The law temporarily reduces the threshold to deduct unreimbursed medical expenses to 7.5% AGI (used to be 10%). This reduction only applies to expenses incurred in 2017 & 2018 and then goes back to 10% for expenses incurred in the years after 2018. So, if clients need to pay pricy medical bills soon, it’s worth considering doing so by the end of this year to receive a potentially bigger tax break.
In certain circumstances the deduction can cover things like home renovations for medical purposes, for instance. This could help aging Baby Boomers if they need to widen their hallways for wheelchair access or installing a chairlift.
When the Tax Cuts and Jobs Act went into effect, it brought a slate of changes to the Internal Revenue Code. Those include an increase to the standard deduction which nearly doubles to $12,000 for singles and $24,000 for married couples, as well as the elimination of personal exemptions.
It is likely that fewer clients will now itemize their deductions. ‘Bunching’ charitable contributions may be one way to benefit from itemizing going forward.
This strategy works because it shifts between itemizing and taking the standard deduction, by grouping a client's deductions into one tax year where itemization is beneficial and minimizing them in off years, where it is beneficial to utilize the standard deduction.
In general, the client gives the same amount of dollars they would give in a 2-year period, but they bunch them into one year. In theory, this will help them itemize deductions in a tax year where they, otherwise couldn’t.
ROTH IRA CONVERSIONS
For taxable years after 2017, clients are no longer able to recharacterize a Roth IRA conversion. So going forward, a client cannot undo a Roth conversion.
Converting to a Roth IRA from a traditional IRA is something to be certain of because a change back to a traditional IRA is no longer permitted. The old pattern was to convert an IRA to a Roth IRA as early in the year as possible, because the client conversion could be unwound by a recharacterization. Now it's likely better to wait until closer to the end of the year to convert an IRA to a Roth IRA because the client will have a better idea of their income and deductions.
Clients have until October 15, 2018 to recharacterize Roth IRA conversions made in 2017.
529 plans, which most people think of for helping to cover college costs, now may also be used to cover private elementary and secondary, public, private or religious school expenses, of $10,000 in tax-free distributions per year and per child, beginning after 2017.
Unfortunately, not all states provide a deduction for amounts contributed to a 529 plan.
The estate and gift tax exemption doubled to roughly $11 million for individuals under the TCJA law. In eight years (2026) though it is scheduled to return to its pre-tax reform indexed amount. That may have some high net worth clients nervous because if they die in 2026 or later they would be passing on half as much wealth to their heirs on an estate tax-free basis. There is a solution that they can take now to avoid this problem later down the road.
$11.18 million may be gifted tax-free during a lifetime under the TCJA law. If an individual gives their wealth before 2026, the dollar amount and any future growth can be transferred tax-free. We recommend gifting the assets to a spousal lifetime access trust, or SLAT. This gives the spouse ability to manage the trust’s assets as trustee and can make them a beneficiary along with the children.
Lincoln Financial Advisors Corp. and its representatives do not provide legal or tax advice. This information should not be construed as legal or tax advice. You may want to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances.