Tax

Cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for the tax year 2018 have been announced by the IRS. Here are the highlights:

In general, income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the saver’s credit all increased for 2018. In addition, the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $18,000 to $18,500. However, contribution limits for SIMPLE retirement accounts for self-employed persons remains unchanged at $12,500.

Traditional IRAs

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions; however, if during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-out amounts of the deduction do not apply. Here are the phase-out ranges for 2018:

• For single taxpayers covered by a workplace retirement plan, the phase-out range is $63,000 to $73,000, up from $62,000 to $72,000.
• For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $101,000 to $121,000, up from $99,000 to $119,000.
• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $189,000 and $199,000, up from $186,000 and $196,000.
• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Roth IRAs

The income phase-out range for taxpayers making contributions to a Roth IRA is $120,000 to $135,000 for singles and heads of household, up from $118,000 to $133,000. For married couples filing jointly, the income phase-out range is $189,000 to $199,000, up from $186,000 to $196,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Saver’s Credit

The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $63,000 for married couples filing jointly, up from $62,000; $47,250 for heads of household, up from $46,500; and $31,500 for singles and married individuals filing separately, up from $31,000.

Limitations that remain unchanged from 2017

• The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $6,000.
• The limit on annual contributions to an IRA remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

• By Leon Clinton
• December 16, 2017

Please note that the information presented below is current as of press time and will be updated as information becomes available.

At nearly 500 pages and counting, the Tax Cuts and Jobs Bill (H.R. 1) is the first significant tax reform effort undertaken by Congress in more than 30 years. If the proposed tax reform becomes legislation, these tax changes will affect everyone from individual taxpayers to business owners and educational institutions.

Individuals

Tax Brackets. The number of tax brackets is reduced to four (currently there are seven): 12%, 25%, 35% and 39.6%.

For individuals, the following tax rates apply:

• 12% up to $45,000
• 25% up to $200,000
• 35% up to $500,000
• 39.6% over $500,000

For married couples filing jointly, the following rates apply:

• 12% up to $90,000
• 25% up to $260,000
• 35% up to $1 million
• 39.6% over $1 million

Standard Deduction. The standard deduction increases to from $6,350 (2017) to $12,000 for individuals and from $12,700 (2017) to $24,000 for married couples.

Personal Exemption. The deduction for personal exemptions is repealed.

Family Tax Credit. The Child Tax Credit is replaced with the Family Tax Credit, which increases to $1,600 from the current $1,000. An additional $300 credit is provided for each parent as well as each non-child dependent. Phase-out thresholds rise to $115,000 for individuals and $230,000 for married couples to allow more families to take advantage of the credit. Also, Social Security numbers for children are required before claiming the enhanced credit.

Alternative Minimum Tax. The AMT is eliminated for individuals and families. As such, individuals could potentially reduce their tax rate significantly, (potentially to zero), via exemptions and deductions. This change affects the approximately 5 million taxpayers whose income is between $200,000 and $500,000.

Capital Gains and Dividends. The maximum tax rate remains at 23.8% (20% plus the 3.8% Medicare tax for taxpayers with income above $200,000 or $250,000 married filing jointly).

Estate Tax. The exemption (currently $5.5 million) immediately doubles to $11.2 million and remains at this level for the next six years, after which time the estate tax is is eliminated completely (tax year 2025 and beyond).

Education Tax Credits. Coverdell plans (Section 530 Program) are eliminated and 529 Savings Plans are expanded to allow some funds to be used for K-12 education. Rollovers to Achieving a Better Life Experience (ABLE) Sec. 529A accounts will be allowed as well.

Mortgage Interest Deduction. Remains but with a few changes such as allowing interest deduction for up to $500,000 (currently $1 million) in mortgage principal on new homes. Existing mortgages are grandfathered in.

State and Local Income Tax Deduction. Repealed, including sales taxes not paid or accrued in a trade or business.

Charitable Contributions. Deductions for charitable donations remain.

Medical Expense Deductions. Repealed.

Student Loan Interest Deduction. Repealed.

Miscellaneous Deductions. Many are repealed including those relating to tax preparation, alimony payments, and moving expenses with the exception of the moving expense reimbursement for members of the Armed Forces on active duty who move because of a military order.

Adoption Tax Credit. Remains.

Electric Vehicles. The $7,500 tax credit for the purchase of electric vehicles is eliminated.

Businesses

Corporate Tax Rate. Reduced to 20% from 35%.

Territorial Taxation. Companies with offshore earnings, currently taxed at a 35% rate, would transition to a territorial tax system. Under the tax reform bill income derived from offshore earnings, if repatriated, would be subject to an effective tax rate of 14% for earnings held in liquid assets and 7% for illiquid assets.

Business Interest. Small businesses retain the ability to write off interest on loans.

Business Expensing. Businesses would be allowed to immediately write off the full cost of new equipment.

Business Entertainment Expenses Deduction. The deduction for business entertainment expenses is eliminated.

Pass-through Entities. The tax rate on pass-through business entities is reduced to a maximum of 25%. Furthermore, a 9% tax rate (vs. the 12% tax rate currently in place) now applies for the first $75,000 ($37,500 for single filers and $56,250 for heads of household) in pass-through business income of an active owner or shareholder earning less than $150,000. The threshold amount is $75,000 for single filers and $112,500 for heads of household. This 9% rate applies to all businesses (subject to the $75,000 income ceiling) and is phased in at 11% for 2018 and 2019, 10% for 2020 and 2021 and 9% for tax year 2022 and beyond.

Low-income Housing Tax Credit. Remains.

Research & Development Tax Credit. Remains.

Work Opportunity Tax Credit. Repealed.

Endowment Assets. A 1.4% excise tax is imposed on investment income derived from endowment funds at private schools (colleges and universities). An exclusion is provided for an institution whose endowment (fair market value) is less than $250,000 per student.

• By Leon Clinton
• December 14, 2017

While similar to FSAs (Flexible Savings Plans) in that both allow pre-tax contributions, Health Savings Accounts or HSAs offer taxpayers several additional tax benefits such as contributions that roll over from year to year (i.e., no “use it or lose it”), tax-free interest on earnings, and when used for qualified medical expenses, tax-free distributions.

What is a Health Savings Account?

A Health Savings Account is a type of savings account that allows you to set aside money pre-tax to pay for qualified medical expenses. Contributions that you make to a Health Savings Account (HSA) are used to pay current or future medical expenses (including after you’ve retired) of the account owner, his or her spouse, and any qualified dependent.

Caution: Medical expenses that are reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return are not eligible.

Caution: Insurance premiums for taxpayers younger than age 65 are generally not considered qualified medical expenses unless the premiums are for health care continuation coverage (such as coverage under COBRA), health care coverage while receiving unemployment compensation under federal or state law.

You cannot be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care and you cannot be claimed as a dependent on someone else’s tax return. Spouses cannot open joint HSAs. Each spouse who is an eligible individual who wants an HSA must open a separate HSA.

An HSA can be opened through your bank or another financial institution. Contributions to an HSA must be made in cash. Contributions of stock or property are not allowed. As an employee may be able to elect to have money set aside and deposited directly into an HSA account; however, if this option is not offered by your employer, then you must wait until filing a tax return to claim the HSA contributions as a deduction.

High Deductible Health Plans.

A Health Savings Account can only be used if you have a High Deductible Health Plan (HDHP). Typically, high-deductible health plans have lower monthly premiums than plans with lower deductibles, but you pay more health care costs yourself before the insurance company starts to pay its share (your deductible).

A high-deductible plan can be combined with a health savings account, allowing you to pay for certain medical expenses with tax-free money that you have set aside. By using the pre-tax funds in your HSA to pay for qualified medical expenses before you reach your deductible and other out-of-pocket costs such as copayments, you reduce your overall health care costs.

Calendar year 2018. For calendar year 2018, a qualifying HDHP must have a deductible of at least $1,350 for self-only coverage or $2,700 for family coverage. Annual out-of-pocket expenses (e.g., deductibles, copayments, and coinsurance) of the beneficiary are limited to $6,650 for self-only coverage and $13,300 for family coverage. This limit doesn’t apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies.

Last month rule. Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers).

You can make contributions to your HSA for 2017 until April 17, 2018. Your employer can make contributions to your HSA between January 1, 2018, and April 17, 2018, that are allocated to 2017. The contribution will be reported on your 2018 Form W-2.

Summary of HSA Tax Advantages

• Tax deductible. You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions on Schedule A (Form 1040).
• Pre-tax dollars. Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
• Tax-free interest on earnings. Contributions remain in your account until you use them and are rolled over year after year. Any interest or other earnings on the assets in the account are tax-free. Furthermore, an HSA is “portable” and stays with you if you change employers or leave the workforce.
• Tax-free distributions. Distributions may be tax-free if you pay qualified medical expenses.
• Additional contributions for older workers. Employees, aged 55 years and older are able to save an additional $1,000 per year.
• Tax-free after retirement. Distributions are tax-free at age 65 when used for qualified medical expenses including amounts used to pay Medicare Part B and Part D premiums, and long-term care insurance policy premiums. However, you cannot use money in an HSA to pay for supplemental insurance (e.g., Medigap) premiums.

Questions about HSAs? Don’t hesitate to call.

• By Leon Clinton
• December 11, 2017