Since the Tax Cuts & Jobs Act was signed on December 22, 2017, the financial services and accounting industry has been busy interpreting not only the contents of the bill, but also ways to implement the changes effectively for the taxpayer community. We’ve had a few months now to digest the details and — trust me — there will be more to come. As a follow-up to our earlier blog about the TCJA, here are 5 more things you need to know.
- 529 Plans Not Just For College
529 plans are no longer just for college. When 529 plans were originally established, the intention was to provide a tax-advantaged savings vehicle to pay for higher education needs. Earnings on contributions made to the 529 would grow tax-free, if withdrawn for college, graduate, post-grad or even technical or vocational schools. And depending on the state you live in, you could also receive tax deductions for any contributions made. Under the TCJA, 529 plan assets are now available to pay for K-12 expenses, too, such as tuition, books, and equipment — up to $10,000 per year, per student.
- Recharacterizaton No More
This strategy applied to individuals who converted a traditional IRA to a Roth IRA, and then had up until October of the following year to reverse the transaction. This strategy made sense because taxes are generally due on the value of the traditional IRA when it's converted to a Roth IRA. But if the value of the Roth assets dropped in value after the conversion, then you’d be on the hook for a higher tax bill. Hence, “recharacterization” would save that individual from paying taxes on a higher value. That strategy is no longer available for recharacterizations taken in 2018 and beyond. For those who are recharacterizing a 2017 Roth conversion — you’re OK!
- Child and Elder Care Credits
The child tax credit has doubled — from $1,000 to $2,000 per child — and, more importantly, the phase-out level for taking the credit has increased significantly. This tax credit is available for taxpayers whose income is less than $200,000 for single and $400,000 for married, filing jointly. This compares the previous tax credit of $1000 with the income phase-outs at $55,000 for single taxpayers and $110,000 for married taxpayers filing jointly. There is also a new provision that allows you to receive a tax credit of up to $500 for a non-child dependent. This is great for those who are caring for an elder loved one, and is subject to the same income limits as the child tax credit to qualify.
- Less to Qualify for Medical Expense Deduction (this year only!)
Under the new law, unreimbursed medical expenses are now deductible if they exceed 7.5% of your Adjusted Gross Income (AGI) vs. the 10% requirement in previous years. But this bump down is temporary and will expire by the end of 2018, when it will float back up to 10%. So if you are planning to have any medical procedure done — this would be the year to do it in order to maximize your deduction.
- Investment Management Fees
Alas, investment management fees are no longer deductible as a miscellaneous expense. This is especially important for individuals who elected to have their investment management fees for their retirement accounts withdrawn from their taxable account in order to take the deduction. Now, since this deduction has gone away, you should shift back to having the fees withdrawn from your retirement account, using pre-tax dollars instead.