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.
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.