Opportunity Knocking

With the enactment of the new tax reform bill, our takehome income will change for 2018. Here’s a chance for baby boomers to painlessly tuck away more for retirement savings with no change in lifestyle required. We have a long-standing Aging with Freedom rule to save unexpected income.

Aging with Freedom seeks high wealth, high health, and high purpose. Here’s a chance to add to the wealth for retirement savings.

Tax Reform Impact Calculator

We found a quick calculator via CNN to estimate the impact of tax reform tailored to our personal income.  CNN Tax Reform Calculator

Entering our answers concludes we will add at least 1% to our takehome pay. That’s money we weren’t counting on, so it goes into the unexpected income savings.

Pass-through changes

If you are a business owner or entrepreneur and you don’t currently use a business entity, such as a Limited Liability Company (LLC) or Subchapter S corporation, you should. These are so-called passthrough tax structures. Unlike a publicly-listed or C-corporation, the pass-through business entity doesn’t pay taxes directly but the income is passed through to the business owners’ personal tax returns. (That’s why you get all those K1s.) The reform bill provides a twenty percent (20%) credit against business income from a pass-through business, reducing the taxable rate on business income. So if you’re in the 35% tax bracket, your LLC income is effectively taxed at only 28%. That’s potentially even more unexpected income. If you’re a sole proprietor with no pass-through business entity, the same income could be taxed an additional 7%. Besides, it’s useful to have a liability firewall between your personal and business assets.

Kay Bell with Don’t Mess With Taxes offered a great summary of how the pass-through tax credit will work. See: How Taxes On Pass-Through Businesses Would Work Under the GOP Tax Plan

Capital Investment Simplified

The new tax reform act vastly simplifies recordkeeping for small businesses by allowing expensing of capital investments. No more complicated depreciation schedules for most small business owners. A capital investment reduces taxable income in the year of the investment. The new 20% tax credit goes away for personal returns with joint incomes greater than $315,000. In other words, bigger businesses still have to contend with depreciation, regardless of the form of business entity.  https://www.wsj.com/livecoverage/tax-bill-2017/card/1513385693

Missed me by that much

Unexpected Income

Max Smart (Get Smart), “Missed it by that much!”

And savers and investors dodged a couple of bullets. Maxwell Smart smiles.

FIFO. The proposed “first-in, first-out” (FIFO in accounting lingo) rule for sales of stock didn’t make the final cut.  We can still pick the stock to sell and control recognition of income when selling. Accumulating stock through dollar cost averaging or different purchases over time yield a pool of stock in the same company with a wide range of basis. We pay tax on the difference between sale price and the basis. The stock held the longest (bought first) typically has a lower basis and therefore has to pay more tax on the gain. The FIFO rule would have hurt baby boomers as they start to rely upon tax-deferred investments to fund retirements. (See: Taxes After Retirement)

Second Home Interest. The second home mortgage interest deduction survives. However, it is reduced. It was on loans up to $1,000,000. Post reform it will be on loans up to “only” $750,000. Most baby boomer snowbirds with two homes will be okay. This result also helps preserve the value of real estate in second home markets.

Unexpected Income

Will the new tax reform bill help baby boomers planning for retirement? Time will tell. Do you think your retirement will benefit from the new tax reform act?