As most are aware by now, Congress voted last year to enact changes to our tax code that will take effect in 2018. This is the largest overhaul of the IRS code since the early 2000’s when the Bush tax cuts were enacted. With that being said, it appears as if the majority of the overhaul will affect corporations instead of the individual taxpayer. Considering all of the noise around the bill, we wanted to clarify some of the changes and non-changes as well as identify potential planning opportunities for those at or near retirement.

1. Tax Cuts and ROTH IRA’s – For those in retirement or near retirement the feasibility of converting some pre-tax funds to after-tax ROTH dollars may now be even more prudent planning. As we have written about before, the way Social Security is taxed can cause some undesirable tax scenarios for retirees. With the individual tax cut resulting in lower individual tax brackets, converting money to a ROTH may be even more attractive. This could lower future taxation on Social Security benefits, and leave a significant increase in net-worth by the time you must take RMD’s. It should be noted that a caveat of the individual tax-cuts is that they will sunset and revert back to 2017 rates in 10 years. This leaves the window open at least for the next decade to take advantage of these lower rates and examine if a ROTH conversion can add value to your situation.

2. ROTH Recharacterization – While it may be prudent examining if you should convert funds to a ROTH, this tax bill has now made that decision permanent should you act. Taking money that you had originally converted to ROTH and converting back to traditional IRA was a popular way to help decrease taxes owed on investments if they had lost value especially when considering RMD’s. The new tax bill has removed the ability of “recharacterizing” ROTH IRA’s back to a Traditional IRA.

3. Doubling of the standard deduction – In 2016, roughly 30% of households decided to itemize their deductions. That number will likely decrease significantly with the increase in the standard deduction as well as the removal and limitation of several popular itemized deductions. The mortgage interest deduction has now been capped at $750,000 of acquisition debt, but for retirees this could be a moot point if you have been in your home for a significant amount of time and most of your mortgage payment is principal. On the flip side, if you have just moved to the area you may consider how much you elect to finance of your new home to maximize your deductions. This will also make it much less likely to deduct any medical expenses unless they are significant. State and Local taxes are also capped at $10,000 so unless you have significant other itemized deductions, it may also be a moot point.

4. Charitable contribution limits – The deductibility for contributions to charity is generally limited to 50% of the taxpayers AGI. The final tax bill includes expanding that deduction up to 60% of AGI. This is great news for those retirees who are charitably inclined. Retirees who donate to charity still have the option of doing so from their IRA in the form of a Qualified Charitable Distribution (That still also avoids making additional Social Security benefits taxable and satisfies RMD’s) but also get more room in the form of regular charitable contributions. It should be noted however, with the standard deduction being nearly doubled it will make it harder to itemize and count individual charitable contributions. The interesting implication here will be that many more folks who are near retirement, and those that have to take RMD’s will probably elect to make distributions from their IRA’s directly to charitable institutions as this is not an itemized deduction and its only limitation is $100,000 per year.

5. Estate Tax Exemption – Originally, the House proposal of the bill included a full repeal of the Estate tax, while the Senate version simply doubled it. The final bill doubled the exemption amount in 2018 to $11.2 million for singles or $22.4 million for married couples. To put it simply, the estate tax will not affect you unless you have an estate over that amount. While the practical implications for most retirees of this increase will be negligible, it should continue to push the focus of estate planning to ensure you have the proper documents and planning in place to minimize other costs such as probate expenses. Just because the estate tax likely won’t affect you does not mean you should not worry about proper estate planning.

For retirees or those near retirement it will be important to revisit your overall strategy to determine what implications may result from the new tax law. Where you plan to take distributions from, what you were deducting, how you made charitable contributions all may need to be adjusted next year. If you have questions about how this may affect your retirement strategy, sign up for our complimentary retirement consultation.

Securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC.
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The above information is not intended to be tax advice and you should consult your local tax professional about how you may be affected by current or pending tax law. The above opinions are those of Robert Jeter and should not be construed as specific investment advice.