Published by Taylor Financial Group
The recent passage of the Tax Cuts and Jobs Act (TCJA) has dramatically changed the world of tax planning as it is the most far reaching tax legislation since 1986. The standard deduction has doubled, many other deductions have been eliminated, changes have been made to Roth IRA conversions, and the list goes on and on. Everybody’s situation is truly different, and everyone will be impacted differently so it is important to review your situation with us and your tax professional to create a personalized tax strategy that best suits your needs. In the meantime, here are a few key thoughts on the New Tax Act that you should be aware of.
- The TCJA has raised the standard deduction to $12,000 for individuals and $24,000 for married couples. It is estimated that nearly 90% of taxpayers will rely on the standard deduction in place of itemizing deductions going forward. The state and local tax limitation is instrumental here, as all state income and real estate tax deductions are limited to $10,000! However, if you are on the borderline, there are some clever tax strategies that can be put into place to help you receive the maximum amount of deductions over a longer period of time, such as bunching medical and charitable deductions into one year and then skipping the next year.
- The New Tax revisions introduce additional credits for parents or guardians. The child tax credit has increased to $2,000 per qualifying child, with $1,400 being refundable. In addition, the income phaseouts have also increased to $400,000 for married filing jointly and $200,000 for individual taxpayers. With the new phaseout limitations, many more households will qualify for this credit, helping reduce tax liabilities for families.
- Another key change is regarding Roth conversions. Given the newly lowered tax rates, converting to a Roth IRA can be a great option. You can pay the taxes now at lowered rates and receive tax-free withdrawals in the future. Roth IRAs provide amazing benefits since you are not required to take an RMD and therefore the account grows income tax-free for your life (and your heirs’ life). It is important that you properly plan the Roth conversion carefully, however, because the TCJA will no longer allow recharacterizations. We are here to help you step-by- step, as there are good strategies that can work well here and Roth IRA’s are a great planning tool.
- Lastly, the new legislation increased the unified estate and gift tax exemptions to $11.2 million for individuals and $22.4 million for married couples. With this new increase, only approximately .08% of estates will owe federal estate tax. This does not mean it’s the end of estate planning, as clients still need to regularly review their Wills and Trusts with us (and their attorney) to prevent any unintended estate consequences.
Although the New Tax Act is complex, it also brings many opportunities to find ways to reduce your tax liability. Through carefully planned strategies such as taking full advantage of deductions and credits, Roth conversions, estate planning (and many more) we can help ensure that your tax savings strategy is custom tailored to your needs.
Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions.. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.
This piece is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.