A response to your loss of home deductions.

[jz]

I'm scheming a rational  response to the curtailed  mortgage interest and property tax deductions, esp. for blue staters.  Establish your primary residence and vacation home as a Smith Family Properties, LLC.    Take business deductions for principal, interest, repair and maintenance, property taxes, property insurance. Pay rent to each.

The downsides would be loss of capital gains deduction at sale, and  loss of stepped up basis at death. Any others that I'm not considering?

[Molar Mechanic]

I did a similar thought experiment this weekend. Look for a post called house to llc or similar. The problem is that whole you do create business write-offs in the llc, you are moving post tax personal money into the llc as per tax income. So on effect, you get a write-off, but you are writing off money you paid yourself, not the money you previously earned.

I'm hoping the evil geniuses of the accounting world find a solution, but until they do, just focus on the lower brackets and hope to come out ahead.

[Wiscoblue]

Nah, we are screwed with this tax bill. I paid 32,000 in property tax and 70,000 in state income tax last year. That’s a hundred that I can’t deduct. I don’t have a mortgage. So no deduction there either. I guess we will just be forking over an extra 37,000 next year to Uncle Sam.

[Molar Mechanic]

ops:

 

Ouch.  That leaves a mark.  I'm in a purple state.  I'm losing a big deduction, but will still come out ahead in the new bill.

[ENT Doc]

Wiscoblue wrote:

Nah, we are screwed with this tax bill. I paid 32,000 in property tax and 70,000 in state income tax last year. That’s a hundred that I can’t deduct. I don’t have a mortgage. So no deduction there either. I guess we will just be forking over an extra 37,000 next year to Uncle Sam.

Click to expand...

Is that $37,000 a net amount?  If you are indeed a Wisconsin doctor and being taxed at 70K state that means you're pulling in close to a million in income.  A quick calculation on the new tax plan calculator shows that you'll be saving $7k because of the lowered tax brackets, even after accounting for the loss in deductions.

[Wiscoblue]

I guess I didn’t factor in the change in AMT.

[ENT Doc]

Wiscoblue wrote:

I guess I didn’t factor in the change in AMT.

Click to expand...

That's something I didn't even think about or that the tax calculator doesn't address.  People forget about the fact that every dollar past the 10% threshold is now being taxed at a lower rate, plus the marriage penalty is eliminated for dollars up to $600k and decreased from the prior baseline thereafter.  AMT is improved as well.  All of those benefits tend to offset the loss of deductions, unless you're in a super high tax state (NY/CA) with lots of property taxes, and not making a killing.  The 300-400k earner in CA living in a pricey house probably won't win out here.

[The White Coat Investor]

Wiscoblue wrote:

Nah, we are screwed with this tax bill. I paid 32,000 in property tax and 70,000 in state income tax last year. That’s a hundred that I can’t deduct. I don’t have a mortgage. So no deduction there either. I guess we will just be forking over an extra 37,000 next year to Uncle Sam.

Click to expand...

Give me a break. You're being overly dramatic. You're not losing a $102K deduction. You're losing $92K of your $102K deduction. And in return, you're getting some other valuable stuff. Since you're talking about the 37% bracket, I assume you've got a taxable income over $600K married. So you're getting two presents in return for your lost $92K deduction. You're getting rid of the Pease adjustment and you're benefitting from the less progressive brackets. So let's say your taxable income is $1M. You've just saved about 3% * the first $600K (that's $18K) and about 4% of the next $400K. (another $16K) for a total of $34K. $92K * 37% = $34K. You're coming out even.

Don't believe what a lot of the press is saying. Most of them don't understand how taxes work.

Most people in all brackets will be getting a significant tax cut. A fair number in all brackets will have a situation that is about the same (like yours). A very small number will actually see a tax increase, and that is also spread across the tax brackets and mostly applies to people in your situation - high tax states.

[Wiscoblue]

Yes WCI, that was a knee jerk response to reading the bullet points on CNBC. I haven’t done my own taxes in a while. Good to know that I won’t get hit as hard as I originally thought.

[StarTrekDoc]

This reform has most people who itemize going sideways and shifting a few points up one place and low another place -- with the hammer coming in 5-7 years.  Other than getting more to standard deduction, it's not really simplifying anything --and added quite a layer of complexity with the pass through.

It's a great business tax reform.  That is clear--from SBO to large corporations; this is huge all around.

Whether the trickle down works -- let's see.  Some encouraging announcements of min wage increase and capital investments from the DOW companies.  I only can hope another 10 year run on the market to pad all our accounts even nicer.

Fear of the piped piper in the sunset years though -- but the can is kicked so let's enjoy for now!