As tax laws change, it brings a moment of anxiety for everyone, but especially for those in or nearing retirement. This blogger could have rolled out the rules in a very tax attorney way, but chose to relay the information in as simple a manner as possible. This article is to educate and not to overwhelm. Speaking with your CPA or tax attorney is always best with complicated tax nuances; however, here is a taste of what is coming that might affect you.
1. The new law nearly doubles the size of the standard deduction – to $12,000 for individuals and $24,000 for married couples who file joint returns in 2018 (up from $6,500 and $13,000). The increase, in conjunction with new limits on some itemized deductions, is expected to lead more than 30 million taxpayers who have itemized in the past to choose the standard deduction instead
2. The new law sets a $10,000 limit on how much you can deduct for state and local income, sales and/or property taxes for any one year. This could be particularly painful for retirees with second homes.
3. There is now a loss of deduction for investment management fees.
4. 401(k)s are spared for now. For 2018, savers under age 50 can contribute up to $18,500 to their 401(k) or similar workplace retirement plan. Older taxpayers can add a $6,000 “catch-up” contribution, bringing their annual limit to $24,500.
5. The stretch IRA is still available as long as the heir properly titles the inherited account and begins distributions, based on his or her life expectancy, by the end of the year following the original owner’s death.
6. 0% Capital Gains Rate still in effect. The new law retains the favorable tax treatment for long-term capital gains and qualified dividends, imposing rates of 0%, 15%, 20% or 23.8%, depending on your total income.
7. Conversions are now irreversible. The new law will make it riskier to convert a traditional individual retirement account to a Roth. The old rules allowed retirement savers to reverse such a conversion—and eliminate the tax bill.
8. The new 2018 tax laws put an end to home-equity loan interest deduction.
9. The new law retains the right of taxpayers age 70 ½ and older to make contributions directly from their IRAs to qualifying charities. Because more taxpayers will take standard deductions rather than itemizing, this will still be a way to get that tax break for charitable donations.
10. As for 529 plans that you may be investing in, consider that the new law expands the use of these savings plans by allowing families to spend up to $10,000 a year to cover the costs of K-12 expenses for a private or religious school. The $10,000 cap applies on a per-pupil basis
11. Temporary expansion of medical deductions The new law reduces the threshold from 10% to 7.5% of Adjusted Growth Income and the more generous rule applies for both 2017 and 2018. In 2019, the threshold goes back to 10%.
12. Some tax free income if you decide to consult during your early retirement years. If your business qualifies, then 20% of your business income would effectively be tax-free. For many pass-through businesses, the 20% deduction phases out for taxpayers with incomes in excess of $157,500 on an individual return and $315,000 on a joint return.
13. Higher estate tax exemption! Starting in 2018, the tax will not apply until an estate exceeds about $11 million. This means a married couple can leave about $22 million tax-free.
14. The step-up rule survived the new tax laws. If you inherit stocks, mutual funds, real estate or other assets, your tax basis will, in most cases, be the value on the day your benefactor died. Any appreciation prior to that time is tax free.