The TCJA (Tax Cuts and Jobs Act) passed in late 2017 affects your tax planning for 2018. We highlighted the changes that are most likely to pertain to our clients. The information is general in nature, and not a substitute for individual and customized tax advice from your tax preparer.
1) Some retirement plan contributions have increased.
If you contribute to a TSP, 401k, or 403b, you may be eligible to increase your savings. The limit is now $18,500 versus $18,000 in 2017. The catch-up contribution (for those age 50 and older) remains unchanged at $6,000. If you contribute to a SEP IRA, the maximum annual contribution is now the lesser of $55,000 (vs $54,000 in 2017) or 25% of compensation.
Roth IRA and IRA contribution limits remain unchanged at $5,500 per year with a $1,000 catch-up contribution.
2) The annual, per-recipient, gift tax exclusion rises to $15,000 (from $14,000 in 2017).
Examples of gifts that are affected by this exclusion limit include how much you can contribute to a child's 529 plan or how much you can gift a child for a wedding or down payment.
3) Alimony is treated differently.
Alimony is no longer allowed to be deducted on the payer's tax return. Likewise, it will no longer be included as taxable income for the recipient. In the past, alimony was treated as "earned income" for purposes of the recipient being able to save to an IRA. This is no longer the case for 2018 going forward.
4) "Backdoor" Roth IRA conversions have been legitimized.
You can only contribute to a Roth IRA if you make less than the income limit defined by the IRS. Many of our clients make too much money to contribute to a Roth IRA. The backdoor Roth conversion is a term used when a taxpayer moves non-deductible contributions in a Traditional IRA account to a Roth IRA account, without owing taxes or being subject to income limitations. The TCJA explicitly states this is now a legitimate planning tool and is allowed.
That being said, you need to be careful. For example, if you have any pre-tax or deductible IRA money (say from an old employer's 401k that you rolled into an IRA), you will owe taxes on the conversion of the non-deductible IRA money to a Roth even though it is a separate account. Here is another resource that goes into more detail (see gotcha #4).
5) Charitable Deductions will not be as big of a benefit, if at all, for many people.
The charitable deduction is an itemized deduction on your schedule A. The TCJA eliminates or cuts many itemized deductions and increases the standard deduction, so many people who have used the schedule A in the past, may not use it in 2018, therefore getting no benefit for their charitable donations.
For clients that have IRA's and are over 70 1/2 (and therefore subject to required minimum distributions or RMD's), a better way to give to charity may be through qualified charitable distributions (or QCD's). This is when you transfer your RMD directly from a traditional IRA to the qualified charity. The RMD is typically taxable income, but when you execute a QCD, it is excluded from taxable income. It gives you the same benefit as if you took a taxable distribution from your IRA, gave the money to charity, then deducted the donation. The limit on QCD's is $100,000 for 2018.
6) You may want to bunch your deductions every other year.
Since many people may be on the border as to whether they will get the standard or itemized deduction, it is worth having your tax preparer do a tax analysis to see if you can reduce your taxes with good planning. For example, one year you may want to reach for the itemized deduction by paying January's mortgage payment in December, pre-pay property taxes and/or contribute double to charity. The following year would be a standard deduction year (no pre-payments or charity), followed by the same strategy the following year to itemize.
The tax law and changes are complicated, so check with your tax and financial advisor before implementing any of the above strategies. PWR prepares taxes. If you are looking for help implementing these strategies, or need a tax preparer, review our services page or schedule a free call to learn more.