Republican Tax Plan 2017

[FIREchiefsr]

thanks.  i think i'll stop reading everything and speculating how it will affect me until something passes and is concrete.  b/c i'm sure they'll tweek this 50 more times before ti passes.

This is one approach.  OTOH, if a person feels that something will pass but not become concrete until Christmas eve, they best be paying attention and thinking about it now.  This bill currently has significant implications for some taxpayers with respect to 2017 year-end tax strategies.  Taking a "do not open until Christmas" approach may not allow enough time to truly run the numbers and determine an optimal strategy.

[boarder42]

thanks.  i think i'll stop reading everything and speculating how it will affect me until something passes and is concrete.  b/c i'm sure they'll tweek this 50 more times before ti passes.

This is one approach.  OTOH, if a person feels that something will pass but not become concrete until Christmas eve, they best be paying attention and thinking about it now.  This bill currently has significant implications for some taxpayers with respect to 2017 year-end tax strategies.  Taking a "do not open until Christmas" approach may not allow enough time to truly run the numbers and determine an optimal strategy.

so far the only thing necessary for me is to open a DAF if needed to get my tax break now if they dont move charitable above the line.  other than that.  these tax changes dont have much else i can do with my finances that would affect us.

and those can be opened in minutes per the discussion congruent to this.

[sol]

Any other examples?

My point was merely that maternity leave is a benefit offered only to mothers.  Not to men.  Not to wonen who are sterile, or who cannot have kids for other reasons.  Like tuition reimbursement and family leave, it is a benefit only for (some) parents.

Another example: tax free subsidized health insurance.  Totally useless to some people.

Another example: executive compensation stock options.  Wtf is up with that sort of blatant unfairness?

Another: overtime pay.  Why do some employees get 2x, some 1.5x, and some are expected to work extra for free?

Let's face it, when you agree to work for someone else, you voluntarily abandon any ideas about "fairness".

[djadziadax]

Any other examples?

My point was merely that maternity leave is a benefit offered only to mothers.  Not to men.  Not to wonen who are sterile, or who cannot have kids for other reasons.  Like tuition reimbursement and family leave, it is a benefit only for (some) parents.

Another example: tax free subsidized health insurance.  Totally useless to some people.

Another example: executive compensation stock options.  Wtf is up with that sort of blatant unfairness?

Another: overtime pay.  Why do some employees get 2x, some 1.5x, and some are expected to work extra for free?

Let's face it, when you agree to work for someone else, you voluntarily abandon any ideas about "fairness".

Correct, the issue is the tax free nature of tuition remission. The bill proposed that it is taxed, not that it is eliminated. I cannot think of any other benefit that is of that magnitude that is NEVER taxed. The examples above may be available to some of others but the extra "compensation" is taxed in some way. For those advocating for progressive taxes, this seems to be a contradiction in the tax code as it exec compensation.

I also don't understand why capital gains are treated differently than earned income...Income is income, no matter the source.
 

[ketchup]

I also don't understand why capital gains are treated differently than earned income...Income is income, no matter the source.

Probably because typically retirees have high voter turnout.

[boarder42]

I also don't understand why capital gains are treated differently than earned income...Income is income, no matter the source.

Probably because typically retirees have high voter turnout.

encourages people to invest in companies. and keep that investment in the company vs moving it around frequently.

[djadziadax]

I also don't understand why capital gains are treated differently than earned income...Income is income, no matter the source.

Probably because typically retirees have high voter turnout.

encourages people to invest in companies. and keep that investment in the company vs moving it around frequently.

By taxing it at a lower rate?? Somehow it does not makes sense. If it should encourage that it stay invested, it probably should be taxed at same rates. So people would not invest if income from the investment is taxed at ordinary rates? If they don't invest, what would they do with that money? Spend, buy gold? Bonds? Seems unlikely.

[Jrr85]

I also don't understand why capital gains are treated differently than earned income...Income is income, no matter the source.

Probably because typically retirees have high voter turnout.

encourages people to invest in companies. and keep that investment in the company vs moving it around frequently.

By taxing it at a lower rate?? Somehow it does not makes sense. If it should encourage that it stay invested, it probably should be taxed at same rates. So people would not invest if income from the investment is taxed at ordinary rates? If they don't invest, what would they do with that money? Spend, buy gold? Bonds? Seems unlikely.

Capital gains are taxed at a lower rate because taxes on capital gains act as a disincentive to investing in (i.e., creating) capital.  Since capital is generally what allows productivity increases, each incremental tax on capital is ultimately a drag on wages.  It's why we don't just have a wealth tax even though that would be match up with ability to pay much better than a progressive income tax.  Besides the fact that a lot of capital is mobile (and even capital that is not mobile can generally be created anyway, meaning future capital creation is "mobile"), taxing wealth would reduce the incentives for creating, maintaining and growing wealth (which is a pretty good proxy for capital).  Only taxing gains when they are recognized is a much less destructive policy, but it still reduces capital formation. 

Not everybody believes this, but that's the justification. 

There is also a moral justification regarding "double taxation", but I've never really understood that argument.   

[FIREchiefsr]

thanks.  i think i'll stop reading everything and speculating how it will affect me until something passes and is concrete.  b/c i'm sure they'll tweek this 50 more times before ti passes.

This is one approach.  OTOH, if a person feels that something will pass but not become concrete until Christmas eve, they best be paying attention and thinking about it now.  This bill currently has significant implications for some taxpayers with respect to 2017 year-end tax strategies.  Taking a "do not open until Christmas" approach may not allow enough time to truly run the numbers and determine an optimal strategy.

so far the only thing necessary for me is to open a DAF if needed to get my tax break now if they dont move charitable above the line.  other than that.  these tax changes dont have much else i can do with my finances that would affect us.

and those can be opened in minutes per the discussion congruent to this.

You've probably just cited one of the best examples.  Let's dissect that for a moment.  Assuming you have $5000 already at fidelity in an after tax account, yes it only takes a small amount of time to open and fund the DAF.  It will probably be ready for further contributions within a day or two.  That is a great start, but you're not done yet.  How much more do you want to front load the DAF prior to Dec 31?  Where are these assets coming from?  Have you identified the specific shares to maximize benefit of contributing highly appreciated shares?  If the source is not already spec lot ID, can you change that account(s)?  How do you get the funds into the Fidelity DAF?  If they are at VG, which forms/signatures/holy medalian approvals are they going to require?  Can they make this happen in a few days?  Can they transfer cost basis without screwing it up?

If you already know these answers, and it will all work out for you then it sounds like you've already speculated how this might affect you and given it sufficient thought to be prepared.  This is all I was really suggesting.  That said, I'm guessing you would choose to keep reading (not reading everything, but at least keeping track) so as to track any changes that might affect your situation.  While I certainly don't suggest there won't be changes, those discussed so far are far removed from the basic standard deduction increase that would drive the DAF strategy you described.

[starguru]

I also don't understand why capital gains are treated differently than earned income...Income is income, no matter the source.

I firmly believe that if we taxed all income the same, got rid of most if not all deductions, we could have a completely progressive system with reasonably low rates, and keep our spending levels the same.  I would love to see the TPC do a study on this. 

The main problem with the Republican plan is that it still allows obscenely wealthy folks to pay a ridiculously low rate.  It might make sense to remove the mortgage interest deduction on mortgages over X dollars, but not if that makes high wage earners (or even medium wage earners) pay a higher rate than someone with $10M (or $100M) in the bank. 

Taxing all income the same eliminates this.  Someone with $100M in the bank will pay a higher rate on realized gains than someone who makes $200k.  There would be no way to game your way out of paying taxes.  No Mitt Romneys paying %14 on tens of million in income.  In return we would get lower rates (Im guessing 33% or less, but again would need analysis to figure it out). 

[Saving4Fire]

I also don't understand why capital gains are treated differently than earned income...Income is income, no matter the source.

Probably because typically retirees have high voter turnout.

encourages people to invest in companies. and keep that investment in the company vs moving it around frequently.

By taxing it at a lower rate?? Somehow it does not makes sense. If it should encourage that it stay invested, it probably should be taxed at same rates. So people would not invest if income from the investment is taxed at ordinary rates? If they don't invest, what would they do with that money? Spend, buy gold? Bonds? Seems unlikely.

Capital gains are taxed at a lower rate because taxes on capital gains act as a disincentive to investing in (i.e., creating) capital.  Since capital is generally what allows productivity increases, each incremental tax on capital is ultimately a drag on wages.  It's why we don't just have a wealth tax even though that would be match up with ability to pay much better than a progressive income tax.  Besides the fact that a lot of capital is mobile (and even capital that is not mobile can generally be created anyway, meaning future capital creation is "mobile"), taxing wealth would reduce the incentives for creating, maintaining and growing wealth (which is a pretty good proxy for capital).  Only taxing gains when they are recognized is a much less destructive policy, but it still reduces capital formation. 

Not everybody believes this, but that's the justification. 

There is also a moral justification regarding "double taxation", but I've never really understood that argument.

I'll also add - capital gains, unlike income, is much more sensitive to inflation.   Income is taxed as it's earned, however investments are held over time.   For example, if you sell a 10 year old investment that appreciates exactly with inflation you'll still have to pay cap gains which means you've effectively lost money.

Anyway, here's a solid article that has pros and cons.   Personally, I'm skeptical cap gains should be taxed exactly like income, but there should be reform.   It's not something I've looked at too closely so I don't have super strong opinions about the topic.  There's some interesting ideas in that article I linked.

[starguru]

I also don't understand why capital gains are treated differently than earned income...Income is income, no matter the source.

I firmly believe that if we taxed all income the same, got rid of most if not all deductions, we could have a completely progressive system with reasonably low rates, and keep our spending levels the same.  I would love to see the TPC do a study on this. 

The main problem with the Republican plan is that it still allows obscenely wealthy folks to pay a ridiculously low rate.  It might make sense to remove the mortgage interest deduction on mortgages over X dollars, but not if that makes high wage earners (or even medium wage earners) pay a higher rate than someone with $10M (or $100M) in the bank. 

Taxing all income the same eliminates this.  Someone with $100M in the bank will pay a higher rate on realized gains than someone who makes $200k.  There would be no way to game your way out of paying taxes.  No Mitt Romneys paying %14 on tens of million in income.  In return we would get lower rates (Im guessing 33% or less, but again would need analysis to figure it out).

Would it be unreasonably punitive to implement that at one stroke, now applying that new rate structure to people who previously paid higher income taxes to buy capital that has already appreciated when the new system is put in place? I know that neither of us is enacting a new tax law, but am curious how you see a transition to such a system being conducted.

I don't think it's punitive in any way.  Can you explain a bit more?

[starguru]

Ah I see.  I don’t see that as particularly problematic.  After all wage earners have the same issue after rates change on them,  right?  Plus if investment income is taxed as regular income it would be subjected to the marginal rates, so the highest brackets would only be paid by the most wealthy.


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[sokoloff]

If they really wanted "simpler", all income would be treated the same. Why should $90,000 of dividends pay $0 in taxes, while a checking account paying .06%(my current rate) be taxed at up to 39%. Not simple, just different winners and losers.

Anyone who is paying 39.6% on their checking account interest is not getting their marginal $90K of dividends at 0%.

[sokoloff]

Ah I see.  I don’t see that as particularly problematic.  After all wage earners have the same issue after rates change on them,  right? 

So, imagine your employer decides that rather than paying you $2500/week, they're going to pay you $2000/week instead. I mean, $2000 is still quite a lot, and is still 6-figures, so you shouldn't really complain...

That's not a lot different from someone making a long-term investment in a company, which went on to create jobs and pay taxes itself, who will now see perhaps $60 in return after taxes per $100 of gross return instead of the investment they signed up for which would pay them $80 or $85 per $100 of gross return.

Sure, the government can change the rules anytime.

Investors can also choose to invest elsewhere or not invest if the rules of the game are changed arbitrarily, capriciously, and without regard to the fairness of the changes or the transition from system 1 to system 2.

Plus if investment income is taxed as regular income it would be subjected to the marginal rates, so the highest brackets would only be paid by the most wealthy.

Highest AGI is not tightly correlated with "most wealthy". It's very easy to have a temporarily high income year without being wealthy at all.

[VoteCthulu]

There is also a moral justification regarding "double taxation", but I've never really understood that argument.

It's not a moral justification, it's just a fact that dividends have already been taxed at the corporate level. Companies don't pay taxes on wages and other expenses (other than social security and medicare, when applicaple), but they do pay the current corporate tax rates on dividend distributions. To tax that money again at full income tax rates would make the total tax rate far higher than that imposed on regular wages.

Whether this is good or bad is primarily an economic  judgement that I honestly don't know all the facts about, but it seems like a non-trivial argument.

[dragoncar]

Wealth taxation (at a much lower level than 1% per year) is probably a good idea in principle. The practice is where it gets sticky. People have all kinds of illiquid or hard-to-value assets and requiring an accounting of them every year is a wasteful, pain-in-the-ass activity.

It also incents the creation of impaired assets so as to reduce their value. "My house is only worth 75% of what a comparable house is worth because I've sold off the rights to rent it out on AirBnB from Christmas to New Years to another party." "My business is worth to someone else a fraction of its true value to me, because all of the know-how is embodied in my head."

The federal government can deficit spend make up the taxation deficit by printing cash.  This creates inflation, which reduces the value of each dollar.  Thus, it's a wealth tax.  There are logistical problems to high inflation rates, of course.

[starguru]

Ah I see.  I don’t see that as particularly problematic.  After all wage earners have the same issue after rates change on them,  right? 

So, imagine your employer decides that rather than paying you $2500/week, they're going to pay you $2000/week instead. I mean, $2000 is still quite a lot, and is still 6-figures, so you shouldn't really complain...

Not the same thing at all.  My point is if wage earners face tax rate changes without special consideration, why should those who get investment income have it any different?

That's not a lot different from someone making a long-term investment in a company, which went on to create jobs and pay taxes itself, who will now see perhaps $60 in return after taxes per $100 of gross return instead of the investment they signed up for which would pay them $80 or $85 per $100 of gross return.

If they made $100 off investments and got taxed $40 that means they made a ton of money off that investment.  The average saver with a respectable nest egg who is withdrawing 20,30,40k a year would not be taxed that much. 

Investors can also choose to invest elsewhere or not invest if the rules of the game are changed arbitrarily, capriciously, and without regard to the fairness of the changes or the transition from system 1 to system 2.

That's true.

Plus if investment income is taxed as regular income it would be subjected to the marginal rates, so the highest brackets would only be paid by the most wealthy.

Highest AGI is not tightly correlated with "most wealthy". It's very easy to have a temporarily high income year without being wealthy at all.

That's true too, but like I said, the average person who saves a "normal" amount for retirement wouldn't be paying that much at all, depending on how the brackets would work out.

At the end of the day, we have a system where ridiculously wealthy people pay relatively "little" taxes.  This is possible because they have income that is not taxed as earned income.  We could have a system that is completely progressive and has lower rates than today if we taxed all income at the same rate. 

[jean]

I spent some time looking at this.  All without children who take the standard deduction will get a tax cut.  I like this, because when I was a childless renter, the tax code felt pretty unfair to me.  I don't have kids, so I didn't really look into how they come out, but I think it is generally a little better unless you have a very large family.

Speaking only of California, everyone who itemizes and would still itemize under the new plan will see a tax increase, simply due to the fact that the change in brackets is not enough to offset the loss of the state tax deduction and the personal exemption(s) in itemizations.  If you itemized in 2017 and wouldn't under the new plan, it is a mixed bag.

The elimination of the AMT is an interesting trick. A lot fewer people would trigger the AMT with the loss of the SALT (state and local tax) deduction. Speaking of Californians, people (married filing joint) with AGIs between about $245k and $600k are almost sure to run into the AMT under current tax law due only to SALT and personal exemptions. The super wealthy trigger the AMT less frequently since they hit the highest brackets of the regular tax code and the AMT has a top rate of 28%. They need to claim a lot of deductions before they run into it. But, removing it will mostly benefit the really wealthy - they can now claim those significant deductions that would lower their rate.  It makes no sense to remove SALT deduction and eliminate the AMT at the same time.  It will only help the quite wealthy.

The loss of the estate take again only impacts the very wealthy.  They’re not changing the step-up basis (heirs can sell stocks without the earnings ever having been taxed).  Probably more things hidden in there. 

My taxes would go up, which isn't the worst thing. I believe in a progressive tax structure. I like that many lower/middle income people get a (small) break. But the bulk of the benefits go to extremely rich.  It seems to be taking from the top ~5% to give to the top 0.5%.  And also increasing the deficit.  It all seems really rushed. I am just waiting for DT to say "Nobody knew taxes could be so complicated!"  Thumbs down from me. 

[Rural]

Well, this would devastate us, as husband's tuition remission would become taxable (and is far higher than his stipend, which is already taxable). I think it'll hit graduate programs all over the country hard, frankly.

I always thought tuition remission not being taxable is quite unfair for university staff that does not have kids, or, already has advance degrees, or, cannot get an advanced degree due to their schedule not permitting it. I have personal knowledge of folks who send 3-4 kids to college through tuition remission, which amounts to 80K a year to 120K a year in that case tax free. While childless coworkers have to work exactly the same schedule, at exactly the same pay, and not have an opportunity for that benefit.

It seems unfair that it is touted as a benefit, but it only applies to selected folks. I don't know of any other company benefit that is selective, and although technically available to all staff, in practice advantages only select few, and is of that magnitude. I myself thought of actually working in higher ed when the child is old enough, just to take advantage of that benefit, realizing how 'special' it is!

Making it taxable is fair - it is income. Person still get a huge benefit, but instead of 47K a year tax free income, they will pay 12K a year for the education their kid is getting. Still a pretty big deal but seems more logical.

Nothing to do with kids or staff. This is about graduate students on assistantships or fellowships - they will now have to pay tax on tuition remissions, usually at out of state rates.

[starguru]

Ah I see.  I don’t see that as particularly problematic.  After all wage earners have the same issue after rates change on them,  right? 

So, imagine your employer decides that rather than paying you $2500/week, they're going to pay you $2000/week instead. I mean, $2000 is still quite a lot, and is still 6-figures, so you shouldn't really complain...

Not the same thing at all.  My point is if wage earners face tax rate changes without special consideration, why should those who get investment income have it any different?

But the ordinary income tax changes apply to future income, rather than gains that have already occurred. I'd like to see how people reacted if Congress retroactively increased the taxes on prior years' ordinary income!

I see your point but you can also look at it that gains aren’t real until actualized.  I also acknowledge that there would be other effects.  Doesn’t mean it won’t result in a better system for Everyone overall.


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[alexpkeaton]

The federal government can deficit spend make up the taxation deficit by printing cash.  This creates inflation, which reduces the value of each dollar.  Thus, it's a wealth tax.  There are logistical problems to high inflation rates, of course.

Umm, only if you think the wealthy are keeping all their wealth in cash, which they don't. Their assets will increase in value with inflation. It's those who don't own assets who are hurt most by inflation: The poor.

[sokoloff]

The federal government can deficit spend make up the taxation deficit by printing cash.  This creates inflation, which reduces the value of each dollar.  Thus, it's a wealth tax.  There are logistical problems to high inflation rates, of course.

Umm, only if you think the wealthy are keeping all their wealth in cash, which they don't. Their assets will increase in value with inflation. It's those who don't own assets who are hurt most by inflation: The poor.

Anyone with debt is helped by inflation/monetary expansion.

Borrow money now and pay it off with devalued money later.

[JLee]

The federal government can deficit spend make up the taxation deficit by printing cash.  This creates inflation, which reduces the value of each dollar.  Thus, it's a wealth tax.  There are logistical problems to high inflation rates, of course.

Umm, only if you think the wealthy are keeping all their wealth in cash, which they don't. Their assets will increase in value with inflation. It's those who don't own assets who are hurt most by inflation: The poor.

Anyone with debt is helped by inflation/monetary expansion.

Borrow money now and pay it off with devalued money later.

If you're high income, sure.

If you're low income, you aren't going to be making all that much more after adjusting for inflation, so it is irrelevant.

https://www.advisorperspectives.com/dshort/updates/2017/09/19/u-s-household-incomes-a-50-year-perspective

[dragoncar]

The federal government can deficit spend make up the taxation deficit by printing cash.  This creates inflation, which reduces the value of each dollar.  Thus, it's a wealth tax.  There are logistical problems to high inflation rates, of course.

Umm, only if you think the wealthy are keeping all their wealth in cash, which they don't. Their assets will increase in value with inflation. It's those who don't own assets who are hurt most by inflation: The poor.

Good point, I wonder how it works in countries that do have wealth tax.  Because I’m pretty sure the wealthy will find a way to avoid the tax anyways.  Do they really mark to market fine art and overseas assets?  They could always switch to a different currency too.  But inflation certainly works to tax cash holding

[sokoloff]

Anyone with debt is helped by inflation/monetary expansion.

Borrow money now and pay it off with devalued money later.

If you're high income, sure.

If you're low income, you aren't going to be making all that much more after adjusting for inflation, so it is irrelevant.

https://www.advisorperspectives.com/dshort/updates/2017/09/19/u-s-household-incomes-a-50-year-perspective

If you're going to pay off the debt, it's relevant regardless of income. Only if you aren't going to pay off the debt is it irrelevant (and in which case you also might as well take out the debt).

[djadziadax]

I spent some time looking at this.  All without children who take the standard deduction will get a tax cut.  I like this, because when I was a childless renter, the tax code felt pretty unfair to me.  I don't have kids, so I didn't really look into how they come out, but I think it is generally a little better unless you have a very large family.

I felt the same way. I was a single renter in NYC and taxes were the worst. Now with a child, I will still get a substantial tax cut due to the increase in the child credit and the fact I max out my 401K.

Now, my state and local taxes will be equal to my federal taxes, hard to comprehend, infuriating, but a fact.

My taxes would go up, which isn't the worst thing. I believe in a progressive tax structure. I like that many lower/middle income people get a (small) break.

I see it this way - MFJ with 2 kids would pay 0% tax on first 55K of their income (24K standard deduction, 1600x2 child credit, 300x2 flex family credit) and then pay only $4200 for the max of $90000 for the 12% tax bracket. For many folks, their state and local taxes will be higher than their fed taxes. There must be many many families in that category since salaries outside of the costs are much lower. That is 4.5% federal tax rate without doing anything special, spending countless hours of doing taxes, going to H& R block, paying for Turbotax, etc etc. Seems like a pretty good deal to me.

[radram]

If they really wanted "simpler", all income would be treated the same. Why should $90,000 of dividends pay $0 in taxes, while a checking account paying .06%(my current rate) be taxed at up to 39%. Not simple, just different winners and losers.

Anyone who is paying 39.6% on their checking account interest is not getting their marginal $90K of dividends at 0%.

That is true, but the dividend rate IS capped at 20% if you make more than $470,700. That is half the rate of their income.

What net worth is required to generate $470,700 in dividends if you are not working? Assuming the 20% rate is a cliff and not a stepping ladder like income tax rates are, it would take $26,150,000 earning a 1.8% dividend to reach the 20% step. And yes, the market gains would be stepped up in basis, and then transferred to your heirs tax free once you meet your untimely demise.

So someone with some $30,000,000 with no job pays half in taxes compared to an executive making $500,000 a year with a company with such bad accountants that they can not even figure out how to compensate him/her in a way that cuts the tax bill in half.

While I am sure few people would say boo-hoo to either of them, no way is this simple or fair.

[starguru]

If they really wanted "simpler", all income would be treated the same. Why should $90,000 of dividends pay $0 in taxes, while a checking account paying .06%(my current rate) be taxed at up to 39%. Not simple, just different winners and losers.

Anyone who is paying 39.6% on their checking account interest is not getting their marginal $90K of dividends at 0%.

That is true, but the dividend rate IS capped at 20% if you make more than $470,700. That is half the rate of their income.

What net worth is required to generate $470,700 in dividends if you are not working? Assuming the 20% rate is a cliff and not a stepping ladder like income tax rates are, it would take $26,150,000 earning a 1.8% dividend to reach the 20% step. And yes, the market gains would be stepped up in basis, and then transferred to your heirs tax free once you meet your untimely demise.

So someone with some $30,000,000 with no job pays half in taxes compared to an executive making $500,000 a year with a company with such bad accountants that they can not even figure out how to compensate him/her in a way that cuts the tax bill in half.

While I am sure few people would say boo-hoo to either of them, no way is this simple or fair.

If the proposal is to tax all income as earned income, there would be no preferential treatment for dividends.  Someone getting 500k in dividend income in a year will pay the same as someone making 500k in wages.


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[sokoloff]

The dividend rate IS capped at 20% if you make more than $470,700. That is half the rate of their income.

Small correction: it's capped at 23.8% (with the Obamacare surtax, assuming that's not repealed with this plan).

What net worth is required to generate $470,700 in dividends if you are not working? Assuming the 20% rate is a cliff and not a stepping ladder like income tax rates are, it would take $26,150,000 earning a 1.8% dividend to reach the 20% step. And yes, the market gains would be stepped up in basis, and then transferred to your heirs tax free once you meet your untimely demise.

So someone with some $30,000,000 with no job pays half in taxes compared to an executive making $500,000 a year with a company with such bad accountants that they can not even figure out how to compensate him/her in a way that cuts the tax bill in half.

While I am sure few people would say boo-hoo to either of them, no way is this simple or fair.

I'm well short of being in either circumstance, but I'm a lot closer to the second than the first. Obviously, the tax rate on the second matters more to the person than the first, on a utility of marginal dollars basis. That person is screwed harder in today's tax system AND in the new Republican plan (which, to be frank, is IMO just a bit of lipstick on the same old pig we already have)

[radram]

If the proposal is to tax all income as earned income, there would be no preferential treatment for dividends.  Someone getting 500k in dividend income in a year will pay the same as someone making 500k in wages.


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Right. That would be simpler. That is not what we have, nor is it what is being proposed. Makes you wonder why that isn't the proposal, since one of the disclosed reasons for the tax code changes is simplicity. :)

[radram]

The dividend rate IS capped at 20% if you make more than $470,700. That is half the rate of their income.

Small correction: it's capped at 23.8% (with the Obamacare surtax, assuming that's not repealed with this plan).

What net worth is required to generate $470,700 in dividends if you are not working? Assuming the 20% rate is a cliff and not a stepping ladder like income tax rates are, it would take $26,150,000 earning a 1.8% dividend to reach the 20% step. And yes, the market gains would be stepped up in basis, and then transferred to your heirs tax free once you meet your untimely demise.

So someone with some $30,000,000 with no job pays half in taxes compared to an executive making $500,000 a year with a company with such bad accountants that they can not even figure out how to compensate him/her in a way that cuts the tax bill in half.

While I am sure few people would say boo-hoo to either of them, no way is this simple or fair.

I'm well short of being in either circumstance, but I'm a lot closer to the second than the first. Obviously, the tax rate on the second matters more to the person than the first, on a utility of marginal dollars basis. That person is screwed harder in today's tax system AND in the new Republican plan (which, to be frank, is IMO just a bit of lipstick on the same old pig we already have)

Thank you for the clarification on the Obamacare surtax.

Yup. Same old pig, with different winners and losers.

[radram]

New question.

Is the savers credit changed or eliminated? Sorry if this was already covered.

[Dancin'Dog]

Was thinking this morning that the elimination on the estate tax would have a big impact on the gift tax. Currently if you make a gift greater than the $14k limit it goes against the lifetime exemption, but that would no longer exist under the new plan.

That's what I was wondering too.  That will allow for much more freedom to give before death to others, besides designated 501c3's. 

Personally, I'd rather be able to help folks directly.  As it is now large non-profits often have a well paid CEO skimming the donations (because he's "so smart he "could" make a lot more working in the private sector!") 

Large landowners would be free to give land parcels to individuals, instead of donating it to the government or churches. 

[StarBright]

Well, this would devastate us, as husband's tuition remission would become taxable (and is far higher than his stipend, which is already taxable). I think it'll hit graduate programs all over the country hard, frankly.

I always thought tuition remission not being taxable is quite unfair for university staff that does not have kids, or, already has advance degrees, or, cannot get an advanced degree due to their schedule not permitting it. I have personal knowledge of folks who send 3-4 kids to college through tuition remission, which amounts to 80K a year to 120K a year in that case tax free. While childless coworkers have to work exactly the same schedule, at exactly the same pay, and not have an opportunity for that benefit.

It seems unfair that it is touted as a benefit, but it only applies to selected folks. I don't know of any other company benefit that is selective, and although technically available to all staff, in practice advantages only select few, and is of that magnitude. I myself thought of actually working in higher ed when the child is old enough, just to take advantage of that benefit, realizing how 'special' it is!

Making it taxable is fair - it is income. Person still get a huge benefit, but instead of 47K a year tax free income, they will pay 12K a year for the education their kid is getting. Still a pretty big deal but seems more logical.

Nothing to do with kids or staff. This is about graduate students on assistantships or fellowships - they will now have to pay tax on tuition remissions, usually at out of state rates.

Yep. DH's friends who are still in grad programs are freaking out about this. Especially since their program discourages them from getting outside jobs. They have 10-15k stipends but if this goes through they will be expected to pay taxes on an additional 40k. I know more than one person  who is trying to speed up their dissertation because of this.

DH's department is also nervous about this. He works at an R2 and it isn't the sort of program that independently wealthy students choose - they have lots of smart but first generation grad students in his program. If this goes through there is real concern that they won't be able to maintain their enrollment.

[djadziadax]

Well, this would devastate us, as husband's tuition remission would become taxable (and is far higher than his stipend, which is already taxable). I think it'll hit graduate programs all over the country hard, frankly.

I always thought tuition remission not being taxable is quite unfair for university staff that does not have kids, or, already has advance degrees, or, cannot get an advanced degree due to their schedule not permitting it. I have personal knowledge of folks who send 3-4 kids to college through tuition remission, which amounts to 80K a year to 120K a year in that case tax free. While childless coworkers have to work exactly the same schedule, at exactly the same pay, and not have an opportunity for that benefit.

It seems unfair that it is touted as a benefit, but it only applies to selected folks. I don't know of any other company benefit that is selective, and although technically available to all staff, in practice advantages only select few, and is of that magnitude. I myself thought of actually working in higher ed when the child is old enough, just to take advantage of that benefit, realizing how 'special' it is!

Making it taxable is fair - it is income. Person still get a huge benefit, but instead of 47K a year tax free income, they will pay 12K a year for the education their kid is getting. Still a pretty big deal but seems more logical.

Nothing to do with kids or staff. This is about graduate students on assistantships or fellowships - they will now have to pay tax on tuition remissions, usually at out of state rates.

Yep. DH's friends who are still in grad programs are freaking out about this. Especially since their program discourages them from getting outside jobs. They have 10-15k stipends but if this goes through they will be expected to pay taxes on an additional 40k. I know more than one person  who is trying to speed up their dissertation because of this.

DH's department is also nervous about this. He works at an R2 and it isn't the sort of program that independently wealthy students choose - they have lots of smart but first generation grad students in his program. If this goes through there is real concern that they won't be able to maintain their enrollment.

Yes, my point was about undergraduate tuition remissions. Grad school tuition remission is a different animal. I suspect that there are multiple ways to address PHD level tuition remission. Universities can eliminate tuition for PHD level programs which now have tuition remission, and charge just fees, for example. That is the European Model. So certain programs that apply tuition remission for all their grad students would simply not have tuition associate with it.

That is more difficult on the undergrad level where usually parents pay tuition and the "fairness" factor is completely different.

[FI by 2035]

Whoa, didn't realize that deferred compensation was also being axed. I take part in a 409a plan with my company, and while it's less than 10% of my income, the taxes on that income alone pushes my family back into the "this new plan increases my taxes" group. Is it just me, or as this plan begins to get carefully dissected, does it not seem like the number of constituencies that will be against it continue to pile up?

http://www.napa-net.org/news/technical-competence/legislation/could-tax-reform-destroy-deferred-compensation/

The 457(b) goes away.

Does this include governmental 457(b) plans?  I'm having a hard time finding a lot of detail on this topic.  The tax deferred space between the 401k and 457(b) is a pretty big benefit of my job.  It would suck to lose it, but it's out of my control.

[WoodSpinner]

Can anyone clarify the change on page 143 of the PDF above?

SEC. 1501. REPEAL OF SPECIAL RULE PERMITTING RE-CHARACTERIZATION OF ROTH IRA CONTRIBUTIONS AS TRADITIONAL IRA CONTRIBUTIONS.
18 (a) IN GENERAL.—Section 408A(d) is amended by
19 striking paragraph (6) and by redesignating paragraph
20 (7) as paragraph (6).

I believe you have to cross-reference it with the current tax code to make any sense of it: https://www.law.cornell.edu/uscode/text/26/408A

Paragraph (6) that is being struck out:

(6) Taxpayer may make adjustments before due date
(A) In general
Except as provided by the Secretary, if, on or before the due date for any taxable year, a taxpayer transfers in a trustee-to-trustee transfer any contribution to an individual retirement plan made during such taxable year from such plan to any other individual retirement plan, then, for purposes of this chapter, such contribution shall be treated as having been made to the transferee plan (and not the transferor plan).
(B) Special rules
(i) Transfer of earnings
Subparagraph (A) shall not apply to the transfer of any contribution unless such transfer is accompanied by any net income allocable to such contribution.
(ii) No deduction
Subparagraph (A) shall apply to the transfer of any contribution only to the extent no deduction was allowed with respect to the contribution to the transferor plan.

My real question is whether this affects a backdoor roth or a mega backdoor roth? I've never done either so I'm not quite clear if a Roth -> Traditional re-characterization is part of the process.

Not sure if others have commented on this but it is significant change, essentially it eliminates the ability to re-characterize (e.g. reverse a Roth Conversion). Nice strategy to have if the assets converted have gone down drastically. See Kitces Analysis.

Not a deal breaker for me, but it was a nice part of my planned Roth Conversion strategy ....

[NorthernBlitz]

Well, this would devastate us, as husband's tuition remission would become taxable (and is far higher than his stipend, which is already taxable). I think it'll hit graduate programs all over the country hard, frankly.

I always thought tuition remission not being taxable is quite unfair for university staff that does not have kids, or, already has advance degrees, or, cannot get an advanced degree due to their schedule not permitting it. I have personal knowledge of folks who send 3-4 kids to college through tuition remission, which amounts to 80K a year to 120K a year in that case tax free. While childless coworkers have to work exactly the same schedule, at exactly the same pay, and not have an opportunity for that benefit.

It seems unfair that it is touted as a benefit, but it only applies to selected folks. I don't know of any other company benefit that is selective, and although technically available to all staff, in practice advantages only select few, and is of that magnitude. I myself thought of actually working in higher ed when the child is old enough, just to take advantage of that benefit, realizing how 'special' it is!

Making it taxable is fair - it is income. Person still get a huge benefit, but instead of 47K a year tax free income, they will pay 12K a year for the education their kid is getting. Still a pretty big deal but seems more logical.

Nothing to do with kids or staff. This is about graduate students on assistantships or fellowships - they will now have to pay tax on tuition remissions, usually at out of state rates.

There is a bit of an analogy to consumption taxes.

If you buy something on sale, you don't pay sales tax on the original price. Instead, you pay sales tax on the price you paid.

Tuition remission is kind of similar, where students are purchasing their access to education at a reduced price.

[djadziadax]

Well, this would devastate us, as husband's tuition remission would become taxable (and is far higher than his stipend, which is already taxable). I think it'll hit graduate programs all over the country hard, frankly.

I always thought tuition remission not being taxable is quite unfair for university staff that does not have kids, or, already has advance degrees, or, cannot get an advanced degree due to their schedule not permitting it. I have personal knowledge of folks who send 3-4 kids to college through tuition remission, which amounts to 80K a year to 120K a year in that case tax free. While childless coworkers have to work exactly the same schedule, at exactly the same pay, and not have an opportunity for that benefit.

It seems unfair that it is touted as a benefit, but it only applies to selected folks. I don't know of any other company benefit that is selective, and although technically available to all staff, in practice advantages only select few, and is of that magnitude. I myself thought of actually working in higher ed when the child is old enough, just to take advantage of that benefit, realizing how 'special' it is!

Making it taxable is fair - it is income. Person still get a huge benefit, but instead of 47K a year tax free income, they will pay 12K a year for the education their kid is getting. Still a pretty big deal but seems more logical.

Nothing to do with kids or staff. This is about graduate students on assistantships or fellowships - they will now have to pay tax on tuition remissions, usually at out of state rates.

There is a bit of an analogy to consumption taxes.

If you buy something on sale, you don't pay sales tax on the original price. Instead, you pay sales tax on the price you paid.

Tuition remission is kind of similar, where students are purchasing their access to education at a reduced price.

Not a good analogy, since sales do not ADD to your income. In your analogy, you have a set amount of money to spend, and then you decide to spend it on a sale item. You keep more of what you already have. In your analogy, a scholarship would be the "coupon" you apply to get a lower price, and that currently is not taxed.

[alexpkeaton]

It seems like it would be similar to the imputed income I pay tax on for my employer-provided life insurance. The income is reported on my W-2, but I don't never received any cash.

[MDM]

New question.

Is the savers credit changed or eliminated? Sorry if this was already covered.

I think it stays, based on https://forum.mrmoneymustache.com/welcome-to-the-forum/republican-tax-plan-2017/msg1758754/#msg1758754.

[jean]

I see it this way - MFJ with 2 kids would pay 0% tax on first 55K of their income (24K standard deduction, 1600x2 child credit, 300x2 flex family credit) and then pay only $4200 for the max of $90000 for the 12% tax bracket. For many folks, their state and local taxes will be higher than their fed taxes. There must be many many families in that category since salaries outside of the costs are much lower. That is 4.5% federal tax rate without doing anything special, spending countless hours of doing taxes, going to H& R block, paying for Turbotax, etc etc. Seems like a pretty good deal to me.

I don't quite follow the math, but I'll assume you are correct for MFJ with 2 kids.  I don't love what happens in the upper middle class brackets, but I could stomach it if it weren't for the deep cuts for the extremely wealthy.    (Also, for that situation, turbotax or spending hours is not necessary under the current tax plan.  Even itemizing is straightforward.)  So, good deal for you maybe, but that doesn't make it a good plan.

Business Insider did some examples at various income points for singles and MFJ+2 kids.
Single: http://www.businessinsider.com/trump-tax-plan-take-home-pay-2017-9
MJF+2kids: http://www.businessinsider.com/trump-tax-plan-family-take-home-pay-changes-2017-11

They didn't do the math with the latest plan unfortunately, but the indicated who it will hurt - those who itemize but aren't super wealthy: http://www.businessinsider.com/trump-tax-plan-raise-taxes-middle-income-families-2017-9

[Rural]

Well, this would devastate us, as husband's tuition remission would become taxable (and is far higher than his stipend, which is already taxable). I think it'll hit graduate programs all over the country hard, frankly.

I always thought tuition remission not being taxable is quite unfair for university staff that does not have kids, or, already has advance degrees, or, cannot get an advanced degree due to their schedule not permitting it. I have personal knowledge of folks who send 3-4 kids to college through tuition remission, which amounts to 80K a year to 120K a year in that case tax free. While childless coworkers have to work exactly the same schedule, at exactly the same pay, and not have an opportunity for that benefit.

It seems unfair that it is touted as a benefit, but it only applies to selected folks. I don't know of any other company benefit that is selective, and although technically available to all staff, in practice advantages only select few, and is of that magnitude. I myself thought of actually working in higher ed when the child is old enough, just to take advantage of that benefit, realizing how 'special' it is!

Making it taxable is fair - it is income. Person still get a huge benefit, but instead of 47K a year tax free income, they will pay 12K a year for the education their kid is getting. Still a pretty big deal but seems more logical.

Nothing to do with kids or staff. This is about graduate students on assistantships or fellowships - they will now have to pay tax on tuition remissions, usually at out of state rates.

Yep. DH's friends who are still in grad programs are freaking out about this. Especially since their program discourages them from getting outside jobs. They have 10-15k stipends but if this goes through they will be expected to pay taxes on an additional 40k. I know more than one person  who is trying to speed up their dissertation because of this.

DH's department is also nervous about this. He works at an R2 and it isn't the sort of program that independently wealthy students choose - they have lots of smart but first generation grad students in his program. If this goes through there is real concern that they won't be able to maintain their enrollment.

Yes, my husband is at an R1; stipends are higher but outside employment is completely forbidden and the penalty is dismissal from the program if caught. They don't admit anyone without a support package, so perhaps they could just say "no tuition for the PhD program," I don't know.


Husband's stipend is not classed as earned income, so we're already paying the employer and employee parts of social security. Don't know what's going to happen, but I think it will be bad for STEM (because support is nearly universal).

[jean]

Yes, my husband is at an R1; stipends are higher but outside employment is completely forbidden and the penalty is dismissal from the program if caught. They don't admit anyone without a support package, so perhaps they could just say "no tuition for the PhD program," I don't know.
Husband's stipend is not classed as earned income, so we're already paying the employer and employee parts of social security. Don't know what's going to happen, but I think it will be bad for STEM (because support is nearly universal).

If they went the "no tuition for the PhD program" route, departments and universities would lose money.   You don't pay tuition, but the advisor generally pays for it from his grants.  I suppose they could reclassify as fees?  Anyway, i really really doubt this will be in any final tax bill that passes - but I'd be understandably panicked too.

My main reason for replying is surprise that you pay both parts of SS on stipend. Usually grad students do not pay any SS (and of course don't earn SS credits).  Do you get to choose to earn SS if you pay SS?  My understanding is that you don't pay any SS, but you do pay regular federal taxes which they will not withhold from the stipend for you.

[ixtap]

Yes, my husband is at an R1; stipends are higher but outside employment is completely forbidden and the penalty is dismissal from the program if caught. They don't admit anyone without a support package, so perhaps they could just say "no tuition for the PhD program," I don't know.
Husband's stipend is not classed as earned income, so we're already paying the employer and employee parts of social security. Don't know what's going to happen, but I think it will be bad for STEM (because support is nearly universal).

If they went the "no tuition for the PhD program" route, departments and universities would lose money.   You don't pay tuition, but the advisor generally pays for it from his grants.  I suppose they could reclassify as fees?  Anyway, i really really doubt this will be in any final tax bill that passes - but I'd be understandably panicked too.

My main reason for replying is surprise that you pay both parts of SS on stipend. Usually grad students do not pay any SS (and of course don't earn SS credits).  Do you get to choose to earn SS if you pay SS?  My understanding is that you don't pay any SS, but you do pay regular federal taxes which they will not withhold from the stipend for you.

This surprises me, as well. I did not pay SS, because I was not an employee. Also, since we were not employees, we did not receive health insurance, although as students we were required to have it. They insisted we would not want to be employees, because then we would have to pay FICA. No, the science PhDs didn't want to pay FICA, but then their advisors paid their health insurance out of their grants, as well as higher stipends.

[radram]

New question.

Is the savers credit changed or eliminated? Sorry if this was already covered.

I think it stays, based on https://forum.mrmoneymustache.com/welcome-to-the-forum/republican-tax-plan-2017/msg1758754/#msg1758754.

Thanks for finding that.

[djadziadax]

It seems like it would be similar to the imputed income I pay tax on for my employer-provided life insurance. The income is reported on my W-2, but I don't never received any cash.

Exactly!!

[djadziadax]

I don't quite follow the math, but I'll assume you are correct for MFJ with 2 kids.  I don't love what happens in the upper middle class brackets, but I could stomach it if it weren't for the deep cuts for the extremely wealthy.    (Also, for that situation, turbotax or spending hours is not necessary under the current tax plan.  Even itemizing is straightforward.)  So, good deal for you maybe, but that doesn't make it a good plan.

Math:
Assume 90,000 income (to keep you in 12% bracket)
Minus    24,000 Standard deduction
Taxable  66,000 * 12%
Tax due  7,920
             Apply child credit x 2 (3,200) + family credit x2 (600) for total tax credit of 3,800.
Credits   3,800
Tax due  4,120 (7,920-3,800)

or         4.57%

The way Business Insider calculates taxes on 175K income is a bit disingenuous. They assume average itemized deduction according to IRS (from all tax returns). Red flag. They should have used the average of that income band, not average of all income bands.

Also, what is really fair tax? What is an income level at which you should not have to pay any taxes in order to offset the "tax cut" folks with 200K income are getting? I don't see any proposal for a fairer system? In Europe, for example, counties implement flat tax on all income - 10% or 15% tax that applies to everyone. Is that fair? Or is it better to have our tax system, but exclude all income up to 100K for families and 50K for individuals from all taxes?  Or should it be 120 for families? Where is the threshold for the tax system to be fair?

This is a very thorny question, but it is clear that the current system is not ideal. It is crazy to have to higher a consultant every year to figure out what taxes are owed. When I first started working, I pay way more tax than necessary due to not understanding the tax code and not having money to buy Turbotax. But folks that spend 400-500 dollars on tax accountants can save you 3K in taxes. Is that really fair? Is that really how a progressive tax system should work?

[sokoloff]

This is a very thorny question, but it is clear that the current system is not ideal. It is crazy to have to [hire] a consultant every year to figure out what taxes are owed. When I first started working, I pay way more tax than necessary due to not understanding the tax code and not having money to buy Turbotax. But folks that spend 400-500 dollars on tax accountants can save you 3K in taxes. Is that really fair? Is that really how a progressive tax system should work?

Fairness doesn't play into compliance, IMO. People should comply with the laws and tax codes of the country, so if they are entitled by law/code to those $3K in savings and can achieve them by sending $400-500 (I wish I spent that little per year!!), then I think they should obviously do it.