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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.
That proposal became law a couple of years ago. The rate is decreasing each year until the eventual complete phase-out starting in 2021.
Source: https://revenue.support.tn.gov/hc/en-us/articles/202989875-What-is-the-Hall-income-tax-rate-
One thing to keep in mind as things shake out: healthcare
Right now Florida has some very nice plans on the Federal ACA exchange, including with nationwide network. A nationwide network can be difficult to find in ACA exchange plans. The plans can be expensive, but are cheap to free if your retirement income qualifies you for ACA subsidies
I haven't checked TN personally, but I have heard that the TN marketplace is not as robust.
End off-topic diversion
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It makes sense to prepay for anyone who 1) Currently itemizes but will likely take the $24k standard deduction next year (This is me and probably a ton of people, not just in high-tax states. I think that's being underreported); and/or 2) Is over the $10k SALT cap which includes local income taxes not just property taxes (this is also me, thanks to relatively high income taxes in my jurisdiction).
And 3) does not fall under the AMT for 2017 and therefore does not get the deduction (but will start getting [part of] it next year with the new AMT rules)
Right. Thanks for adding that.
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How are we hanging this new 529 plan thing. It says can be used for k-12 expenses. If my kid attends public school the supplies I buy are expenses school field trips etc. Are any of these capable of using 529 money.
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Speaking of 529s...
SALT is federally limited now. If 529 contributions lower SALT (i.e., they lower state income tax due),
1) Make enough 529 contributions to lower state income taxes to <$10,000.
2) Let it grow tax-deferred.
3) Pull out as needed and pay the 10% penalty.
This has always been a strategy but it's more relevant now. It's also available to those without children.
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How are we hanging this new 529 plan thing. It says can be used for k-12 expenses. If my kid attends public school the supplies I buy are expenses school field trips etc. Are any of these capable of using 529 money.
It would appear so. As well as any 'education specific' trips your kids take. Specific text below:
https://www.congress.gov/bill/115th-congress/house-bill/1/text (https://www.congress.gov/bill/115th-congress/house-bill/1/text)
https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf (https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf)
‘‘(7) TREATMENT OF ELEMENTARY AND SECONDARY TUITION.—Any
reference in this subsection to the term ‘qualified
higher education expense’ shall include a reference to expenses
for tuition in connection with enrollment or attendance at an
elementary or secondary public, private, or religious school.’’.
(2) LIMITATION.—Section 529(e)(3)(A) is amended by adding
at the end the following: ‘‘The amount of cash distributions
from all qualified tuition programs described in subsection
(b)(1)(A)(ii) with respect to a beneficiary during any taxable
year shall, in the aggregate, include not more than $10,000
in expenses described in subsection (c)(7) incurred during the
taxable year.’’.
(b) EFFECTIVE DATE.—The amendments made by this section
shall apply to distributions made after December 31, 2017.
I would certainly consider supplies "public school expenses" as well as trips to museums, astronomy labs, or other similar educational activities (that are inherently educational, I doubt you could take a trip to DC out of a 529 plan...)
MODIFY TO ADD: I can't tell which way this reads. Someone please clarify my bolded edits below if this is the right reading or not:
‘‘(7) TREATMENT OF ELEMENTARY AND SECONDARY TUITION.—Any
reference in this subsection to the term ‘qualified
higher education expense’ shall include a reference to (1) expenses
for tuition in connection with enrollment or (2)attendance at an
elementary or secondary public, private, or religious school.’’.
(2) LIMITATION.—Section 529...
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Speaking of 529s...
SALT is federally limited now. If 529 contributions lower SALT (i.e., they lower state income tax due),
1) Make enough 529 contributions to lower state income taxes to <$10,000.
2) Let it grow tax-deferred.
3) Pull out as needed and pay the 10% penalty.
This has always been a strategy but it's more relevant now. It's also available to those without children.
New York has clawback provisions that subject nonqualified withdrawals to state tax recapture. I believe most states that provide a state tax deduction have similar protections.
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Speaking of 529s...
SALT is federally limited now. If 529 contributions lower SALT (i.e., they lower state income tax due),
1) Make enough 529 contributions to lower state income taxes to <$10,000.
2) Let it grow tax-deferred.
3) Pull out as needed and pay the 10% penalty.
This has always been a strategy but it's more relevant now. It's also available to those without children.
New York has clawback provisions that subject nonqualified withdrawals to state tax recapture. I believe most states that provide a state tax deduction have similar protections.
Move to an income tax-free state and do a 529 rollover before starting withdrawals?
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Move to an income tax-free state and do a 529 rollover before starting withdrawals?
Rollover to another state’s plan triggers recapture too (at least in NY).
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1) Make enough 529 contributions to lower state income taxes to <$10,000.
2) Let it grow tax-deferred.
3) Pull out as needed and pay the 10% penalty.
So, not worth it if you pay less than 10% in state income taxes?
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To the extent the child tax credit exceeds the taxpayer's federal tax liability, the taxpayer is eligible for a refundable credit (up to the amount of such excess, but not to exceed $1,400) only to the extent the taxpayer's earned income exceeds $2,500, in which case the refundable credit will only be equal to 15% of the amount of earned income in excess of $2,500.
So for a family with one child, the marginal tax rate from $2,500 to $11,833 of earned income is negative 15% ($2,500 to $21,166 for married couple with two children). Beyond that the marginal tax rate is 0% until the remaining $600 credit is used.
There might be some considerations here for retired (low income) mustachians with children under 17 and small to moderate amounts of side hustle income that would count as earned income. For example, I believe regular workplace 401k contributions would reduce your amount of earned income, whereas IRA contributions would not. If the employee side of solo 401k contributions similarly reduced earned income, you may not want to shelter small amounts of income that way. Is there a similar thought for not wanting to make the employer side 20% SEP, 401k, etc contributions and simply pass them through as income in order to benefit from the credit?
My quick calculations say that in 2017 while retired we made roughly $7,000 of earned income. Assuming no tax liability, and doing nothing to shelter that income means roughly a $675 cash payment back per eligible child.
While this and ACA exists (with very generous subsidies at low income and steep cliffs) , I'm tempted to think that a retiree who can put off Roth conversions for the future will not want to find themselves generating investment income through either Roth conversion or tax gain harvesting.
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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.
FWIW, in King County WA, prepayment checks are being rejected (because of state laws that pre-date the TCJA):
https://www.seattletimes.com/business/real-estate/king-county-dont-prepay-your-property-taxes-now-to-avoid-tax-hit-next-year/
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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.
FWIW, in King County WA, prepayment checks are being rejected (because of state laws that pre-date the TCJA):
https://www.seattletimes.com/business/real-estate/king-county-dont-prepay-your-property-taxes-now-to-avoid-tax-hit-next-year/
This is the case for Washington County, OR too. They are not accepting any property tax prepayments. http://www.co.washington.or.us/AssessmentTaxation/
Bummer.
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Move to an income tax-free state and do a 529 rollover before starting withdrawals?
Rollover to another state’s plan triggers recapture too (at least in NY).
But you could pull it out for private school and use the money you were planning to use for private school to double dip state tax deductions.
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We are now on the cusp of itemizing or taking the standard deduction. I just pulled forward my January mortgage payment and April property tax payment into 2017 since we will be itemizing. We will take the standard deduction in 2018. I’m predicting by 2019, it will be worthwhile to pull forward the mortgage and property tax bill into December again. Thus alternating between standard and itemized on a go forward basis, at least for a few years.
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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?
I recommend buying a golf course.
Golf (in the USA) has been on the decline for at least a decade. The prospects for youth sports complexes seem to be a bit better: 15 billion dollar industry.
Of course, fantasy sports are doing even better, but I don't think the IRS will allow you a deduction for your fantasy sports camp.
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I still need to look, does the daycare FSA expire in five years like the house wanted?
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Just prepaid 2 months of interest on the house for 2018 considering going to 3 but not sure yet
instant 31% ROI
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Just prepaid 2 months of interest on the house for 2018 considering going to 3 but not sure yet
instant 31% ROI
The IRS indicates that prepaying next year’s interest is not deductible until the year the interest is applicable.
Prepaid interest. If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. You can deduct in each year only the interest that qualifies as home mortgage interest for that year.
https://www.irs.gov/publications/p936
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Just prepaid 2 months of interest on the house for 2018 considering going to 3 but not sure yet
instant 31% ROI
The IRS indicates that prepaying next year’s interest is not deductible until the year the interest is applicable.
Prepaid interest. If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. You can deduct in each year only the interest that qualifies as home mortgage interest for that year.
https://www.irs.gov/publications/p936
so when my 1098 comes and shows interest i paid will it show that some was prepaid for next year? if not how does the IRS track this ...
further reason we really should have simplified the tax code this year.
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Just prepaid 2 months of interest on the house for 2018 considering going to 3 but not sure yet
instant 31% ROI
The IRS indicates that prepaying next year’s interest is not deductible until the year the interest is applicable.
Prepaid interest. If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. You can deduct in each year only the interest that qualifies as home mortgage interest for that year.
https://www.irs.gov/publications/p936
so when my 1098 comes and shows interest i paid will it show that some was prepaid for next year? if not how does the IRS track this ...
further reason we really should have simplified the tax code this year.
I've seen it mentioned in some of the news articles about people pre paying property taxes. The payments are being accepted but there is no guarantee they will be deductible for 2017. I imagine there is a box that can be checked on the form that indicates some of the interest/tax paid was for another tax year. I feel like the whole "double up on the payments so you can deduct more in one year" is not new (especially with mortgage payments), just not as prevalent as it will be this year. I'm curious to see how the IRS handles it.
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So far the IRS has advised that you can deduct 2018 taxes in 2017 only if you've received the assessment in 2017. Since many counties don't assess property taxes until the year they're due, this will disallow it for most people.
I don't know how likely this ruling is to be changed or clarified, but at this point I wouldn't be worried about getting the pre-payment in if you don't have the bill in hand.
I'm still glad I sent in my check as soon as I heard about it, since the worst case scenario is that I don't get any deduction and lose the low interest rate for 6-9 months I get on my emergency fund (yes, I consider the chance to save about $1500 an emergency, flame away if you want)
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So far the IRS has ruled that you can deduct 2018 taxes in 2017 only if you've received the assessment in 2017. Since many counties don't assess property taxes until the year they're due, this will disallow it for most people.
I don't know how likely this ruling is to be changed or clarified, but at this point I wouldn't be worried about getting the pre-payment in if you don't have the bill in hand.
I'm still glad I sent in my check as soon as I heard about it, since the worst case scenario is that I don't get any deduction and lose the low interest rate for 6-9 months I get on my emergency fund (yes, I consider the chance to save about $1500 an emergency, flame away if you want)
Good to know. For some it may work. If the taxes are due in January anyway, they may have gotten a bill in December. Mine are due December 1st and July 1st, so it definitely wouldn't work for me.
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I should have said "IRS adviced" instead of "IRS ruled", since this is not a final ruling by the IRS. Everyone remember that the whole tax change shit-storm is still evolving, so tomorrows answers are often different from today's.
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So far the IRS has advised that you can deduct 2018 taxes in 2017 only if you've received the assessment in 2017. Since many counties don't assess property taxes until the year they're due, this will disallow it for most people.
Most jusristictions assess property taxes on a July-June fiscal year basis. About half the taxes are usually due before the end of the calendar year and about half the taxes are usually due in the next calendar year, so most people can move about 1/2 of their property taxes into an earlier income tax year. It usually isn't possible to prepay property taxes beyond the first half of the coming year for an earlier income tax deduction.
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I made my mortgage payment on my servicer's website this week instead of having my bank mail a check on Friday or Tuesday. We'll see if that gets me an extra $500 primary residence interest to deduct in 2017. I also asked the servicer to pay the property tax bill that they had planned to pay in March from my escrow account before the end of the year. Any additional cash I want to use to increase my deductions I will prepay donations to charity planned for 2018 as I know that the IRS will allow that deduction.
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Most jusristictions assess property taxes on a July-June fiscal year basis.
This may be true in your state, but I don't think this applies to most of the counties in the US. I haven't found a good data compilation of assessment periods online, though, so you could be right.
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So far the IRS has advised that you can deduct 2018 taxes in 2017 only if you've received the assessment in 2017. Since many counties don't assess property taxes until the year they're due, this will disallow it for most people.
Most jusristictions assess property taxes on a July-June fiscal year basis. About half the taxes are usually due before the end of the calendar year and about half the taxes are usually due in the next calendar year, so most people can move about 1/2 of their property taxes into an earlier income tax year. It usually isn't possible to prepay property taxes beyond the first half of the coming year for an earlier income tax deduction.
This is how it works in my location. Everyone is sitting on a property tax bill with the first half due December 20, 2017, and with the second half optional. I've advised clients to pay the full payment, since we have the bill and the option is available.
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My takeaway from what I've seen in politics over the past year or so -- such as the new tax law -- is that all the people who say government is the enemy are seeming much less like kooks lately. I would not at all be surprised to see more open rebellion begin to happen. I'm not trying to be alarmist, but things seem to be trending a certain way right now and I have never seen this many people upset to the point where they are openly talking about stuff that would have been unimaginable to me even a decade ago.
Social media and the internet didn't exist like.this a decade ago.
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Regarding prepayment of property tax, I sent mine in early before there was clarity. The IRS announcement yesterday dashed my hopes of a quick tax reduction win, but I called a trusted, local CPA who assured me that it would be deductible even after hearing the announcement Wednesday. A CPA friend on Facebook said the same. The CPA explained it to me that even though the assessment is sent in 2018, the tax lien date is 2017 so it will be deductible. Our county is saying to mail in 100-105% of the bill from last year and we'll settle the difference later in 2018. I still don't feel 100% confident in the deduction, but with 2 CPA's saying I'm good to go it seems like a relatively low risk try given the opportunity cost is a "high yield" savings account. It would seem a blanket statement one way or another is misinformed. Call a CPA in your county who has digested the IRS news from Wednesday. I'd be curious what others have found
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My takeaway from what I've seen in politics over the past year or so -- such as the new tax law -- is that all the people who say government is the enemy are seeming much less like kooks lately.
Before Trump was elected, the idea of the "gangster government" persecuting people for their political leanings was mostly a right-wing persecution complex. Now, the Treasury Secretary and his friends openly crow about how the new tax plan is "death to democrats" because of the SALT restrictions.
My, how things change.
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Indeed, the political pendulum swings such that whatever one side denounced the other for is now good while they're in power, and will again be denounced when they lose power in the future. It seems lile the only philisophical consistency in politics now is "us good, them bad".
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Indeed, the political pendulum swings such that whatever one side denounced the other for is now good while they're in power, and will again be denounced when they lose power in the future. It seems lile the only philisophical consistency in politics now is "us good, them bad".
What do you see as the Democrats' recent history of turnabout as fair play? I think it's been a half century of milque toast response on their side when they take power.
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Indeed, the political pendulum swings such that whatever one side denounced the other for is now good while they're in power, and will again be denounced when they lose power in the future. It seems lile the only philisophical consistency in politics now is "us good, them bad".
What do you see as the Democrats' recent history of turnabout as fair play? I think it's been a half century of milque toast response on their side when they take power.
Before 2009, Democrats usually sought support from the other side of the aisle for things they did. When the GOP flatout said they would not support any healthcare legislation, Obama directed the Democrats to pass the ACA on their own anyway. That enraged Republicans and they decided to completely block every piece of legislation that came through Congress as a result. Democrats responded by branding all Republicans as evil. Then, in 2017 when the GOP took control of all three branches of government, they decided to cut Democrats out of the decision-making process entirely and rule as a one-party state.
This stuff has been building up for a decade now and it's gotten to the point where things seem like they are about to explode from half the country feeling like they've been silenced. All because a bunch of politicians decided to act like spoiled children.
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Indeed, the political pendulum swings such that whatever one side denounced the other for is now good while they're in power, and will again be denounced when they lose power in the future. It seems lile the only philisophical consistency in politics now is "us good, them bad".
What do you see as the Democrats' recent history of turnabout as fair play? I think it's been a half century of milque toast response on their side when they take power.
Before 2009, Democrats usually sought support from the other side of the aisle for things they did. When the GOP flatout said they would not support any healthcare legislation, Obama directed the Democrats to pass the ACA on their own anyway. That enraged Republicans and they decided to completely block every piece of legislation that came through Congress as a result. Democrats responded by branding all Republicans as evil. Then, in 2017 when the GOP took control of all three branches of government, they decided to cut Democrats out of the decision-making process entirely and rule as a one-party state.
This stuff has been building up for a decade now and it's gotten to the point where things seem like they are about to explode from half the country feeling like they've been silenced. All because a bunch of politicians decided to act like spoiled children.
I must be missing the point—how is this an example of Democrats doing what they denounced Republicans for, as VoteCthulu described? Even with the new tax bills and law, Democrats’ complaints seemed to center on lack of public sessions, not having drafts to review in advance of discussions and votes, etc. I can’t picture Democrats pulling off a move like Republicans did with Merrick Garland’s nomination, for example (and don’t think anyone’s claiming they did something similar in the past).
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I must be missing the point—how is this an example of Democrats doing what they denounced Republicans for, as VoteCthulu described? Even with the new tax bills and law, Democrats’ complaints seemed to center on lack of public sessions, not having drafts to review in advance of discussions and votes, etc.
I think the Republicans felt pretty much the same way about the ACA. "You have to pass it to find out what's in it." Democrats did it to get their new social program passed. Republicans did it to get their new tax cuts for the rich passed. I've feel that VoteCthulu is right - the polarization of US politics has been increasing for decades.
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I must be missing the point—how is this an example of Democrats doing what they denounced Republicans for, as VoteCthulu described? Even with the new tax bills and law, Democrats’ complaints seemed to center on lack of public sessions, not having drafts to review in advance of discussions and votes, etc.
I think the Republicans felt pretty much the same way about the ACA. "You have to pass it to find out what's in it." Democrats did it to get their new social program passed. Republicans did it to get their new tax cuts for the rich passed. I've feel that VoteCthulu is right - the polarization of US politics has been increasing for decades.
They may claim to feel that way, but it's bullshit.
https://www.snopes.com/aca-versus-ahca/
Modern Republican strategy:
Gaslight
Project
Obstruct
...and I'm saying this as someone who was part of the Republican party for decades.
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I must be missing the point—how is this an example of Democrats doing what they denounced Republicans for, as VoteCthulu described? Even with the new tax bills and law, Democrats’ complaints seemed to center on lack of public sessions, not having drafts to review in advance of discussions and votes, etc.
I think the Republicans felt pretty much the same way about the ACA. "You have to pass it to find out what's in it." Democrats did it to get their new social program passed. Republicans did it to get their new tax cuts for the rich passed. I've feel that VoteCthulu is right - the polarization of US politics has been increasing for decades.
Might want to include the entire quote:
Imagine an economy where people could follow their aspirations, where they could be entrepreneurial, where they could take risks professionally because personally their families [sic] health care needs are being met. Where they could be self-employed or start a business, not be job-locked in a job because they have health care there, and if they went out on their own it would be unaffordable to them, but especially true, if someone has a child with a pre-existing condition. So when we pass our bill, never again will people be denied coverage because they have a pre-existing condition.
We have to do this in partnership, and I wanted to bring [you] up to date on where we see it from here. The final health care legislation that will soon be passed by Congress will deliver successful reform at the local level. It will offer paid for investments that will improve health care services and coverage for millions more Americans. It will make significant investments in innovation, prevention, wellness and offer robust support for public health infrastructure. It will dramatically expand investments into community health centers. That means a dramatic expansion in the number of patients community health centers can see and ultimately healthier communities. Our bill will significantly reduce uncompensated care for hospitals.
You’ve heard about the controversies within the bill, the process about the bill, one or the other. But I don’t know if you have heard that it is legislation for the future, not just about health care for America, but about a healthier America, where preventive care is not something that you have to pay a deductible for or out of pocket. Prevention, prevention, prevention–it’s about diet, not diabetes. It’s going to be very, very exciting.
But we have to pass the bill so that you can find out what is in it, away from the fog of the controversy.
This was AFTER everyone access to read, AFTER multiple debate, DURING time where the citizens had time to read and QUESTION the bill. None of that was done with the GOP tax plan. Let's not pretend they are equivalent here, because they are not.
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Can we please keep this thread from going political?
It's been extremely useful regarding hacking the new tax plan and the political discussion in the last 15+/- posts is really not helping.
Back to the thread....
Anybody got a good definition or understanding of the pass-throughs? I haven't found a great synopsis of them online yet.
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?
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Wouldn't it be great if you could control the behavior of other people on the internet who persist in discussing uncomfortable facts that make you question your ideology? Man, that would be like comfortable pajamas.
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... who persist in discussing uncomfortable facts that make you question your ideology? ...
Its not changing my mind on anything, honestly. And isn't useful to the discussion HERE. Take it to the "Regret Voting Republican" thread.
Back to the thread....
Anybody got a good definition or understanding of the pass-throughs? I haven't found a great synopsis of them online yet.
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Back to the thread....
Anybody got a good definition or understanding of the pass-throughs? I haven't found a great synopsis of them online yet.
You may find what you are looking for in this thread...
https://forum.mrmoneymustache.com/taxes/pass-through-business-deduction/
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Back to the thread....
Anybody got a good definition or understanding of the pass-throughs? I haven't found a great synopsis of them online yet.
You may find what you are looking for in this thread...
https://forum.mrmoneymustache.com/taxes/pass-through-business-deduction/ (https://forum.mrmoneymustache.com/taxes/pass-through-business-deduction/)
Thats perfect, thanks!
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Wouldn't it be great if you could control the behavior of other people on the internet who persist in discussing uncomfortable facts that make you question your ideology? Man, that would be like comfortable pajamas.
Maybe he should homeschool us.