The new tax law is a complex topic that has been consuming the time of accountants, tax lawyers, and financial planners. The IRS’s men and women are also scrambling because they have less than two weeks to work between the moment President Trump signed the law, and when most of the new provisions became effective January 1. You can bet that you will be affected by the most significant changes to the tax law in over three decades when Congress approves them. These are the facts you should know about how new rules will affect retirement planning and retirees.
The State And Local Tax Deductions Get A Squeeze
The $10,000 maximum amount you can deduct from your state, local, and/or property taxes in any given year is set by the new law. Retirees who own second homes at the coast or in the mountains could find this particularly difficult. Property taxes could be deducted on any number of properties. There was no dollar limit for write-offs for state and local income taxes or sales taxes. The $10,000 annual limit is imposed by the new law, which lumps all SALT (state and/or local taxes) deductions together. This combined with an increase in the standard deductibility will cause millions of taxpayers not to itemize but to claim the standard deduction.
Loss Of Deduction For Investment Management Fees
One part of the government has been pushing financial advisors working with retirement accounts to charge clients fixed fees instead of commissions. Congress now wants to abolish such investment management fees. These costs were previously allowed to be deducted as an itemized miscellaneous deduction if they exceeded 2% of your adjusted income. All write-offs that were subject to the 2% ceiling were eliminated by Congress as part of the tax overhaul. You can pay a management fee to a traditional IRA from the account, or you could use pretax money to pay it.
Last fall, there were a lot of controversies after it became known that the House of Representatives was looking at severely restricting the amount of pretax retirement savings that can be contributed to their 401k plans. Congress ultimately decided to keep 401(k), at least for the moment, intact. 2018: Savers younger than 50 years old can contribute $18,500 to their workplace retirement plan or 401(k). An additional $6,000 “catch up” contribution can be added by older taxpayers to bring their annual limit to $24,500.
Stretch IRA Preserved
Early in the tax reform debate, it was clear that Congress would end the “stretch IRA” rule which allows heirs to distribute payouts from an inherited IRA over the course of their lives. This could allow for tax-deferred growth within the tax shelter for many years or even decades. One proposal that was popularized on Capitol Hill would have required heirs to clear out inherited IRAs within five years of the death of the original owner. The IRS would have been able to collect more tax from the distributions if the accelerated payout was in place. This plan was ultimately scrapped. The stretch IRA can still be accessed as long as the heir correctly titles the inherited account, and starts distributions based on the original owner’s life expectancy by the end of the calendar year after his or her death.
Survives 0% Capital Gains Rate
The new law maintains favorable tax treatment for long-term capital gains and qualified dividends. Rates of 0% to 15%, 20%, or 23.8% are imposed depending on your income. Profits from assets that have been held for more than one year are considered long-term gains. The tax rates for “ordinary” income such as interest, salary, retirement plan payouts, and short-term gains range from 10% to 37%.
Your capital gains rate used to depend on your tax bracket. Congress has now established income thresholds to replace the old brackets. Taxpayers with taxable income below $38,600 for individual returns or $77,200 for joint returns will be eligible for the 0% rate on long-term gains, qualified dividends, and 0% for short-term gains. Investors with taxable income above $479,000 for joint returns or $425,800 for single returns are subject to the 20% rate. Investors with incomes between $479,000 and $425,800 are eligible for the 15% rate.
Retirees often have the option to take the 0% rate if their taxable income falls below the threshold at which point their paychecks cease.
Custodial Accounts & The Kiddie Tax
You need to be aware of changes in the kiddie taxes if you are saving money for grandkids or great-grandkids in custodial accounts. The old law required that investment income earned by dependent children younger than 19 years (or 24 if they are full-time students) be taxed at the rate of their parents. This would mean that the tax rate would differ depending on the income of the parents. This income will start to be subject to the tax rates that apply for trusts and estates starting in 2018. This is a far more complicated rate than the rates applicable for individuals. For married couples filing joint returns, the top 37% tax rate for 2018 is $600,000. The same rate applies to trusts and estates, which is $12,500 . . …and, of course, the kiddie tax. However, this doesn’t mean that a child’s income will be subject to higher taxes.
For example, let’s say your grandchild earns $5,000 and the parents have $150,000 in taxable income. Applying the 25% rate of the parents to the $5,000 would have resulted in a $1,250 tax. The old rules would still apply, so the new rate of 22% would be used to tax the $5,000 income. The new trust tax rates result in an $843 kiddie tax bill.
The kiddie tax is applicable to investment income exceeding $2,100 for children under 19 years of age or full-time students over 24.
This article was written by Alla Tenina. Alla is one of the best tax attorneys in Los Angeles California, and the founder of Tenina law. She has experience in bankruptcies, real estate planning, and complex tax matters. Click Here for more information. The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. This website contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser; the ABA and its members do not recommend or endorse the contents of the third-party sites.