Whenever tax laws change, we typically host sessions to explain how new laws may impact our clients from multiple angles. The 2018 Tax Reform is the most recent topic of these sessions. Of course, as wealth advisors, we work to focus on the total financial picture rather than just looking at things from an investment perspective or a tax perspective. As usual, the ramifications of the most recent tax changes impact multiple areas. Below are some of the more commonly known changes and some of the opportunities that have been made more readily available.
CHANGES TO DEDUCTIONS EXEMPTIONS AND CREDITS
The most conspicuous changes have been made pertaining to deductions that are now available and the new tax brackets. Most itemized deductions have been reduced or repealed although some phaseouts have been eliminated and the standard deduction has almost doubled for most individuals and families. Because of this, itemization lumping is likely to become more popular as a greater percentage of families opt to itemize every other year and take the larger standard deduction when not itemizing.
Corporations seem to benefit more from the new tax laws than individuals with sharply lower tax rates, incentives for repatriation of funds, the elimination of Alternative Minimum Taxes and a new 20% deduction for certain types of pass through businesses. We encourage businesses of any size to get a handle on how these changes will impact after tax income and how to get ahead of these changes as soon as they can.
Much remains the same for individuals and families including long term capital gains and qualified dividend tax rates, but there are a few items which most should be aware of and look to take advantage of in the next eight years that this law is slated to be in effect.
SHIFTING TO TAX FREE
As always, we continue to espouse the long term benefits of shifting assets to “tax bucket four” over time and how this makes a big difference in tax payments and reduced asset depletion over time. If we shift assets from being triple taxed or from being taxed on harvested assets to never being taxed again, the benefits seem “too good to be true” for some younger families. Many don’t realize that Roth 401k’s and Health Savings Accounts are now available at many employers. Some are surprised at how much less assets are depleted in retirement when pulling from Roth 401ks instead of regular 401ks. Even more surprising is how many people are completely unaware that with H.S.As they are not taxed on contributions, accumulations or withdrawals making this employee benefit one of the best if not the best benefit available from a tax standpoint for employees.
As can be seen in the example below, detailing planning options for a client in 2017. there are significant advantages in taking advantage of items from a “tax bucket” standpoint. The example below only considers the “tax bucket “ adjustments and does not take into account social security options, investment options or new opportunities available now in 2018. These long-term planning decisions tend to make a bigger difference than earning a few extra tenths of a percent on investment dollars.
If you have not read the article written in Forbes about structuring an almost tax-free retirement income stream by converting to Roth IRAs over several years, you might enjoy reading this article. We typically advise clients to start aggressively looking at doing this whenever their earned income decreases in any given year due to work transitions, business slowdowns or retirement. Another great time to convert is when the market has dipped temporarily. The last few weeks have provided that opportunity although the IRS now has eliminated to do-over provision known as re-characterization, so it’s best to make sure you do it right the first time.
A good article about how not to convert your Roth-IRA from the Wall Street Journal can be found here.
OTHER 2018 TAX REFORM CHANGES
These are just a few of the newer opportunities that are now available or have been made available through the tax reform of 2018. Other items have changed markedly such as divorce planning with changes in taxation on alimony and separation payments, education planning with more savings options but possible increased scrutiny of assets, increased estate tax exemptions and the like. If you’d like us to burn you a DVD copy of the latest Tax Reform session, let us know and we can send you one, or feel free to chat with your friendly neighborhood Certified Financial Planner about how you can best plan for the new environment.
Joe D. Franklin, CFP is Founder and President of Franklin Wealth Management, and CEO of Innovative Advisory Partners, a registered investment advisory firm in Hixson, Tennessee. A 20+year industry veteran, he contributes guest articles for Money Magazine and authors the Franklin Backstage Pass blog. Joe has also been featured in the Wall Street Journal, Kiplinger's Magazine, USA Today and other publications.
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