In December 2017 one of the biggest tax overhauls of the past three decades passed into law. Many will benefit from lower tax rates while others will face tax increases by the substantial loss of deductions. As we move into 2018, our focus shifts to planning opportunities that will become more valuable under the New Tax Cuts and Jobs Act. Many of these changes and opportunities are expected to be available from 2018 through at least 2025 when the law sunsets.
Note – You should discuss all of these opportunities with a Certified Public Accountant (CPA) before enacted.
Qualified Charitable Donations (QCD) – for those who are 70½ or older
The option to make a charitable donation using a Required Minimum Distribution (RMD) was made permanent in 2016. However, for many people it still made sense to gift appreciated securities to charity. Going forward many taxpayers will find themselves taking the standard deduction ($24,000 for a married couple filing jointly). In this case, they don’t get the benefit of charitable gifts as an itemized deduction. This makes QCDs much more attractive as taxpayers avoid the tax on the distribution AND they get a higher standard deduction.
Bunching of Charitable Deductions
To counteract the limitations and eliminations of many itemized deductions, the new tax law expands the standard deduction (given to all taxpayers regardless of their actual deductions) to $12,000 for individuals and $24,000 for those married filing jointly.
This means that fewer folks will be itemizing going forward. Those with no mortgage interest or medical deductions have limited deductions – $10,000 state and local tax (SALT) deduction and their charitable deductions. As a result, for clients who are regularly placing funds into a Donor Advised Fund, it may make sense to consider bunching together their contributions rather than contributing on an annual basis. They will therefore exceed the standard deduction in years the donations are made and receive the maximum tax benefit for their charitable contributions.
One of the biggest transformations out of the Tax Cut and Jobs Act is the expanded use of 529 plans. Prior to this tax bill, one could only use 529 plan assets to fund college and higher education. Due to the limited use, many taxpayers were worried about overfunding the plans. Now, taxpayers may use up to $10,000 per year per beneficiary for K through 12 education.
This helps prevent overfunding 529 plans, but also for New York, Connecticut, and Pennsylvania residents, one can put money into the 529 plan, get a state income tax deduction, and pay for a private school. In other words, these states are giving you a small discount on your private school tuition costs! Be mindful of how much your state allows you to deduct as each state is different. Unfortunately, New Jersey does not provide an income tax deduction for 529 plan contributions.
Elimination of Miscellaneous Itemized Deductions
The Tax Cut and Jobs Act eliminated the Miscellaneous Itemized Deduction. The most common miscellaneous itemized deductions for taxpayers are tax preparation fees and wealth management fees. Many high tax state residents (think NJ, NY, CA, etc.) were not able to reap the benefits of these deductions since they were most likely paying Alternative Minimum Tax (AMT). Additionally, one can only deduct in excess of 2% of their Adjusted Gross Income.
RegentAtlantic tailors how we deduct our fees based on each client’s circumstance. Going forward we will be debiting our management fee directly from IRA accounts and Pre-tax 401(k) accounts. Debiting management fees directly from IRA accounts results in our fee payment with pre-tax assets. This in essence provides a discount equal to the reduction of future taxes on those funds. The caveat is IRA accounts are only permitted to pay for themselves; they cannot pay for other accounts in a portfolio. Taxable accounts will generally pay for themselves . We still prefer that Roth IRAs are paid for by the taxable account if possible to maximize the growth of the Roth account given its tax-free growth and withdrawals.
Increased Gift Tax Exemption
Separate from the Act was the increase in the annual exclusion gift from $14,000 per person to $15,000 per person. The lifetime gift tax exemption doubled to over $11,000,000 per person. You need to record amounts gifted above the annual exclusion on a gift tax return; although, no taxes are due until gifts exceed the lifetime exemption amount.
Gifting aside, the best opportunity for passing assets to the next generation is to get a step-up in cost basis and pass the assets upon death rather than use a lifetime exemption. An attorney and Wealth Advisor should coordinate and evaluate any gifting strategy put in place.
The Tax Cut and Jobs Act was a robust change to the tax code that we knew in 2017 and many years prior. RegentAtlantic is still evaluating these changes and will release additional planning opportunities as the IRS and tax professionals release more guidance.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.