The Tax Cuts and Jobs Act of 2017 affected so many different parts of the tax code that it's taken us three posts to cover them (see Part 1 – a line by line comparison for 1040 and Schedule A, and Part 2 – Tax Rates). But that's OK because these rules don't affect the taxes you're filing now for 2017. They went into effect at the beginning of 2018 and you'll see the impact when you file your 2018 taxes next year, in 2019.
In this post, we'll cover a catch-all group of changes, most of which affect only a portion of tax filers. The exception is the inflation adjustment that is used each year to change many items.
Inflation Adjustment- Chained CPI: This change affects us all, because so many items are adjusted to reflect the impact of inflation, including tax brackets, income limits for claiming certain tax breaks, and retirement plan contribution limits. This is called indexing. When an item is indexed, it means that it is recalculated each year based on the inflation rate. However, a tax item might only change when the change reaches a certain hurdle. For example, the employee 401(k) contribution limit changes in increments of $500. Although there is inflation each year, it might take a couple of years before it's enough to total $500.
What is changing: In the past, the inflation rate that was used for these adjustments was the CPI-U, the consumer price index for all urban consumers. Beginning with 2018, the C-CPI-U will be used. That is the chained consumer price index for all consumers. The C-CPI-U changes a bit more slowly than the CPI-U because it recognizes consumer behavior: some consumers change what they buy when one items goes up in price more than another. If the price of beef, for example, increased more than chicken, you might decide to buy chicken instead. (The Bureau of Labor Statistics has a great video explaining the C-CPI-U on their website.)
With C-CPI-U, change will occur more slowly. It might take an extra year before the next $500 increase in retirement contribution limits happens. The range of income taxed at each tax bracket will still be recalculated each year, but it will increase more slowly than under the CPI-U.
This change is permanent; it does not expire.
529 Qualified Tuition Plans: Up to $10,000 per student per year from a 529 plan may now be used for tuition at a public, private, or religious elementary or secondary school. Previously, funds could only be used for post-secondary education.
Student Loans: Discharge (forgiveness) of a loan is generally considered taxable income. From 2018 to 2025, discharges of student loans due to death or total and permanent disability of the student will be excluded from income. In other words, the forgiven debt will not be taxed as income if it was due to death or disability.
Kiddie Tax: For many years, there have been special rules about how tax is calculated on unearned income, such as interest and investment income, received by children under age 19 and full time students under age 24. What's changed is the tax rate that is applied to that unearned income. Through 2017, the parent's tax marginal tax rate was used. But from 2018 to 2025, the tax rates for trusts and estates will be used.
Tax Rates - Estates and Trusts
Rate on that portion of income
Not over $2,550
Over $2,550 but not over $9,150
Over $9,150 but not over $12,500
These brackets are very compressed compared to the brackets for single and married filers. You reach the top tax rate of 37% with just $12,500 of unearned income. However, lower rates will apply to long term capital gains.
Recharacterization of IRA Contributions: Has a financial professional proposed this strategy to you? Step 1: Convert assets in your traditional IRA to a Roth and pay the tax on the amount you convert. Step 2. If the value of the assets drops before XX date, undo the conversions and put the assets back into the traditional IRA.
You can still do Step 1 – converting from a traditional IRA to a Roth, or a traditional employer account to a Roth. But you can no longer do Step 2. Whatever the value is on the day you convert, that's what you'll owe taxes on. There are no re-do's on conversions. And this change is permanent.
ABLE Accounts: From 2018 through 2025, the beneficiaries of these accounts for the disabled can make contributions above the annual limit ($15,000 in 2018) equal to the lesser of the federal poverty line for a single person household or the beneficiary's earned income for that year.
Estate taxes: The size of estates that can be passed to heirs before owing estate tax is doubled for 2018 through 2026. The estate exemption amount is $11,180,000 for 2018, and it will be increased for inflation in subsequent years. If you have seen other places stating that the 2018 amount is $11,200,000 you just saw the chained CPI in action. Under the old inflation calculation, the amount would have been $11.2 million. But under the new inflation calculation, it's $11.18.