Investing under the new tax law: The details you might have missed

The biggest tax act in over 30 years was signed into law last December, and people are obviously focusing on the big changes to tax rates, deductions, and tax exemptions. But there are a lot of small details that haven’t gotten quite as much attention.

Here are 4 areas that have changes you may have missed.

Alternative Minimum Tax (AMT):

The AMT has been altered for 2018 by greatly increasing the income levels where the tax will apply.  Many of the deductions that were a trigger for the AMT have also been significantly reduced or eliminated.  The number of taxpayers having to contend with the AMT after 2017 will be greatly reduced, making computing your actual tax rate on various types of investment income a much simpler exercise.

Miscellaneous Itemized Deductions:

All deductions subject to the 2% of income floor have been eliminated beginning in 2018.  This category of itemized deductions encompasses a wide range, including fees paid for tax advice and preparation, investment advisory and financial planning fees, unreimbursed job expenses, and legal fees related to tax advice and planning.

Prior to 2018, all of these deductions were typically detailed as part of a taxpayer’s miscellaneous itemized deductions.  Although these deductions were methodically listed, between the 2% deduction floor and the AMT calculation, many taxpayers received little if any tax benefits for this category of deductions.

Since investment advisory fees can no longer be deducted as a line item entry on your tax return, the fees relating to IRAs and other retirement accounts should be deducted from the corresponding retirement account.  This effectively allows the taxpayer to use pre-tax funds to pay these fees.

Roth Retirement Accounts:

The new tax law maintains the ability to fund Roth IRAs from existing IRA accounts, known as a Roth Conversion.  The Roth IRA conversion can be an excellent taxable income management tool for the early retirement years, prior to beginning Social Security benefits or Required Minimum Distributions from regular retirement accounts.  Taxpayers may also use this strategy to optimize their tax liability in low income years, to better manage their lifetime tax obligations.

The new quirk is that the 2018 law did eliminate the ability for a ROTH Recharacterization.  This tax strategy allowed taxpayers to undo the Roth conversion if their situation changed from the time of the initial conversion.  This course reversal, returning assets to the regular IRA, also eliminated the associated tax liability.  Please note that for any ROTH IRA conversions completed prior to December 31, 2017, the Recharacterization option will still be available until the extended due date of the tax return or as late as October 15, 2018.  Beginning in 2018, converting IRA assets to a Roth IRA is an irrevocable election.

529 Plans:

These have always been a favorite vehicle for college savings and beginning in 2018, plans are enhanced with the ability to pay up to $10,000 per year of K-12 tuition.  These tax-deferred plans can be used to fund children’s education costs while also shifting assets outside of a taxable estate, all while the account owner maintains full legal control.  Although the maximum plan balance varies by state, many plans are now allowing continued account funding until the balances reach as high as $500,000.

The tax-deferred growth becomes tax-free growth if the plan funds are used for qualified education expenses.  Contributions to these plans may also create a state tax deduction in many states.  See this article for more details on 529 Plans.

 

The new tax law affects a number of broad strategies that savvy investors may pursue with their portfolios.  This article focused on the areas that have changed from the prior tax law.  Check out Part II, where we discuss some of the unchanged tax details that you don’t want to forget.

Keep in mind, each family’s specific circumstances will determine what strategies make sense for their situation.  Please contact us if you have questions about your specific circumstances.

Dana Sippel, CFP®, CPA/PFS

Dana Sippel, CFP®, CPA/PFS

When it comes to sailing, it is essential to always make sure all of the lines are secured. They need to be checked, double checked, even triple checked, to ensure a safe voyage. It is this kind of precision and attention to detail that make Dana Sippel not only an exceptional sailor, but has led him to build an experienced career in wealth management.
Dana Sippel, CFP®, CPA/PFS