On balance, the Tax Cut and Jobs Act of 2017 was a very positive financial development for American taxpayers. Lower corporate and individual income tax rates, wider tax brackets, and an increased Standard Deduction were all helpful. However, these provisions were offset somewhat by the elimination of the Personal Exemption and a few other deductions.
Thankfully, small investors were treated to some true tax savings. Contrary to my expectations, capital gains remain free for people in the lowest two tax brackets, and those brackets were adjusted higher. In 2018, a married couple filing jointly can have taxable income up to $77,400 (including capital gains) and pay no tax on their capital gains. This came as a surprise to us, especially in light of the reduced marginal tax rates. Medical expenses remain deductible, and Roth conversions remain available. Estate and gift tax exemptions were doubled, making planning easier for most Americans.
Now we’ll discuss what was lost. Medical expense deductions expire in two years, and we sincerely hope that Congress will regain some sense of propriety by extending these important deductions for people who experience an unusually high-cost medical year. The loss of the Personal Exemption ($4,050 per household member in 2017) can hurt large families whose income phases out the new child tax credit.
Personal financial planners and other interested individuals will mourn the loss of the Recharacterization of Roth Conversions. This long name is not as complicated as it sounds. Roth Conversions are simply transactions that convert existing funds from a Traditional (deductible) IRA to a non-deductible Roth IRA. Roth IRAs are favored by people who would rather pay taxes on the money they earn now, as opposed to paying tax when these funds are eventually removed from a Traditional IRA.
Roth conversions continue to be allowed, but gone in 2018 is a wonderful provision that formerly allowed a Roth Conversion to be “undone,” either in full or in part. Called “Recharacterization,” this technique was used to plan levels of income, for instance to keep other capital gains non-taxable (as described above). Since January 1, 2018, Roth conversions are permanent and taxable at marginal tax rates in the year of the conversion. No more second chances.
Many people may want to consult qualified financial planners and CPAs before performing Roth Conversions under the new rules. Although this may be good for our business, we consider the loss of the Recharacterization provision a negative event for taxpayers.
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