5 Ways to Take Action on the New Tax Cuts Act

Feb 13, 2018


Most taxpayers are in the process of gathering their tax records to meet with their accountants and file their 2017 income tax returns. At this point, there’s not much a taxpayer can do since the tax year is over. But it’s never too early to start focusing on 2018 tax planning. The following are five ways to take action on the recently enacted tax law.

1. Convert a Non-Deductible Traditional IRA to a Roth IRA

The new tax confirms the legitimacy of making nondeductible IRA contributions and then moving funds into a Roth IRA when income limits prevent regular contributions to a Roth IRA.

Quoting the Congressional Conference Report on the law: “Although an individual with adjusted gross income (AGI) exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA.”


2. Charitable Deductions

The tax law cuts back or eliminates many itemized deductions, while almost doubling the standard deduction. The charitable deduction has been impacted. Here are two potential courses of action.

  1. If a taxpayer is close to hurdling the standard deduction ($24,000 for married filing joint and $12,000 for single filers), one might consider a “lumping and clumping” strategy. Here is an example: A married couple is projected to have $23,000 in itemized deductions and normally gives $2,500 to charity each year; which would fall short of the itemized deduction threshold of $24,000. The couple could consider lumping four years of charitable deductions $10,000 and then clump the contribution into a donor advised fund (DAF). The taxpayers would exceed the itemized deduction threshold and be able to take a tax deduction for the full amount donated to the DAF. Later on, the taxpayers can petition the DAF to make contributions to their favorite charities while allowing their contributions to grow.
  2. Owners of traditional IRAs, who are age 70½ or older, could consider charitable donations through qualified charitable distributions (QCDs), especially if the taxpayers cannot exceed the standard deduction limit.

A QCD is a direct transfer from an IRA to a qualified charity. When a taxpayer does a QCD of their required minimum distribution (RMD), they will not have to treat the RMD as income but on the flipside, the taxpayers will not get a charitable deduction, which they might not be able to deduct their contributions anyway.

A QCD reduces your income, which could mean reduced taxable Social Security benefits and lower future Medicare premiums, which are tied to income. Another QCD benefit could be adjusted gross income (AGI) falls below the threshold of ($250,000 for married filing joint or $200,000 for single) where investment income  would be subject to the 3.8% Medicare Surtax.

QCDs can satisfy the annual RMDs and total as much as $100,000 per year.

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3. Lower Tax Rates

Clients considering converting traditional IRAs into Roth IRAs may never have a better opportunity than now by using today’s low tax rates. Doing a Roth conversion now locks in today’s tax rates. Historically, tax rates have been volatile; this can be a great opportunity to eliminate the risk of tax rates going up in the future. Remember, you don’t have to convert the whole IRA. As an upper limit, one might consider the Roth conversion amount that would not bump the taxpayer into the next tax bracket. Also, pairing the Roth conversion with charitable lumping and clumping is a tax-savings powerhouse.

4. Investment Expenses

The new tax law has eliminated miscellaneous itemized deductions, including investment expenses. For advisors, one idea is to have each client account pay its own way. For example, a client has a taxable account ($400,000) and a traditional IRA account ($600,000), then the advisor charges 1% or $10,000 to manage all of the assets. Consider billing the IRA $6,000 and the taxable account $4,000 on a prorata basis. Paying an after-tax cost with pretax money is a tax-smart idea.

5. Estate and Gift Taxes

The annual gift-tax exclusion is now $15,000, although I would consider this less relevant now that the estate and gift lifetime exemption is at an incredible $11.2 million per person! Parents can gift to children who have earned income to fund Roth IRA contributions without trepidation of the gift-tax consequences.

The new tax law presents opportunities and challenges. Clients (and prospects) are looking to you for counsel on their financial future. Reviewing the information above will help you better prepare for upcoming client meetings. It’s time to step up—just like my Philadelphia Eagles did. Every day is my Super Bowl!

Want more? I recently recorded a short video that you can send to your clients to start the conversation.

Please consult with your compliance department regarding these suggestions.

Information provided by SEI Investments Management Corporation (SIMC), a wholly owned subsidiary of SEI Investments Company (SEI).

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only.

Neither SEI nor its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein: and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

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