Senate Tax plan - local property tax cap, pay early?

[anes121508]

Hey all....

I've read several different things in different sources, however I'm reading in some places that the senate plan allows 10K deduction for either local property taxes or state taxes (if I'm interpreting below correctly). Assuming I would still plan on itemizing in 2018 despite 24K standard deduction and this becomes law, and I pay over 10K a year in property taxes, and I pay over 10K a year in state taxes.....pay my local property taxes for 2018 early (as in now in 2017) in order to take deduction in 2017? since next year I can just use state tax deduction to hit the 10K cap proposed? What do you all think? Am I missing a key point that makes this impossible or is this a good idea?

"Some property taxes would be deductible. The first $10k in state and local property taxes could be deducted under the Senate bill, bringing it into line with the House version. Previously no state and local taxes could be deducted from non-business income under the Senate version"

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[bravotwozero]

I’ve said this before in another thread, but I really think we would need to wait until the house and the senate plan has been reconciled to determine what people can deduct and that hasn’t happened yet. Also, the new tax plan won’t go into effect until 2019. So for 2017 and 2018, the old rules will apply.


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[coachB]

Hey all....

I've read several different things in different sources, however I'm reading in some places that the senate plan allows 10K deduction for either local property taxes or state taxes (if I'm interpreting below correctly). Assuming I would still plan on itemizing in 2018 despite 24K standard deduction and this becomes law, and I pay over 10K a year in property taxes, and I pay over 10K a year in state taxes.....pay my local property taxes for 2018 early (as in now in 2017) in order to take deduction in 2017? since next year I can just use state tax deduction to hit the 10K cap proposed? What do you all think? Am I missing a key point that makes this impossible or is this a good idea?

"Some property taxes would be deductible. The first $10k in state and local property taxes could be deducted under the Senate bill, bringing it into line with the House version. Previously no state and local taxes could be deducted from non-business income under the Senate version"

As already pointed out, we still have no idea what the final bill will allow. However, the $10k is only for property taxes (state and local), not state income tax.

 

[southerndoc]

As already pointed out, we still have no idea what the final bill will allow. However, the $10k is only for property taxes (state and local), not state income tax.

I think it's state and local income tax and property tax up to a maximum of $10,000 claimed for deduction.

 

[anes121508]

I think it's state and local income tax and property tax up to a maximum of $10,000 claimed for deduction.

anyone know the answer to this?

Below is copied and pasted from the .GOV HR1 text (I'm not even sure if this is the part, but think this is where the answer lies):

SEC. 1303. REPEAL OF DEDUCTION FOR CERTAIN TAXES NOT PAID OR ACCRUED IN A TRADE OR BUSINESS.
Section 164(b)(5) is amended to read as follows:


“(5) LIMITATION IN CASE OF INDIVIDUALS.—In the case of a taxpayer other than a corporation—

“(A) foreign real property taxes (other than taxes which are paid or accrued in carrying on a trade or business or an activity described in section 212) shall not be taken into account under subsection (a)(1),

“(B) the aggregate amount of taxes (other than taxes which are paid or accrued in carrying on a trade or business or an activity described in section 212) taken into account under subsection (a)(1) for any taxable year shall not exceed $10,000 ($5,000 in the case of a married individual filing a separate return),

“(C) subsection (a)(2) shall only apply to taxes which are paid or accrued in carrying on a trade or business or an activity described in section 212, and

“(D) subsection (a)(3) shall not apply to State and local taxes.”.

So now here is Section 164(b)(5) as referenced, because I think you need the existing bill to determine what they even did:

§164. Taxes
(a) General rule
Except as otherwise provided in this section, the following taxes shall be allowed as a deduction for the taxable year within which paid or accrued:

(1) State and local, and foreign, real property taxes.

(2) State and local personal property taxes.

(3) State and local, and foreign, income, war profits, and excess profits taxes.

(4) The GST tax imposed on income distributions.


In addition, there shall be allowed as a deduction State and local, and foreign, taxes not described in the preceding sentence which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in section 212 (relating to expenses for production of income). Notwithstanding the preceding sentence, any tax (not described in the first sentence of this subsection) which is paid or accrued by the taxpayer in connection with an acquisition or disposition of property shall be treated as part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition.

(b) Definitions and special rules
For purposes of this section-

(1) Personal property taxes
The term "personal property tax" means an ad valorem tax which is imposed on an annual basis in respect of personal property.

(2) State or local taxes
A State or local tax includes only a tax imposed by a State, a possession of the United States, or a political subdivision of any of the foregoing, or by the District of Columbia.




How do you interpret this?

 

[southerndoc]

I'm wrong judging by the text you posted.

I don't think anybody will know the answer to a ton of questions until the Senate and House meet and hone everything out.

 

[Birdstrike]

Everything I’ve seen so far has indicated state income tax will not be deductible anymore, in any amounts, in the senate and house plans. That may have changed (might still change) and this remains a moving target.


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[GeneralVeers]

I'm glad state income tax won't be deductible anymore. It will may the slimy state politicians accountable, and people will be up in arms about their high tax rates, and whether or not they are getting value. Hopefully this will encourage competition between states to lower taxes, and keep professionals and high earners in their states.

 

[BAM!]

I'm glad state income tax won't be deductible anymore. It will may the slimy state politicians accountable, and people will be up in arms about their high tax rates, and whether or not they are getting value. Hopefully this will encourage competition between states to lower taxes, and keep professionals and high earners in their states.

You really think high tax states will lower taxes? I don't. The only thing that will lower is bipartisan cooperation on capital hill.

 

[GeneralVeers]

You really think high tax states will lower taxes? I don't. The only thing that will lower is bipartisan cooperation on capital hill.

I don't completely understand your question. Right now taxes are high in a lot of individual states, because with the state income tax deduction, about 1/3 of the high state taxes are subsidized by the Federal goverment. Take that away and essentially it will be a 30% increase in state taxes for a lot of people.....

 

[southerndoc]

NYTimes is reporting that the consensus bill agreed upon by the Senate and House allows up to $10k in deductions split between property, sales, and income tax.

Top individual rate drops to 37% (from 39.6%), but it will kick in below the $1 mil set for the Senate version (NYT doesn't comment on what level it starts).

Still a lot of details remain to be published. We will likely find out this evening. For example, the AMT is still in effect but not as many taxpayers will be subjected to it as with the Senate version of the bill.

 

[southerndoc]

CNBC is reporting AMT is out completely.

 

[bravotwozero]

At this rate, I wouldn’t believe anything until the final version is passed into law...


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[Janders]

Agreed, until all the specifics are out, who knows how any one of us will do under this "plan".

State income tax, i deduct mortgage interest = probably bad for me
I've been hit with AMT lately = probably good for me

Not to mention deductions with children, etc etc... My crystal ball is cloudy.

 

[GeneralVeers]

Looks like the reconciled bill will be effective as of 01/2018. Hopefully it stays that way and get tax relief sooner! Still as yet-to-be seen is how they are going to treat Professionals with pass-through corporations like us.

 

[southerndoc]

Looks like the reconciled bill will be effective as of 01/2018. Hopefully it stays that way and get tax relief sooner! Still as yet-to-be seen is how they are going to treat Professionals with pass-through corporations like us.

You're going to pay income tax on it. "Service" professionals (physicians, lawyers, accountants, etc.) aren't allowed the passthrough rate.

 

[GeneralVeers]

You're going to pay income tax on it. "Service" professionals (physicians, lawyers, accountants, etc.) aren't allowed the passthrough rate.

They talked about having a different rate of 27% for professionals using passthrough.

 

[bravotwozero]

They talked about having a different rate of 27% for professionals using passthrough.

The 20% corporate tax deduction for professionals with pass through corporations is going to phase out at $315k for married filing jointly. They screwed us. I suspect Marco Rubio had something to do with this.

 

[Birdstrike]

Looks like they made some major, MAJOR improvements in the final tax bill.
Initial House version had my taxes going up about $4000
Senate plan was going to cut my taxes $10,000
Looks like the final version will save Birdstrike & fam over $11,000 per year.

Big, big savings between 200K-400K.

I seriously hope this finally passes.

Find out how it affects you:

Tax Plan Calculator by Maxim Lott

 

[GeneralVeers]

$7200 here based on Birdy's calculator.

I am most looking forward to the individual mandate repeal. I can finally buy health insurance that's actually useable.

 

[Birdstrike]

As @GeneralVeers alluded, it also strikes a deathblow to Obamacare, repealing the individual mandate. Without it, the key underpinning of Obamacare is gone. Without it, there's no way to force the young and health to pay in to the system and prop the system up for the underinsured. With out it, Obamacare is a dead man walking:

CHART: How The New Version Of The Republican Tax Bill Would Affect You

 

[Birdstrike]

I am most looking forward to the individual mandate repeal. I can finally buy health insurance that's actually useable.

Agree, but this is where it gets tricky: Will eliminating the individual mandate, without repealing all the other requirements and regulations of Obamacare, allow this to happen, yet?

 

[GeneralVeers]

Agree, but this is where it gets tricky: Will eliminating the individual mandate, without repealing all the other requirements and regulations of Obamacare, allow this to happen, yet?

Either way it's imploding. I see no reason to force people to buy a product they don't want from a private company.

 

[GeneralVeers]

Since they are excluding professionals who make $315K or more, is there any reason you can't just leave the money in the S-corp under an investment account in the S-corp then pay the corporate rate? Right now there's no point in doing that as the corporate and individual rates are the same.

Certainly it would be easy to manage a lot of expenses to get paid out of the corporation directly.

 

[EctopicFetus]

As @GeneralVeers alluded, it also strikes a deathblow to Obamacare, repealing the individual mandate. Without it, the key underpinning of Obamacare is gone. Without it, there's no way to force the young and health to pay in to the system and prop the system up for the underinsured. With out it, Obamacare is a dead man walking:

CHART: How The New Version Of The Republican Tax Bill Would Affect You
View attachment 226689

Well if you are getting a subsidy that subsidy will simply grow as the premium might go up the portion the individual will have to pay in the exchanges wont change.

 

[GeneralVeers]

Well if you are getting a subsidy that subsidy will simply grow as the premium might go up the portion the individual will have to pay in the exchanges wont change.

I'm thinking of just going uninsured next year. Also getting rid of the mandate, should allow for more private insurance options again, as there will be increased demand for less expensive plans that don't have to follow ACA guidelines.

 

[EctopicFetus]

I think the real will is the non qualified plans. People can more appropriately buy the skinny plansand save on the premiums. The current plans are bloated and run up the premiums. Will be interesting.

I’ll save a ton potentially. I do everything I can to minimize my tax liability. I oppose the increase in our debt and wish they would have cut spending and paid the debt down. Sounds like in 2018 they will work on this. I hat to think my kids will be taking over 20+T in debt.

 

[GeneralVeers]

I think the real will is the non qualified plans. People can more appropriately buy the skinny plansand save on the premiums. The current plans are bloated and run up the premiums. Will be interesting.

I’ll save a ton potentially. I do everything I can to minimize my tax liability. I oppose the increase in our debt and wish they would have cut spending and paid the debt down. Sounds like in 2018 they will work on this. I hat to think my kids will be taking over 20+T in debt.

Cuts in spending will never happen. No one is going to cut spending for seniors or the poor.....ever. Therefore any tax cut will have to be done without a cut in spending. This is an excellent test case for those who say (like myself) that it will actually generate more revenue through less tax avoidance, and increased economic growth.

 

[Birdstrike]

Either way it's imploding. I see no reason to force people to buy a product they don't want from a private company.

I agree. But I don't think repealing only the mandate, goes far enough. We need to repeal the regulations, and all the rest of it.

 

[GeneralVeers]

I agree. But I don't think repealing only the mandate, goes far enough. We need to repeal the regulations, and all the rest of it.

No argument from me there. Republicans tried that...twice and failed miserably. Everyone one of them who voted against getting rid of Obamacare should lose their jobs. We are trying in NV to kick out Dean Heller, who definitely deserves to go.

 

[Birdstrike]

I think the real will is the non qualified plans. People can more appropriately buy the skinny plans and save on the premiums.

I think to even allow these to become available, the meat of the Obamacare regulations need to be repealed also. I don't think just repealing the mandate, frees the insurance companies from all the onerous requirements and structure of what plans they can offer and can't offer. Catastrophic plans only, are still not allow, if repealing the mandate is all we have.

 

[southerndoc]

All 1100+ pages of the conference bill can be read at http://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT- 466.pdf

 

[GeneralVeers]

I think to even allow these to become available, the meat of the Obamacare regulations need to be repealed also. I don't think just repealing the mandate, frees the insurance companies from all the onerous requirements and structure of what plans they can offer and can't offer. Catastrophic plans only, are still not allow, if repealing the mandate is all we have.

Insurers can offer whatever plans they want....the problem until now is that the indvidual mandate has forced consumers to buy only ACA-approved plans, which means the market for private plans all but dried up. Additionally government subsidies and tax deductions were only available for ACA-compliant plans as well.

I can get a short-term quarterly plan for about $250/month which covers what I want, but there's no point as it's not ACA compliant and I'd still have to pay the penalty in addition to the plan premiums.

Removing the mandate, will increase demand for non-ACA afforable plans, and should encourage insurers to start offering them.

 

[EctopicFetus]

Insurers can offer whatever plans they want....the problem until now is that the indvidual mandate has forced consumers to buy only ACA-approved plans, which means the market for private plans all but dried up. Additionally government subsidies and tax deductions were only available for ACA-compliant plans as well.

I can get a short-term quarterly plan for about $250/month which covers what I want, but there's no point as it's not ACA compliant and I'd still have to pay the penalty in addition to the plan premiums.

Removing the mandate, will increase demand for non-ACA afforable plans, and should encourage insurers to start offering them.

While I am not a fan of the ACA GV is right. The non qualified plans have existed for some time but few people bought these though they were way cheaper. Repealng the mandate allows everyone to buy whatever plan they want and insurers can offer whatever they want.

 

[shoal007]

While I am not a fan of the ACA GV is right. The non qualified plans have existed for some time but few people bought these though they were way cheaper. Repealng the mandate allows everyone to buy whatever plan they want and insurers can offer whatever they want.

Well if that calculator is correct. The final version will save me 12k.. that's some significant $$$.

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[Birdstrike]

While I am not a fan of the ACA GV is right. The non qualified plans have existed for some time but few people bought these though they were way cheaper. Repealng the mandate allows everyone to buy whatever plan they want and insurers can offer whatever they want.

Good to hear. It may unravel even faster than I thought.

 

[GandalfTheWhite]

Looks like the reconciled bill will be effective as of 01/2018. Hopefully it stays that way and get tax relief sooner! Still as yet-to-be seen is how they are going to treat Professionals with pass-through corporations like us.

Where are you seeing the 27% rate for service passthroughs?
It appears that if your S-Corp is still service oriented, it does not qualify for the passthrough deduction.

 

[Brahnold Bloodaxe]

Where are you seeing the 27% rate for service passthroughs?
It appears that if your S-Corp is still service oriented, it does not qualify for the passthrough deduction.

This is the best explanation I've found for pass-throughs anywhere. Read to the bottom and as you'll see we were purposefully effed.

In the conference committee, the Senate approach won out. As a result, sole proprietors, S corporation shareholders, and partners in a partnership will be entitled to a deduction equal to 20% of their allocable share of business income.

As was the case in the Senate bill, however, the deduction comes with numerous caveats:

• Generally, the deduction cannot exceed 50% of your share of the W-2 wages paid by the business.
• Alternatively, the limitation can be computed as 25% of your share of the W-2 wages paid by the business, PLUS 2.5% of the unadjusted basis (the original purchase price) of property used in the production of income.
• The W-2 limitations do not apply if you earn less than $157,500 (if single; $315,000 if married filing jointly).
• Certain "personal service businesses" -- i.e., accountants, doctors, lawyers, etc... -- are not eligible for the deduction, unless their taxable income is less than $157,500 (if single; $315,000) if married.

In its simplest form, it works like this:

A is a 30% owner of a manufacturing S corporation. His share of income in 2018 is $700,000, and his share of the W-2 wages of the S corporation are $200,000. A is entitled to a deduction equal to the LESSER OF:

1. 20% of $700,000, or $140,000, or
2. 50% of his share of the W-2 wages of the S corporation, or $100,000.

Thus, A can take a deduction of $100,000 on his return.

It's important to note, the committee report makes clear that the deduction will be taken on the top of Page 2 of Form 1040, rather than on Page 1, where it would reduce adjusted gross income and potentially cause the taxpayer to lose or gain other benefits.

Who's Not So Happy?

Accountants, lawyers, and doctors...again. Not only are these types of businesses generally precluded from generating the 20% deduction, but under the Senate bill, an exception existed where even these business owners could claim the deduction provided their taxable income was less than $250,000 (if single, $500,000 if married). The final bill, however, reduces the income levels for this personal service business exception to $157,500 (if single, $315,000 if married). As in the Senate bill, the low-income exception phases out over the span of $50,000 of income ($100,000 if married).

This means that any lawyer, doctor, or accountant earning more than $415,000 (if married, $207,500 if single), loses out on the 20% deduction entirely. This result was necessary to prevent potential abuses; for example, where a law firm instructs its associates to pool together and form an LLC, and rather than pay the associates wages for their efforts, the firm would pay amounts into the LLC, with that income then allocated among the associates in the same manner the wages would have been. The advantage, of course, is that the associates wages would have been taxed at ordinary rates, but the pass-through income is eligible for the 20% deduction. Under the previous Senate bill, that would have been the case until the taxable income of the associates hit the $250,000/$500,000 thresholds. With those thresholds now reduced to $157,500/$315,000, these opportunities to game the system are minimized.

The Tax Bill Is Finalized: Who's Happy, And Who's Not?

lol...opportunities to game the system are minimized? So when a corporate shareholder kingpin gets his 21% tax rate, that's just sound tax policy. When a doctor working hiss ass off for his S-corp gets to subtract 20% of W2 income which would still leave him with an effective tax rate of closer to 30% than 21% that's "gaming the system." Lmao

So like I said, were were effed.

 

[EctopicFetus]

I’m looking forward to speaking with my accountant and tax lawyer. If an owner of a practice there may be some options.

 

[The White Coat Investor]

Looks like they made some major, MAJOR improvements in the final tax bill.
Initial House version had my taxes going up about $4000
Senate plan was going to cut my taxes $10,000
Looks like the final version will save Birdstrike & fam over $11,000 per year.

Big, big savings between 200K-400K.

I seriously hope this finally passes.

Find out how it affects you:

Tax Plan Calculator by Maxim Lott

Cool calculator. Has me saving $32K. Interestingly, my taxes were going up under the original house plan. I think it underestimates that though, since I should get a decent pass through break. I'm still trying to figure out how that works though. For docs, it starts going away at $315K, but I can't quite tell how it is going to affect my other business.

 

[GeneralVeers]

Cool calculator. Has me saving $32K. Interestingly, my taxes were going up under the original house plan. I think it underestimates that though, since I should get a decent pass through break. I'm still trying to figure out how that works though. For docs, it starts going away at $315K, but I can't quite tell how it is going to affect my other business.

It's not clear to me either how exactly the passthrough works. Can we use the 20% deduction up to $315K and everything after that is taxed at the regular rate, or if you make over $315K you get no deduction?

 

[Brahnold Bloodaxe]

It's not clear to me either how exactly the passthrough works. Can we use the 20% deduction up to $315K and everything after that is taxed at the regular rate, or if you make over $315K you get no deduction?

The latter. If you make over 315k filing jointly, the deduction is retroactively phased out over the subsequent $100k of income. Somebody calculated it elsewhere, but basically your marginal tax rate would be >70% between 315k and 415k, because for every dollar you earn in that range you're losing >70 cents of the deduction that you had on your first $315k of earnings. If you're single, the same thing applies between 157k and 207k. I'm paranoid but it seems like this is designed squarely to hit doctors and only doctors. Law partners in big city firms make well over 7 figures so they won't care about high tax rates on a paltry 100k of income while accountants mostly make under 300k, so guess who is the only large class of people who get to eat this sheit sandwich...Other pass through businesses are exempted from these limits altogether as they apply only to "specified service businesses" that include only lawyers, doctors, and accountants. For some reason engineers and architects were removed from the original list of professions that wouldn't qualify lol.

 

[EctopicFetus]

The latter. If you make over 315k filing jointly, the deduction is retroactively phased out over the subsequent $100k of income. Somebody calculated it elsewhere, but basically your marginal tax rate would be >70% between 315k and 415k, because for every dollar you earn in that range you're losing >70 cents of the deduction that you had on your first $315k of earnings. If you're single, the same thing applies between 157k and 207k. I'm paranoid but it seems like this is designed squarely to hit doctors and only doctors. Law partners in big city firms make well over 7 figures so they won't care about high tax rates on a paltry 100k of income while accountants mostly make under 300k, so guess who is the only large class of people who get to eat this sheit sandwich...Other pass through businesses are exempted from these limits altogether as they apply only to "specified service businesses" that include only lawyers, doctors, and accountants. For some reason engineers and architects were removed from the original list of professions that wouldn't qualify lol.

A little too conspiracy theory for me.

I think there will be ways SDGs figure this out. Will depend on whats the verbiage.

 

[GonnaBeADoc2222]

We got seriously screwed here. Basically discriminating on basis of chosen profession. Why should engineers and architects benefit and doctors/lawyers/accountants not.

 

[EctopicFetus]

So lets say you are in an SDG. Lets say you own your own billing company which is a separate business does this apply. You could charge yourself whatever you want to bill and code those charts and then pay that out as pass thru.

In effect if Emcare and TH can do it so can SDGs if structured right. The 1099 types are screwed best I can tell. Good to be a tax attorney right now.

 

[Birdstrike]

The latter. If you make over 315k filing jointly, the deduction is retroactively phased out over the subsequent $100k of income. Somebody calculated it elsewhere, but basically your marginal tax rate would be >70% between 315k and 415k, because for every dollar you earn in that range you're losing >70 cents of the deduction that you had on your first $315k of earnings. If you're single, the same thing applies between 157k and 207k. I'm paranoid but it seems like this is designed squarely to hit doctors and only doctors. Law partners in big city firms make well over 7 figures so they won't care about high tax rates on a paltry 100k of income while accountants mostly make under 300k, so guess who is the only large class of people who get to eat this sheit sandwich...Other pass through businesses are exempted from these limits altogether as they apply only to "specified service businesses" that include only lawyers, doctors, and accountants. For some reason engineers and architects were removed from the original list of professions that wouldn't qualify lol.

This 70% thing applies to s corps, or all W2 income?

 

[Brahnold Bloodaxe]

This 70% thing applies to s corps, or all W2 income?

Just pass-through income, W2 income is taxed with progressive tax brackets just like before. I think what people are still confused about is the nature of what the 70% rate actually is. As far I understand it, if you're an S-corp making 400k a year, you're not paying any more taxes than someone who's making 400k W2 even though technically your effective tax rate on the last $100k of income is over 70%.

What happens is that if you instead make 315k of pass through income, you get to deduct 20% of that whereas the guy making 315k W2 does not. So if you stop working after your first 315k, you will come out far ahead in take home pay compared to the W2 guy. But if you continue to earn money after that first 315k, that 20% deduction is gradually phased out.

In other words:
At 315k of pass through income, you get to subtract 20% of 315k.
At 400k of pass through income, you get to subtract nothing and have to pay taxes on the full 400k just like a W2 guy would.

Thus, even though you made an extra $100k, your take home pay has only increased by about 30k because by earning over the "limit" of 315k you lost eligibility for the 20% deduction altogether. If you were W2 then you never qualified for the deduction to begin with so it's all the same to you. If you were some famous architect on the other hand those limits don't apply and you could deduct the 20% even if your S-corp income was >10m.

 

[GeneralVeers]

It's all very confusing because they were trying to prevent "abuse" of the lower corporate rates. The theory was that everyone would just incorporate and pay lower taxes. The unfortunate consequence is that it's now confusing, and discriminatory. I would actually expect court challenges to this, given the discriminatory, and unequal application of the law.

We can thank the so-callled "moderate" Republicans who hijacked this bill. We should have just had a clean bill with 2-3 income tax brackets, elimination of all special deductions, and a lower corporate rate applied to all businesses.

 

[bravotwozero]

It will be interesting to see how this is worded on the bill. If it is not precise enough, may lead to a lot of interpretations and confusion

 

[GeneralVeers]

It will be interesting to see how this is worded on the bill. If it is not precise enough, may lead to a lot of interpretations and confusion

And what counts as a professional? If I have a company which hires doctors, but I don't work as a doctor am I counted? What if I only work 4 shifts a month but the others work full time? It really seems arbitrary