The Tax Cut & Jobs Act: Special Needs Edition. Robert B. Fleming Fleming & Curti, PLC Tucson, Arizona

Transcription

1 The Tax Cut & Jobs Act: Special Needs Edition Robert B. Fleming Fleming & Curti, PLC Tucson, Arizona

2 Medical Expense Deduction IRC 213: old rules included 7.5% floor through 2013 Affordable Care Act increased to 10%, but left >65 at 7.5% through 2016 Much discussion of elimination of the deduction altogether House version, for instance, ended deduction for 2018 The final Act ( 213(f)) returns the floor to 7.5% for everyone (including AMT, which had been 10% already) for tax years 2017 and : back to 10% for everyone (no special treatment for seniors) Of course, fewer taxpayers will itemize

3 ABLE Act Accounts Review: ABLE Act is for those with disability onset before age 26, and allows deposits totaling <annual gift tax exclusion amount. Not income, not resource for public benefits programs like SSI, Medicaid, 8, TANF Two changes included in Tax Act: ABLE to Work Act for additional savings by employed ABLE beneficiary ABLE Financial Planning Act for limited A rollovers

4 ABLE To Work Act Employed ABLE beneficiary may contribute additional amount up to Federal Poverty Level for one person (about $12K), expanding the $15,000 maximum Beneficiary must not have contributed to employersponsored defined contribution plan, 403(b), or 457(b) account Beneficiary can, however, claim the retirement savings contributions credit ( savers credit ) for up to $2K of their contribution ( 25B(d)(1)(D)) even for contributions <$15K threshold

5 ABLE Financial Planning Act Allows beneficiary of 529 education account to roll over up to the $15K annual 529A limit each year into an ABLE / 529A account No penalty, no tax for roll-over How to use this option? Roll over all existing 529s as quickly as $15K limit allows? No. Uses up $15K limit 529 penalties are less restrictive than 529A pay-back Use selectively to convert education $$ to rent payment, e.g. Consider new contributions to 529 plan, with follow-on roll over

6 ABLE and SSA s Program Operating Manual System (POMS) New (as of 3/7/18) SI : Sec. C1b says contributions from a 3 rd party including a 3 rd - party discretionary trust are not income Sec. C4 ABLE distributions are not income, even if for nonqualified expense Sec. G appears to approve pre-paid debit cards funded by ABLE account, but require eligibility workers to document balances Unaddressed: Transfers from d4a (self-settled SNT) into ABLE account APPROVED from ABLE perspective SILENT from SSI Trust perspective

7 Qualified Disability Trusts Reminder: IRC 642(b)(2)(C) creates QDisTs Trust must be described in 42 USC 1396p(c)(2)(B)(iv), and All beneficiaries must be disabled per Comm r of SSA Trust gets a deduction of the personal exemption amount What happens under Tax Cut Act? Personal exemptions eliminated ( of Act suspended until 2025) But new 642(b)(2)(C)(iii): (I) IN GENERAL. In the case of any taxable year in which the exemption amount under section 151(d) is zero, clause (i) shall be applied by substituting $4,150 for the exemption amount under section 151(d) (subsec II adds inflation adjustment)

8 The Kiddie Tax ( of the Act) Doctrine of unintended consequences? IRC 1(g) had imposed tax at parents highest marginal rate (the so-called Kiddie Tax ) for <19 (or students to 24) New law: Zero tax rate up to $2,600 Tax due: 37% of income over $12,500 (LT cap gains at 20%+3.8%) Low-income parents might pay well less than 37%/23.8%, so effect could be substantial tax increase Applies to minor s d4a trust NB: Kiddie tax applies whether or not the child is claimed as a dependent

9 Miscellaneous Itemized Deductions New IRC 67(g) eliminates all miscellaneous itemized deductions Does it apply to trusts (and estates)? No, says IRS. See IRS Notice BUT what about self-settled, grantor trust? No miscellaneous itemized deduction for trust-related expenses Double-whammy from Kiddie Tax for beneficiaries <18

10 Retirement Accounts and Planning Roth conversions can not be undone (used to be able to reverse a conversion until tax due date, including extensions) Back-door Roth IRA contributions are more clearly OK Under age 70.5 with too-high income to allow Roth Contribute post-tax to traditional IRA, then recharacterize Qualified charitable distributions: IRC 408(d)(8) permits up to $100K of MRD directly distributed to charity, bypassing income With increased standard deduction, no value for some charitable contributions, so QCC is more attractive Can t use Donor Advised Fund

11 Things NOT in the Final Act (or Pared Back Considerably from Proposals) Elimination of stretch IRA for non-spouse beneficiaries still permitted FIFO accounting requirement for all stock sales not required Alternative Minimum Tax (AMT) remains for individuals, though with increased limits Medical expense and student loan interest deductions stay State and local taxes (so-called SALT ) still deductible, but with $10,000 cap Mortgage interest still deductible, but only on <$500,000 mortgages

12 Resources The House Enrolled version of HR1 is online at The online Code at the Legal Information Institute is already updated with Tax Act text ( The really excellent blog at provides plain-language explanations