On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act. The changes to the Internal Revenue Code impact virtually every individual and business and are generally effective in 2018.
Estate and Gift Tax
The federal gift, estate, and generation-skipping tax credits will shelter gifts and estates up to $11.2 million for an individual and $22.4 million for a married couple. This is an increase from $5.49 million and $10.98 million, respectively, in 2017. These exemption amounts are scheduled to increase with inflation each year until 2025. On January 1, 2026, the exemption amounts are scheduled to revert to $5 million, adjusted for inflation.
If an estate is over this threshold in 2018, a 40% tax rate applies.
The annual gift tax exemption is increased to $15,000 per donee. If a gift is greater than the annual exemption amount, the donor must file a gift tax return (Form 709), but no gift tax is owed at that time. If the donor’s cumulative total of lifetime gifts and estate upon death reaches $11.2 million, a gift tax would be due at the 40% tax rate.
There is no federal inheritance tax.
Maine’s estate tax was linked to the federal law for tax years 2016 and 2017. At this time, Maine taxation in 2018 will not double like the federal estate tax. The Maine estate tax exemption amount will be adjusted for inflation to $5.6 million for an individual. Maine does not have a gift or inheritance tax.
For individuals, the new income tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. While regular individual income tax rates decreased, capital gain tax rates, qualified dividend tax rates, and the net investment income tax rate all remain unchanged.
The personal exemptions have been eliminated, but the standard deductions were increased to $12,000 for single filers, $18,000 for heads of households, and $24,000 for joint filers. There remains an additional $1,600 standard deduction amount for elderly individuals who are 65 or older and blind individuals. If married, the additional standard deduction is $1,300 each.
The tax reform also included large changes to itemized deductions. Many were repealed, while others were merely scaled back. But most important for elderly individuals and individuals with disabilities is the survival of the deduction for medical expenses. For 2017 and 2018, the deduction is increased, allowing filers to claim expenses exceeding 7.5% of their adjusted gross income. Thereafter, the deduction will revert to 10% of the taxpayer’s adjusted gross income.
For trusts and estates, any retained income up to $2,550 will be taxed at 10%, $2,550 to $9,150 will be taxed at 24%, $9,150 to $12,500 will be taxed at 35%, and retained income above $12,500 will be taxed at the maximum rate of 37%.
The law now disallows a recharacterization of a Roth IRA into a traditional IRA in order to unwind a Roth conversion. Previously, IRS rules allowed individuals to recharacterize up to the tax due date if the tax burden on a Roth conversion was more than they expected, if they are in a higher tax bracket due to unexpected income, or if they don’t have enough cash to pay the taxes incurred by a conversion. Although the tax reform now disallows this recharacterization, an individual can still contribute to a traditional IRA and then recharacterize to a Roth IRA later.
With the increased standard deduction, fewer taxpayers will itemize and therefore receive no financial benefit for some charitable contributions. However, there is an opportunity for charitable gifting with required minimum distributions from retirement assets. This is called Qualified Charitable Distributions. Up to $100,000 of RMDs can be directly distributed to charitable organizations to by-pass income to the individual.
Finally, although proposed in the tax reform, there is no elimination of “stretch” IRAs for non-spouse beneficiaries. This means that next generation beneficiaries remain able to extend the tax-deferred status of an inherited IRA over that beneficiary’s lifetime.
The Achieving a Better Life Experience Act was passed by Congress at the very end of 2014. It allows states to set up programs that permit individuals with disabilities and their friends, family members, or trusts, to make contributions to 529A accounts, similar to 529 education accounts. The ABLE account is a tax-preferred savings account, and the funds in the account are non-countable resources to the designated beneficiary and therefore do not jeopardize the beneficiary’s eligibility for means-tested public benefits like Supplemental Security Income (SSI) and Medicaid (MaineCare).
The annual contribution limit into these ABLE accounts has increased to $15,000 to mirror the annual gift tax exclusion. In addition and in some cases, the beneficiary is now able to contribute some of his or her earnings to the account.
Rollovers, up to $15,000 per year, from 529 education accounts to 529A ABLE accounts are now permitted with no penalty and no tax consequence so long as the education account was owned by the disabled beneficiary or a member of the disabled beneficiary’s family. “Family” under the Act is very broad and includes spouses, children, grandchildren, siblings, parents, aunts, uncles, nieces, nephews, in-laws, and first cousins.