What we know about 2018 taxes (so far)…

Following the passage of a budget blueprint by the U.S. House of Representatives last Thursday, the final two months of 2017 will be interesting and may result in changes to planning for both income taxes and for estate and gift taxes.  The House’s vote paves the way for the Senate to pass a tax-cut package with a simple majority, which is key to Republican’s tax-cutting goals.

Whether state and local income tax deductions (SALT) end up being eliminated in favor of a higher standard deduction, retirement (401(k)) contributions are reduced or whether the estate tax (aka “death” tax) ends up being eliminated are now in the hands of the House Ways and Means Committee.  These issues, along with the repatriation of offshore corporate cash holdings, are all bargaining chips in the game of getting “tax reform” passed as quickly as possible.

As of this writing, however, we can update some key figures we know so far to be true based on IRS announcements for tax-related provisions for 2018.

Employees saving for retirement will be allowed to contribute an extra $500 to their 401(k) next year after the IRS announced 2018 contribution limit for retirement accounts last week.  The new limit on 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan will increase from $18,000 to $18,500.  The “catch-up” contribution limit for employees over 50 remains at $6,000, meaning that they can contribute a total of $24,500.

Contributions for traditional and Roth IRA plans also remained unchanged at $5,500 along with catch up contributions for the same at $1,000 for those 50 and older.

The income limits for contributing to a Roth IRA are as follows:

Single taxpayer:  $120,000 – $133,000

Married filing jointly:  $189,000 – $199,000

If your income is above these limits, then you can’t contribute anything to a Roth IRA, however, you can still convert traditional IRAs to Roth IRA or do a “backdoor” Roth IRA where you contribute to a traditional IRA and convert it to a Roth IRA a year after your initial contribution.

You can always make a contribution to a traditional IRA and within certain income limits, your IRA contribution may be tax deductible.  For 2018, the income ranges for making a deductible IRA contribution have increased as follows:

If your income is below these limits, then you can make a fully deductible IRA contribution and if your income is above these limits, then you can still make a contribution, but it’s not deductible for income tax purposes.  If your income falls in between the limits above, then a portion of your contribution will be deductible.

For fans of health savings accounts (HSAs), like us, the contribution limits for 2018 have increased by $50 for individuals, to $3,450, and by $200 for families, to $6,900.  You can make these contributions, on top of any normal retirement plan contributions, and withdraw HSA funds tax-free after age 65 for qualified medical expenses.  Those 55 and older can contribute an extra $1,000 as a catch-up contribution, but it has to be made in the name of the person who is 55 or older (HSAs are not joint accounts).

To be eligible to contribute to an HSA, you must participate in a high deductible health plan (HDHP):

For 2018, the estate and gift tax exemption increases to $5.6 million per individual, up from $5.49 million in 2017.  The estate and gift tax exemption is indexed for inflation and so couples who plan properly may potentially exclude or gift up to $11.2 million without incurring the 40% federal estate tax, up by $220,000 from 2017.

Theoretically, tax reform could change all of this (as well as the retirement contribution limits), but it’s not a given and there are other factors, such as the step-up in basis that affects capital gains taxes at death, that further complicate how the estate and/or gift tax will be used as a bargaining chip in how tax reform is ultimately crafted.

Taxpayers with significant wealth will likely continue to plan for an estate tax as the “Byrd” rule is still in play, which blocks legislation if it would “significantly increase the federal deficit beyond a ten-year term”.  Under the George W. Bush tax cuts in 2001, the estate tax exemption was set to increase over a period of years until 2010, when the estate tax would be repealed completely.  But the Byrd rule came into play and, as a result, this legislation was scheduled to “sunset” in 2011 and return to the original limits in place ten years prior.  To avoid this, the federal estate and gift tax exemption was increased permanently, to $5 million, and indexed for inflation by the Obama administration as it was a bargaining chip during the process of getting health care legislation passed.

As it stands today, individuals can also still make use of their gift tax annual exclusion, which increased for the first time since 2013, to $15,000 (up from $14,000).  You can now give away $15,000 to as many people as you’d like without incurring gift taxes, and a husband and wife can similarly make gifts of $30,000.

Other 2018 income tax changes, like the slightly increased standard deduction and AMT exemptions are subject for next year given the potential changes coming.

We will provide planning updates based on the outcome of pending tax reform, as well as year-end suggestions for capital gains taxes, in the coming weeks.  Please contact your ACM Wealth Advisor with any questions.

Advisors Capital Management, LLC is an investment advisor registered with the United States Securities and Exchange Commission. Registration does not imply any degree of skill or training. All investing carries risk, including the potential for the loss of principal and past performance is no guarantee of future results. This content is for informational purposes only, can change at any time without notice, and is not investment advice or a recommendation to trade any security. Indices are not available for direct investment. We only provide services in jurisdictions where we are registered. Our disclosure brochure (ADV Part 2A) and customer relationship summary (ADV Part 3) are available at https://adviserinfo.sec.gov and upon request.