Tax Reform Is Here, But Make Sure You Catch These Items…

February 20, 2018

With 2018 finally here, the new tax law is in full swing.  While much of the mainstream discussion was around the tax rates and certain deductions, there were other items included in this bill that should be considered when thinking about your 2018 tax situation.  Here are a few of the key provisions that weren’t covered in as much detail:

Charitable Giving – The new tax law still allows a deduction for charitable contributions exactly as before.  However, with the new standard deductions essentially having doubled, there may be fewer taxpayers itemizing their deductions.  To maximize the tax benefit received from charitable giving, taxpayers may consider “lumping” their charitable contributions into one year.  For example, instead of giving $10,000 every year, you may consider giving $20,000 one year and nothing the next.

If your preference is to give each year, then a Donor Advised Fund could be used to maximize your tax benefit while maintaining your normal giving routine. A Donor Advised fund is a separate account that acts like your own charitable foundation. You can contribute into the account in one year (for which you are afforded a deduction), then the money can be donated to charities from the account as you see fit.  Of course, the tax benefit of charitable donations is often not the sole driver of your giving, but the strategies above are something certain taxpayers may consider.

529 Plan Use –  Under the old tax plan, distributions from 529 plans were limited to paying for higher education costs.  Now, distributions up to $10,000 for K-12 education expenses for private or religious schools, per student, are allowed.  The expanded use of these assets, and the ability for 529 plans to impact more families, calls for greater planning around 529 plans going forward. This change clearly makes 529 plans the education account of choice for parents or grandparents. Those with Coverdell Accounts and Education Savings Accounts should be considering rollovers into a 529 plan.

529 users should be aware that not all state laws have been updated to reflect these changes.  At this time, Illinois law does not allow for distributions from 529 plans for K-12 education expenses without incurring taxes and penalties.  Be sure to double-check your state’s laws to ensure these distributions are allowed and will not cause adverse tax consequences.

Roth IRA Conversions – While these are still available under new law, there is a nuance with respect to these conversions that has changed.  Under old law, taxpayers could execute a Roth IRA conversion and, if the investments inside that new Roth IRA did not perform well, unwind it before the filing deadline of that year’s tax return (including extensions).  This is the concept of “recharacterization” and would allow the taxpayer to treat the Roth IRA conversion as if it never happened, essentially affording the taxpayer a “do-over.”  While this was certainly advantageous for many individuals, the ability to recharacterize Roth IRA conversions is going away.  You can still recharacterize any Roth IRA conversions performed during the 2017 tax year, but this is discontinued beginning with 2018 conversions.

Taxes are certainly not a simple topic, so please do not hesitate to reach out to your BDF team for further information on anything outlined above.

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