The House and Senate released their new plans tonight. The gory details are here in this 570 page document: http://www.wsj.com/public/resources/documents/JointExplanatoryStatement121517.pdf
It’s really easy to model in Excel because it’s so similar to the existing tax code. Took me about 5 minutes.
To me, the biggest changes are:
- The Rubio-encouraged refundable child tax credit (up to 1,400 of the 2,000 tax credit is refundable)
- This is a huge entitlement program. Tax refunds to the poor with many kids can easily exceed $15k now.
- Doubling of standard deduction.
- The $10k cap on property tax + state tax is constant for singles and married alike. Going forward, singles are much more likely to itemize. Marrieds are much less likely to itemize. If you live in a high tax state like me, you will easily hit the $10k cap. Standard deduction for MFJ is $24k, so only after $14k of mortgage interest + charitable contributions will itemized deductions kick in. If the sum of your charitable contributions + mortgage interest = $15k, you will have a total of $25k in deductions, but keep in mind the economics there. Only $1k of the $25k will go towards increasing your effective deduction, meaning that most of those deductions are economically meaningless to you.
- Apparently large AMT changes.
- AMT exemption amount for MFJ is raised to $109,400 (used to be $84,500). AMT exemption phase out is now $1M (it used to be $160,900).
- I searched through the 570 page document and couldn’t figure out the new point at which the 28% tax rate begins. I temporarily coded this as $500k (I could be way off).
- What I think the above means is that AMT won’t hit most of us (pending the above bullet point).
Under the new plan, my tax liability decreases by $7,200/year. Perhaps more importantly, my marginal rate decreases from 37.5% (due to AMT phase out) to 24%.
If the law passes as many believe it will, on Jan 1 many of us will have to reevaluate the Roth vs Trad decision. I believe I’ll still go with Traditional, especially given my relatively high marginal state rate and the potential for arbitrage by relocating to a lower cost state in retirement.
The new tax code makes the strategy of Roth IRA conversion ladders much more appealing than before. With the doubling of the standard deduction, you can now convert up to $24k/year tax free from trad to Roth. If you convert more, you can exploit the new 10% and 12% brackets up to $77.4k in additional income.
If you find errors in my spreadsheet, let me know.
Download 2017 tax spreadsheet here (Same as posted previously)
Download 2018 tax spreadsheet here
Update – a few days ago I noticed a WSJ tax calculator (https://www.wsj.com/graphics/republican-tax-plan-calculator/). My sheets seems to jive well with their tool.
32 thoughts on “Model of New Tax Plan (House + Senate Compromise)”
Few questions and forgive my ignorance, not sure if you covered this in previous posts but where do you input other pretax contributions like 401k, Healthcare FSA, Dependent Care FSA, Healthcare Premiums, etc…? I itemize (~$70k for 2017) so if you input deductions above and beyond the $24k for MFJ, will it assume you are then itemizing? In the Federal Taxes owed column, does that include all federal taxes owed including social security, medicare, medicare surcharge, etc?
I paid ~$10k just in AMT last year and am disgusted they kept it in.
Never mind on the pretax deductions question. For some reason, rows 1-7 were completely collapsed when I downloaded the spreadsheet.
Sounds good. AMT is the devil. The 570 page document is somewhat vague on every detail I need to model it properly, but my current understanding is that AMT will not affect most people making under $1M or so.
As far as how to use the spreadsheet, simply put in #kids and deductions. Then look up your taxable wages in table or chart. Taxable wages = Gross wages – 401k contributions – HSA contributions – etc.
At first I read it that way also but why does it say that the exemption is only $109,400?
AMT is a beast to understand and explain. I’ve backwards engineered the thing in the coding of my spreadsheet.
The AMT exemption amount is the AMT analog of the standard deduction.
After that earnings are taxed at 26%. After a certain point (Used to be $187.7k), earnings are taxed at 28%.
The AMT exemption amount used to phase out at $160.9k by reducing the size of your exemption by 25% past this point, leading to an effective marginal rate of 26%*1.25 or 28%*1.25. Now the exemption amount is $1M for MFJ, so it’s not relevant for most of us.
Long story short, it’s my current understanding that AMT is no longer binding for most of us.
Can you elaborate on the “re-evaluate the Roth vs. Trad decision”? Even though it sounds like you are sticking with Trad, what change with new tax code would make someone consider changing this and why?
Roth is better when current tax rate is < future tax rate. Traditional is better when current tax rate > future tax rate.
We just had a massive tax change, the largest in 30 years. My effective marginal tax rate just went from 37.5% to 24%.
Before, it was easy. I predicted that my future tax rate would be less than 37.5%, so Trad was a no brainer. Going forward I have to ask myself whether my future tax rate will be less than 24%. If so, then I should choose Trad. If not, then I should choose Roth.
I think I’m going to do Traditional going forward for reasons outlined here: http://www.frugalprofessor.com/how-to-mint-money-using-tax-arbitrage/. The doubling of the standard deduction expands the opportunity for such arbitrage.
I am considering switching from ROTH to TIRA contributions for 2018, but want to make sure myself and my wife’s contributions would be fully deductible in 2018.
2018 Gross Income will be 110,000 +/- with $1000 in taxable interest.
Married filing jointly. Wife is stay at home w/ two kids. We do not itemize.
I will contribute $18,500 to 401k through my employer.
I will contribute $5900 to HSA through my employer. (Employer will kick in an additional $1000.)
My MAGI will be $111,000 – $18500 – $5900= $85600. Is this correct way to calculate MAGI?
$85600 is below the threshold of the $101,000 limit for full deductibility for MFJ I found on IRS website.
Based on all of this, is it safe to say that BOTH myself and wife should be able to make a fully deductible contribution of $5500 each, even though I’m covered by a 401k plan at work and she does not work?
Your math looks good to me.
Before you go all in, however, I’d do some scenario analysis on TaxCaster or within TurboTax’s actual software for 2017 (under the correct assumption that not much will change with the tax code in 2018 on that particular dimension of TIRA deductability). If your taxes are reduced by MTR*TIRA_contribution_amounts, then you’re good to go.
Be sure to read through this post: https://frugalprofessor.com/ask-the-professor/.
Great explanation…just wanted to make sure I wasn’t missing anything!
Hey, this is great, thanks. In combination with the Kitces Report blog I am finally getting some confidence today about what our situation will be next year – and what I can do to react during the remainder of this year. We’ve been under AMT forever with marginal 28% and that has influenced my Roth conversion strategy. Now we’ll be out from AMT with a much higher marginal rate. QUESTION though, why are your marginal rates (in the $400K+ wage range) 1.5% higher than I expected based on the published brackets of 32% and 35%? Thanks again!
Happy to help. The Child Tax Credit (CTC) begins to phase out at $400k of income. I assumed a 5% like the prior tax code.
Your comment helped me isolate a bug in the spreadsheet. The effective marginal tax rate for the CTC phase-out is 5% higher than the statutory rate. If you re-download the file using the same link it will now be corrected.
Thanks, I’ll have to learn more about CTC, but work like yours is so helpful in phase-out situations. So now you’ve got us in a marginal rate of 40%, yikes. No more Roth conversions (with no chance to recharacterize), I think. One more thing re the trad IRA contribution field. We have been in non-deductible IRA contribution territory for many years, but still contribute so when I populated that field with 13,000, it changed our tax by I think 6,000. I probably should input 0 there. Do you mean that field to be used only for deductible IRA contributions, probably?
I haven’t modeled the phase-out of tIRA deductions yet (on the to-do list), so please leave blank. I’m in that region as well and will continue to make non-deductible tIRA contributions for the purpose of backdoor Roths.
Just wondering if this is a catch, but it looks like our State Income tax will increase based on the Tax Reform. Hopefully you can correct my thinking if I am wrong, but our state of residence and maybe others start with Fed AGI and then deduct the standard or itemized deductions and federal exemptions. So a family of 4 that’s $28,900 in 2017.
The new $24,000 Standard deduction is clearly less than that, so it appears that if nothing changes on the state side our state taxable income will actually increase as a result and cost us more than the tax savings on the Federal side
Is this right?
Your logic sounds pretty good to me, and it’s something I hadn’t even realized until you mentioned it.
Honestly I stumbled across it when trying to determine updated withholding amounts for next year and while working through those numbers saw our state taxable income jump up.
This is one I would rather be wrong about.
I would rather you be wrong as well! Bummer for both of us.
Maybe I’m not clear on this, but in my case (semi-retired), I have some W-2 income, some Pension income, some Roth Conversion costs, and some tax credits like the electric vehicle credit. It doesn’t seem like there is any way to model this in your spreadsheet. Is that right?
Your tax taxable wages = (W2 + Pension + Roth Conversion amount). The electric vehicle credit would simply reduce your taxes owed by the size of the credit.
Any chance you can make the spreadsheet compatible with Google Sheets or LibreOffice? Right now it only seems to work with Excel and doesn’t work properly with the other two. Thanks!
Deskjockey, sorry for the slow response. I uploaded the 2017 file into google sheets here: https://docs.google.com/spreadsheets/d/11ID3KR8UMgRpiSq4XgZHC2xzPSAVCoWtY8IELimeQDM/edit?usp=sharing. I prefer Excel so I won’t maintain updates of this google doc. But the good news is that it took about 1 minute to open the file in Google Sheets.
I must be dense, but I don’t see any output that says “You will owe $xxx in taxes for this input”. I also don’t see any place to enter SS income, LTCG, or dividends. What am I missing?
Never mind, I see the LTCG and dividends, but not SS income. Is that not included?
Labor income is looked up in the table directly. I’m in my mid-30s. I’m not a tax professional. Everything I’ve learned about the tax code is by reverse engineering my tax returns. I’ve never dealt with Soc Sec income directly. Is this taxed differently from labor income?
Yes, Social Security income is taxed differently from labor income. See https://www.kiplinger.com/article/taxes/T051-C000-S001-are-your-social-security-benefits-taxable.html for a general explanation.
Please correct me if I am wrong but I think the 2018 spreadsheet calculates federal taxes incorrectly for the following case (and similar ones).
1. No wage income but since your spreadsheet starts at $500 for wage income, let’s make wages $1000
2. capital gains and qualified dividends 150,000
3. MFJ, taking standard deduction of 24000.
According to my calculations, the taxes on (110K-24K) 127K taxable income is:
0% bracket for CG: 77400 – 1000 wage income = 76400, Taxes @0%: 0
15% bracket for CG: 127K – 77400 = 49,600. Taxes @15%: 7,440
Your 2018 spreadsheet shows the taxes to be 10,890.
Sorry I meant to type (151K-24K) = 127K taxable income.
Turbotax’s tax online tax calculator for 2017 shows the taxes to be $7995 for the above case
MFJ. 0 kids. $150k div + LTCG. $0 labor income.
Assume Std Ded of $12.7k + 2 personal exemptions of $4.05k = $20.8k.
$150k – $20.8k = $129.2k.
First $75.9k of $129.2k taxed at 0%.
Remaining $53.3k taxed at 15%.
Total tax burden is $7,995.
You’re right that my spreadsheet is incorrect for this corner case. It wasn’t properly coded for scenarios in which investment income >>>> labor income.
I’ve updated both spreadsheets. If you re-download, the changes will be incorporated.
Here is a good resource of taxation of cap gains & dividends:
Your 2018 tax form asks for number of children under 16, just like the 2017. But I thought the new tax law extended the eligible age to 17 for the $2000 credit, and allows 500 for other dependents (eg kids over 18 and in college).
Is that correct?
Roger, thanks for the comment. Here’s what I found in the 570 page pdf. I’m not sure how to interpret it, but I think the 16 and younger interpretation (as currently coded) is correct. If you can find further support of the child-in-college credit, let me know and I’ll code it.
The conference agreement temporarily increases the child tax credit to $2,000 per qualifying child. The credit is further modified to temporarily provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children. The provision generally retains the present-law definition of dependent.
Under the conference agreement, the maximum amount refundable may not exceed $1,400 per qualifying child.73 Additionally, the conference agreement provides that, in order to receive the child tax credit (i.e., both the refundable and non-refundable portion), a taxpayer must include a Social Security number for each qualifying child for whom the credit is claimed on the tax return. For these purposes, a Social Security number must be issued before the due date for the filing of the return for the taxable year. This requirement does not apply to a nonchild dependent for whom the $500 non-refundable credit is claimed.
Further, the conference agreement retains the present-law age limit for a qualifying child. Thus, a qualifying child is an individual who has not attained age 17 during the taxable year.