With the Tax Cuts and Jobs Act (TCJA) over five months old, many families are still getting a feel for how it will impact them personally and what changes they may want to make under the new legislation. Here are a few potential issues to consider.
Charitable giving: Under the TCJA, those who itemize can now deduct 60 percent (compared to 50 percent) of their income for qualified charitable donations. So taxpayers nearing the standard deduction threshold may want to front load their charitable contributions in one year in which they itemize to get the highest tax benefits. They can do so by making several years’ donations to a donor-advised fund and then allocating the funds to their charities of choice over a period of years.
Retirement investments: Lower income tax rates may make converting a traditional IRA to a Roth look more attractive. But it’s important to weigh the decision fully since the new law eliminates the prior ability to reverse the conversion by October 15 of the following year.
Divorce: Alimony payments were previously taxed as income to the payee and deducted by the payer. Beginning in 2019, alimony will no longer be viewed as income to receiving spouses or deductible for payers who entered into divorce agreements after Dec. 31, 2018. Without the deduction, divorcing spouses will likely want to pay less in alimony going forward.
Estate planning: The threshold for estate taxes doubles from $5.6 million to $11.2 million in 2018; $22.4 million for married couples. Only 1,800 estates nationwide are expected to owe the 40 percent levied above the exempted amount in 2018. Wealthy individuals should review existing wills with clauses tied to the tax exclusion to avoid larger dispositions than intended. It’s also good to remember the TCJA law doesn’t apply to state estate tax. Among Washington D.C. and the 12 states that levy estate taxes, only three currently match the federal exemption. And six states have an inheritance tax likely unaffected by the legislation. Unless a political shift leads to a change in law or the bequestor expects to live beyond 2026, when the law sunsets, insurance policies purchased to pay federal estate taxes may no longer be necessary.
This is just a sampling of areas the new law impacts. I encourage you to check with your tax advisor, and I am always happy to answer any questions you may have about your finances. I do not provide tax advice; coordinate with your tax advisor regarding your specific situation.
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