5 Changes to the Tax Code that Haven’t Made the Headlines.
Written by: Allie Schmidt, Financial Advisor, CFP®, CPA
The Tax Cuts and Jobs Act was a major overhaul to both the corporate and individual tax codes and came into effect in 2018. These changes left taxpayers begging the question… “Will I pay more or less in taxes?” There are so many moving parts that this simple question has anything but a simple answer. As I’ve dug a little deeper into some of the changes, I noticed that most articles focused on the “big news”: the changing and lowering of tax brackets, the doubling of the standard deduction, and the $10k limit on the SALT (State & Local Taxes) deduction. So I wanted to go rogue and assume you already know those changes and point out 5 changes to the tax code that didn’t make the headlines…well until now.
Estate tax exemption increase: This was a major increase. The 2018 federal estate and gift tax limit was increased to $11.18M per person, $22.36M per couple, up from $5.6M per person, $11.2M per couple in 2017*. This is dramatically different and will likely change the estate planning for a lot of folks. This is a historically large jump in estate and gift tax limits and is the biggest news since portability was signed into law in 2010. Portability of the federal estate tax exemption between married couples comes into play if the first spouse dies and the value of the estate does not require the use of all of the deceased spouse’s federal exemption from estate taxes. To give an example, Jo and Sandy are married and have a taxable estate of $15M with all assets jointly titled. Sandy dies in 2018, and she doesn’t use any of her $11.18M exemption since the assets are titled jointly (all assets transfer directly to her spouse). Prior to portability and without estate planning, Sandy’s $11.18M exemption goes away unused and when Jo dies, she has a taxable estate of $3.82M. However, with portability, Sandy’s unused exemption is added to Jo’s giving her an exemption of $22.36M. Basically, you get the amount your spouse didn’t use, as opposed to it just going away…game changer.
Out-of-pocket medical costs: You can claim these costs as an itemized deduction on your 2018 return to the extent they exceed 7.5% of your adjusted gross income (AGI), regardless of your age. The hurdle goes up to 10% starting in 2019. Remember this can also include “elective” items as well, such as acupuncture, chiropractor visits, addiction treatment programs, IVF (in-vitro fertilization), home modifications for medical needs, etc**.
Alimony tax changes: In the past alimony expenses were a deduction for the payer and income for the recipient. Beginning in 2019, the person paying the alimony is no longer entitled to the tax deduction and the recipient no longer claims the support as income. This is true only for divorces that are finalized after January 1, 2019. This change will likely lead to different negotiation tactics when it comes to the amount of alimony between spouses.^
Child tax credit: The Child Tax Credit can be claimed for qualified children under the age of 17 and was doubled for 2018, from $1,000 to $2,000 per qualifying child. Importantly, this is a credit, not a deduction, which means it offsets your taxes dollar for dollar. The elimination of the personal exemption had families with multiple children feeling short-changed, but with the credit on the back-end, it will depend on each family situation to determine which was the better deal. (See why it’s so hard to determine whether people would pay more or less?). The other moving part here was the dramatic change to the income threshold to qualify. In the past this credit was only available for low-to-middle income households, with the credit phasing out for married couples who made more than $110k and for single filers who made more than $75k; however, in 2018 those limits have increased to a total phase out at over $440k for married filing jointly and $240k for single filers. A whole lot more families just qualified for this credit. **
529 College savings plan exemption: 529 college savings plans are offered through states and are designed to encourage tax-advantaged savings for future college expenses. These plans have been expanded to include elementary and secondary school expenses up to $10k per year. There are still specific state rules around 529s, so it’s important to pay attention to those nuances (i.e. state taxes, claw back of deductions), but no matter what state you live in, you are able to withdraw as much as $10k for elementary and secondary school expenses and not have to pay federal tax or a penalty for this withdrawal. This is particularly helpful if the 529 account appears to be overfunded for college, allowing you to reduce the account on your terms in a qualified manner to avoid those taxes and penalties if there aren’t enough qualified college expenses in the future. **
These are just 5 of the many, many changes that flowed through the Tax Cuts and Jobs Act, but some that are discussed a little less frequently and likely affect a whole lot of people. Since we are a financial planning firm and not a tax preparation firm, our minds always go to how to use each of these changes to strive to benefit our clients over the long-run by planning. The tax code is always changing, this is the second major tax law change we’ve had in a decade. Flexibility is the most important piece; permanent law seems to only be permanent until it’s changed. So, we’ll continue to stay flexible and pay attention.
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*forbes.com
**irs.gov
^cnbc.com
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through HD Wealth Strategies, a registered investment advisor and separate entity from LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific tax advice or recommendations for any individual. We suggest that you discuss your specific tax issues with a qualified tax advisor. This is a hypothetical example and is not representative of any specific situation. Your results will vary. Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
