Hot off the press: Kitces' latest on the tax bill

[jfoxcpacfp]

Individual Tax Planning Under the Tax Cuts and Jobs Act of 2017

Haven't had time to read it yet but I expect this to be the most comprehensive and rational commentary on the almost-finished bill.

[AndyJ]

I saw they are getting rid of a deduction for non-reimbursed business expenses (that exceed 2% of income). Does this mean that we can no longer deduct our malpractice insurance? I’m an ER doc with my own s-Corp with a policy that costs $37,000 every year.

Or am I just dreading this wrong?

[AndyJ]

Or am I just totally confused?

[InfoRPh]

jfoxcpacfp wrote:

Individual Tax Planning Under the Tax Cuts and Jobs Act of 2017

Haven’t had time to read it yet but I expect this to be the most comprehensive and rational commentary on the almost-finished bill.

Click to expand...

I was needing a "new tax bill AMT for dummies" and his graph is extremely useful

[The White Coat Investor]

AndyJ wrote:

I saw they are getting rid of a deduction for non-reimbursed business expenses (that exceed 2% of income). Does this mean that we can no longer deduct our malpractice insurance? I’m an ER doc with my own s-Corp with a policy that costs $37,000 every year.

Or am I just dreading this wrong?

Click to expand...

That's the unreimbursed employee expense deduction on Schedule A. A sole proprietor or partner or an S corp owner would take those as a business expense on Schedule C, K or the corporate return.

[jfoxcpacfp]

The White Coat Investor wrote:

AndyJ wrote:

I saw they are getting rid of a deduction for non-reimbursed business expenses (that exceed 2% of income). Does this mean that we can no longer deduct our malpractice insurance? I’m an ER doc with my own s-Corp with a policy that costs $37,000 every year.

Or am I just dreading this wrong?

Click to expand…

That’s the unreimbursed employee expense deduction on Schedule A. A sole proprietor or partner or an S corp owner would take those as a business expense on Schedule C, K or the corporate return.

Click to expand...

To add to that, many people have heard that CPA fees are no longer deductible. Not so. It's just that the deduction for the excess expenditures over 2% of your AGI are going away. All of these deductions are on Schedule A: mileage as an employee, other unreimbursed employee business expenses, money you spend in pursuit of income or for tax preparation (CPA fees, purchase of TT, AUM fees, etc.) are no longer deductible.

If you spend money to make money in a business, not as an employee, those expenses are still deductible. That makes today a really good time to nail down those accountable plans instead of racking up business mileage as an employee, especially if you are employed by your own business.

[ENT Doc]

Great summary.  Also confirms that the FIFO rule for security sales is not included.  Nice.

[spiritrider]

The one that struck me with a "WOW" is the change to taxation under the Kiddie Tax rules.

Now after the amount of the minors deduction and amount taxed at their rate, any excess amount will be taxed at trust rates!!!

This flew completely under my radar.

[G-pathy]

InfoRPh wrote:

jfoxcpacfp wrote:

Individual Tax Planning Under the Tax Cuts and Jobs Act of 2017

Haven’t had time to read it yet but I expect this to be the most comprehensive and rational commentary on the almost-finished bill.

Click to expand…

I was needing a “new tax bill AMT for dummies” and his graph is extremely useful

Click to expand...

It doesn't account for the degree to which being a pass-through business lowers the curve.  That's the graph I really want to see.

[Bmac]

Can you clarify how that will work for UTMA's? For example, a 15 yo child with a UTMA that would generate $3500 in taxable dividends. Parents currently in 39% tax bracket. We will be in 37% next year. How does the new tax bill affect the child's taxation?

[Zaphod]

G-pathy wrote:

InfoRPh wrote:

jfoxcpacfp wrote:

Individual Tax Planning Under the Tax Cuts and Jobs Act of 2017

Haven’t had time to read it yet but I expect this to be the most comprehensive and rational commentary on the almost-finished bill.

Click to expand…

I was needing a “new tax bill AMT for dummies” and his graph is extremely useful

Click to expand…

It doesn’t account for the degree to which being a pass-through business lowers the curve.  That’s the graph I really want to see.

Click to expand...

I thought that was in there as well, its really a great way of displaying it.

[jfoxcpacfp]

Bmac wrote:

Can you clarify how that will work for UTMA’s? For example, a 15 yo child with a UTMA that would generate $3500 in taxable dividends. Parents currently in 39% tax bracket. We will be in 37% next year. How does the new tax bill affect the child’s taxation?

Click to expand...

As I understand it, your child's marginal tax rate for that amount will be 10%. First $2,100 not taxed, then $1,400@ 10%, or $140.

[TheGipper]

Awesome summary.

Five points/questions struck me.

1) Pass through businesses are definitely going to want to split profits among several "family member owners" to get everyone below 315,000 taxable income if possible!

2) Working part time towards end of career if it get's MFJ taxable income below 315,000 (or AGI 400,000) just got more attractive for both the 20% pass-through deduction and child credits.

3) Ruh-roh.  Does his section on nonqualified deferred compensation crackdown also apply to non-gvt 457b?  I would think not since the non-distributed funds are still at risk for forfeiture during a prolonged elective drawdown period, but I better look into this.  Anyone?

4) Kiddie Tax rules are actually slightly better for high-earners.  Can get more unearned income taxed at the lower trust rates (10-24%) up to $9150.  Its a pretty large tax efficient portfolio that will put you above that.

5) I still don't see how even large groups with high earning docs are going to want to switch to C Corp/PSC.  I get the lower 21% corporate rate but won't their also be a 23.8% cap gains rate on dividends,?  Maybe for better benefit plans (ie MERP) and ability for better long term profit/debt/capital expense management?

 

[spiritrider]

jfoxcpacfp wrote:

Bmac wrote:

Can you clarify how that will work for UTMA’s? For example, a 15 yo child with a UTMA that would generate $3500 in taxable dividends. Parents currently in 39% tax bracket. We will be in 37% next year. How does the new tax bill affect the child’s taxation?

Click to expand…

As I understand it, your child’s marginal tax rate for that amount will be 10%. First $2,100 not taxed, then $1,400@ 10%, or $140.

Click to expand...

Actually the only first $1,050 is a deduction, the next $1,050 is taxed at the child's rate of $10% ($105) and then remainder is taxed at a higher rate.

Currently the remainder is taxed at the parent's marginal rate. In the tax bill it is taxed at trust rates, which have highly compressed tax brackets. < $2550 = 10%, < $9,150 = 24%, < $12,500 = 35% and >= $12,500 = 37%.

With only $1,400 not taxable to the child, someone in the middle bracket (24%) would have paid $336 and someone in the top bracket (37%) would have paid $518. Now with the trust rules they will both pay $140.

However, with $9,150 not taxable to the child, someone in the middle bracket (24%) would have paid $2,196 and someone in the top bracket (37%) would have paid $3385.50. Now with the trust rules they will both pay $1,839.

I understand the inherent logic of placing UTMA accounts on a level tax playing field with trust accounts. I am not one to subscribe to class warfare, but this change clearly benefits higher income taxpayers the most. In fact, a medium income tax payer (12%) would have paid $1,098 and now will pay $1,839 (almost double). I realize that most medium income taxpayers are not going to have $11,250 unearned in their child's UTMA, but still... Maybe the grandparents bought each grandchild a Bitcoin!

[The White Coat Investor]

TheGipper wrote:

Awesome summary.

Five points/questions struck me.

1) Pass through businesses are definitely going to want to split profits among several “family member owners” to get everyone below 315,000 taxable income if possible!

2) Working part time towards end of career if it get’s MFJ taxable income below 315,000 (or AGI 400,000) just got more attractive for both the 20% pass-through deduction and child credits.

3) Ruh-roh.  Does his section on nonqualified deferred compensation crackdown also apply to non-gvt 457b?  I would think not since the non-distributed funds are still at risk for forfeiture during a prolonged elective drawdown period, but I better look into this.  Anyone?

4) Kiddie Tax rules are actually slightly better for high-earners.  Can get more unearned income taxed at the lower trust rates (10-24%) up to $9150.  Its a pretty large tax efficient portfolio that will put you above that.

5) I still don’t see how even large groups with high earning docs are going to want to switch to C Corp/PSC.  I get the lower 21% corporate rate but won’t their also be a 23.8% cap gains rate on dividends,?  Maybe for better benefit plans (ie MERP) and ability for better long term profit/debt/capital expense management?

 

Click to expand...

5) Yea, I don't get that either. I still don't see a C corp being attractive for a doc. Sole proprietor unless you want to try to save medicare tax by being taxed as an S corp.