Ah, tax season. It comes every year, and often feels routine. But this tax season could be very different. It’s the first filing year since Congress passed drastic changes to the tax code in the 2017 Tax Cuts and Jobs Act. So you’re likely to encounter a very different tax return with changes to some beloved tax breaks. And some write-offs you’ve claimed in the past may be gone altogether.
Before you meet with your tax professional or file your 2018 tax return, keep these things in mind:
Income Tax Planning
The 2017 tax law limits deductions for state and local income and real estate taxes to $10,000 annually. This may affect when you will decide to pay your next fourth quarter state and local taxes.
The 2017 tax law also changed the tax brackets for investors. For the years 2018 through 2025, there are new 0 percent, 15 percent, and 20 percent tax brackets for long-term capital gains and dividends and they’re indexed for inflation.
Charitable Giving
The 2017 tax law raised the standard deduction to $24,000 for a married couple filing jointly, $18,000 for someone filing as head-of-household and $12,000 for an individual. To itemize deductions, the write-offs must exceed your standard deduction.
Retirement Account Distributions and Roth IRA Conversions
If you are 70 ½ or older and have money in a retirement account, you must take a required minimum distribution (RMD) each year. Some people with traditional Individual Retirement Accounts (IRAs) may want to convert them to Roth IRAs to save on taxes. But under the 2017 tax law, once a Roth conversion is made, it is irrevocable.
Since the long-term benefits of a Roth may or may not outweigh your income tax consequences for keeping your traditional IRA, don’t make a conversion until first discussing the potential action with your financial adviser.
Gifts, Gift Taxes, and Estate Taxes
The 2017 tax law says that you can withdraw tax-free from 529 savings plans up to $10,000 a year for education costs for kindergarten through 12th-grade education costs. You can also maximize a gift to a 529 plan in the amount of $75,000 during a single year; for gift tax purposes, that amount can be spread over five years so it won’t exceed the annual gift tax exclusion, which is $15,000 per person in 2018 (or $30,000 per married couple).
When deciding whether to make a gift, your options include: giving it to the person directly, putting it in a Uniform Transfers to Minors account for the person’s benefit (if he or she is a minor), putting it in a trust for that person’s benefit (if the trust is structured to receive annual exclusion gifts), or putting it in a 529 plan for education for the person’s benefit.
The 2017 tax law also raised the federal estate, gift, and generation-skipping transfer tax exemption from $5 million per person to $11.18 million per person in 2018, indexed for inflation ($11.4 million in 2019). But this increase is set to expire December 31, 2025. This means that as of 2026, unless the law changes, the federal estate, gift, and generation-skipping tax exemption amounts will revert to the prior $5 million amounts, adjusted for inflation.
Changing State-Tax Residency
The top of the year may be a good opportunity to examine whether to consider changing your state residency. States such as Florida and New Hampshire do not have a state estate tax; other states do, and some of those taxes are quite stiff. There may also be income tax benefits to changing residency to a particular state.
Before relocating, talk with your estate planning attorney and tax professional.
Planning for the future financially and navigating all of the resources on your own can be stressful. At Bethesda, we help seniors find solutions and options that make the most of their retirement. Contact us today to learn or visit our blog for more finance and planning tips.
By Katie L.S. Von Kohorn and Meghan E. McCullen for Next Avenue.
