The SECURE Act & Tax Extenders

Over the last week, Congress passed its Appropriations Act, designed to continue to fund the government. To it, they attached the SECURE Act (Setting Every Community Up for Retirement Enhancement) and the extension of multiple expired/expiring tax provisions, known as the “Tax Extenders”. The president is expected to sign the entire bill before departing for the holidays.

The SECURE Act modifies a number of qualified plan (401k, SIMPLE, SEP, etc.) and IRA/Roth IRA rules, along with a couple of 529 plan rules and the treatment of the “kiddie tax”. Below, I highlight the changes along with their likely impact on PWA clients. Virtually all of these changes take place as of 1/1/2020, but unlike the last few tax changes that passed in late December, there is no action that you need to take immediately. If you’re having trouble sleeping, you can read the Secure Act in its entirety on pages 1532-1656 of the Appropriations Act. There are only a few tax extenders that are likely to impact PWA clients. I’ve highlighted those below as well. For the full list, see pages 3-26 of the Division Q amendment to the Appropriations Act.

Secure Act Summary

First a little editorial… the name of the Act (Setting Every Community Up for Retirement Enhancement) and a lot of the press around it is completely misleading in my opinion. The Act’s changes to the retirement system are mostly minor positive tweaks with one somewhat concerning opening of Pandora’s high-cost-annuities-in-a-401k Box (more on that below). It is a far cry from the type of changes that would give everyone access to and the incentive to participate in a tax-advantaged retirement plan. The Act has been sold as “the”, or at least “an” answer to modern retirement issues, but it really doesn’t change a whole lot other than opening a new way for insurers to profit. Call me skeptical, but the insurance industry’s lobby game was strong on this one and when lobbyists step up to the plate in Washington, a home run is rarely a good thing for anyone other than their interest group. So, rather than reading this to see the multiple amazing ways that the Act will help you, please read it to get a sense for the minor positive changes and the couple of things to cautiously look out for in the future. Without further ado, the Secure Act:

· Eliminates a roadblock to Multiple Employer Plans (MEPs) that would allow two or more employers to join a pooled retirement plan, ideally expanding access to plans and reducing costs due to plan size. Pretty self-explanatory and nothing but positives here. Theoretically, this could allow anyone who works for a small business to have a 401k plan available, or a better 401k plan available in the future. Whether or not employers do band together to do this remains to be seen.

· Allows more part-time workers to participate in 401k plans. Specifically those who work 500-1000 hours per year, who were previously excluded from participation, will now be able to participate in the plans. That’s a clear positive for part-time workers and a slight negative for other workers who may see the increased costs to employers as a result of this change passed down to them in some form.

· Increases the business tax credit for new employer retirement plans to $5000 from $500 and adds a $500 credit for auto-enrollment feature. All good incentives that help motivate employers to create retirement plans and get their employees to participate. When compared to the cost of maintaining these plans though (esp. with any sort of matching or profit sharing), it’s honestly still chump change.

· Tweaks the Safe Harbor 401k rules to allow for a higher default employee contribution % while removing notification requirements for plans that make non-elective contributions. Employers can now auto-enroll employees with as much as a 15% contribution level (up from 10%) or with an automatic annual escalation to 15% max. Employees can still opt out though.

· Allows a new exception from the 10% early distribution penalty from a retirement plan for childbirth/adoption within one year after birth, up to a max of $5k per parent. Repayment is allowed to certain types of plans, though the rules are unclear. The increased flexibility is great and maybe more people will participate in employer retirement plans if they can get money back out of them for events like this. But generally, giving people the ability to raid retirement savings for non-retirement reasons isn’t setting anyone up for retirement.

· Eliminates the use of 401k loan “credit card” arrangements. Did you know that some plans adopted provisions that let an employee take out a 401k loan credit card that they could use for any purpose up to the loan limit? That’s not setting anyone up for success in retirement. There are already well-established reasons that loans can be permitted and formal arrangements to make sure participants are taking loans for those reasons only, and are aware of the terrible tax and penalty implications of defaulting on those loans.

· Requires plan administrators to include on quarterly statements an estimate of lifetime income that could be produced at retirement age based on current 401k balance. In other words, if you used your lump sum 401k balance to purchase a straight annuity (series of monthly payments for your life), how much could you expect each month in retirement? I think framing the question in this way is helpful in leading people to realize they may need to save more (or less) based on where they stand.

· Extends the date by which a retirement plan needs to be in place for a tax year from 12/31 of that tax year to the filing deadline of the tax return (plus extensions). This is helpful if you started self-employment or a small business and don’t realize you could benefit from setting up a retirement plan until you prepare your taxes, only to find out that you previously had to open most retirement plans by 12/31 to make a difference. Now you can see the benefit in real numbers and make the decision to open and fund the plan at tax time.

· Allows for portability of lifetime income options in a retirement plan. If the plan decides to eliminate a lifetime income option that was offered, employees enrolled in that option would be allowed to take an in-service withdrawal either by a direct rollover to an IRA or retirement plan or by a distribution to the employee. This is a necessary precursor for the next bullet.

· Provides a fiduciary safe harbor for including lifetime income options using annuities. As long as the cost is “reasonable” and the insurer is thought to be financially capable of satisfying its obligations, the plan sponsor will not be held to the same standards as they are with the selection of other investments in the plan as set forth by the Employee Retirement Income Security Act of 1974 (ERISA). This is the provision that drove the insurance industry lobbying for the SECURE Act. It essentially allows employers (and those they hire to select 401k options) to include annuities in the plan. This is not inherently bad. Some annuities, especially annuities that convert a lump sum into an immediate or future monthly cash flow stream for life, make a lot of sense from some people. But there are also terrible annuity products with monstrous fees that take advantage of consumers with overcomplicated promises dressed up as “guaranteed lifetime income” that really make no sense for anyone, especially not inside an already tax-deferred retirement plan. Now, plan sponsors can be talked into including these options by insurers (who kick back commissions to the plan administrator) and will no longer be held to the same standard as they are for selecting mutual funds. For PWA clients, this isn’t an issue. If you have a new fabulous “guaranteed lifetime income” option in your 401k at some point in the future, we’ll evaluate it like any other option and will likely come to the conclusion that it doesn’t make sense. For those who don’t have an advisor looking out for them as a fiduciary, I fear this new ERISA exclusion is opening up Pandora’s Box just when we’re really starting to get plan fees and mutual fund fees down to something reasonable. I hope I’m wrong.

· Eliminates the maximum age for making an IRA contribution (which used to be 70). This is great as people are generally working longer and if they want to keep saving for retirement past 70, it allows them to do so. But, generally speaking, those who are working past 70 and contributing to their retirement past age 70 aren’t the people who have a retirement savings issue. So, it’s a nice provision, but not sure it really helps a whole lot.

· Changes the Required Minimum Distribution (RMD) starting age to 72 from 70.5 for pre-tax retirement plans (401ks, IRAs, etc.). A nice add, with people living longer, to not have to start withdrawing from their pre-tax money and therefore paying tax for an extra 1-2 years. Not a huge change, but it will have some impact for those that can rely on other sources of money from retirement to age 72 and can use that timeframe to tax-optimize their withdrawals over life (Roth conversions, gain harvesting, minimizing tax on social security income, minimizing Medicare IRMAA surcharges, etc.).

· Ends the stretch IRA. This provision will force inherited IRAs to be liquidated over 10 years in most circumstances, rather than over the lifetime of the person who inherits the account. No RMDs during the first 9 years. You just need to liquidate by end of year 10. Exceptions: surviving spouse, disabled, chronically ill, not more than 10 years younger than the deceased owner, and minor children of the deceased (until they reach the Age of Majority). This is a big negative for most who stand to inherit a 401k or IRA, and that’s intended since this provision is the primary “pay-for” of the bill in its ability to raise tax revenue. It stinks, but it’s hard to argue with it. Deceased people don’t need retirement accounts and therefore the tax benefits that go along with them don’t make a ton of sense for those who inherit them. I’m in the minority of advisors in admitting this, but the change seems fair to me… maybe even generous in giving 10 years. This one has major estate planning implications. If one leaves their retirement accounts to a trust that is directed to pay out only the RMD each year to the trust beneficiary (to minimize tax over their lifetime under the old rules), that trust won’t pay anything out for 9 years and then will pay the entire lump sum in year 10, or worse, will retain it and pay tax at trust rates. Estate plans and the wording of such trusts need to be re-evaluated and potentially re-written. If you have such a trust, or have one that will be created at your death by your will (testamentary trust), and your estate attorney doesn’t contact you shortly, you’ll need to reach out to him or her and evaluate if any changes are necessary.

· Add a new provision that up to $10k (lifetime) can be used from a 529 to pay off student debt without Federal tax / penalty. Another $10k to pay off a sibling’s student debt. State rules differ and will likely follow the same path as they followed on the addition of K-12 private school tuition. Sounds wonderful, but are there really a lot of people who have extra 529 money lying around to pay down their or a sibling’s student loans? It also doesn’t make sense to set up a 529 for this purpose (unless it allows you to game the state tax deduction rules). It would make more sense to just pay down the debt, not contribute to a 529 and hope it grows while the student loans continue to accrue interest at the same time.

· Reverses the Kiddie Tax changes made by TCJA which taxed investment income of minors at estate & trusts tax rates instead of parent rates. Back to parent rates now. This one has nothing to do with retirement. There was just a lot of pushback especially when people realized the Kiddie Tax applies to Military Survivor’s Benefits and the TCJA exposed much more of that to higher tax. Now it’s “fixed” back to the old rules.

Relevant Tax Extenders

· The deduction for mortgage insurance (PMI) expenses returns for those who itemize.

· The threshold to deduct medical expenses for those who itemize is 7.5% of adjusted gross income (down from 10% without the extenders).

· The qualified tuition deduction, which doesn’t require itemizing, is back (max $4k, income restrictions apply as before).

All of the above tax extenders apply for tax years 2019 and 2020. They expire again for 2021 unless further extended by future legislation.

Updated 2020 Tax Numbers

The IRS has released the key tax numbers that are updated annually for inflation, including tax brackets, phaseouts, standard deduction, and contribution limits.  Due to rounding limitations, not all numbers have changed from last year, but tax bracket thresholds have increased by just under 1.6%.  The notices containing this information are available on the IRS website here and here.  Some notable callouts for those who don’t want to read all the way through the update:

  • Max contributions to 401k, 403b, and 457 retirement accounts will increase by $500 to $19,500 (+$6,500 catch-up, up from $6,000, if you’re at least age 50).
  • Max contribution to a SIMPLE retirement account will increase by $500 to $13,500 (+$3,000 catch-up if you’re at least age 50).
  • Max total contribution to most employer retirement plans (employee + employer contributions) increases from $56,000 to $57,000.
  • Max contribution to an IRA remains at $6,000 (+$1,000 catch-up if you’re at least age 50).
  • The phase out for being able to make a Roth IRA contribution is $206k (married) and $139k (single). Phase out begins at $196k (married) and $124k (single).
  • The standard deduction increases by $400 to $24,800 (married) and by $200 to $12,400 (single) +$1,300 if you’re at least age 65.
  • The personal exemption remains $0 (the Tax Cuts & Jobs Act eliminated the personal exemption in favor of a higher standard deduction and child tax credits).
  • The child tax credit is not inflation-adjusted and remains at $2,000, phasing out between $400-440k (married) and $200-220k (single).
  • The maximum contribution to a Health Savings Account (HSA) will increase to $7,100 (married) and $3,550 (single).
  • The annual gift tax exemption remains at $15,000 per giver per receiver.
  • Social Security benefits will rise 1.6% in 2020.  The wage base for Social Security taxes will rise to $137,700 in 2019 from $132,900.

You can find all of the key tax numbers, updated upon release, on the PWA website, under Resources.

Withholding Checkup

The IRS recently launched a campaign urging taxpayers to conduct a paycheck checkup and review their withholding settings in light of the new tax law. To quote from the IRS:

The Tax Cuts and Jobs Act, passed in December 2017, made significant changes, which will affect 2018 tax returns that people file in 2019. These changes make checking withholding amounts even more important. These tax law changes include:

  • Increased standard deduction
  • Eliminated personal exemptions
  • Increased Child Tax Credit
  • Limited or discontinued certain deductions
  • Changed the tax rates and brackets

Checking and adjusting withholding now can prevent an unexpected tax bill and penalties next year at tax time. It can also help taxpayers avoid a large refund if they’d prefer to have their money in their paychecks throughout the year. The IRS Withholding Calculator and Publication 505, Tax Withholding and Estimated Tax, can help.

Special Alert: Taxpayers who should check their withholding include those who:

  • Are a two-income family.
  • Have two or more jobs at the same time or only work part of the year.
  • Claim credits like the Child Tax Credit.
  • Have dependents age 17 or older.
  • Itemized deductions in 2017.
  • Have high income or a complex tax return.
  • Had a large tax refund or tax bill for 2017.

Withholding doesn’t seem like it should be complicated, but it really is. You may think that your employer could just apply your tax rate based on your fully year salary to your pay each period and voilà, done. But your employer doesn’t know your mortgage interest or property taxes for deduction purposes. They don’t know your bonus in advance (and by the way, they use a completely different rate on bonus income in most cases too!). They don’t know what tax credits apply to you. They don’t know your spouse’s salary. They don’t know your investment income or any other special circumstances that lead to an increase in income, deductions, or credits. We account for all those things by setting the “allowances” and the extra amount withheld per pay period on your W-4 so that it MacGuyer’s the system into something close to the right amount of tax over the course of a full year. With all the changes to the tax rules this year, the mid-year implementation, and some still unclear tax rules that are awaiting IRS guidance, well… it reminds me of MacGuyver without access to duct tape.

Here’s the good news… In most cases, underwithholding will simply lead to delaying the same amount of tax you would have paid during calendar 2018 to the time you file for 2018. That is, the total tax you’ll pay will be the same whether you pay it during the tax year or at the time of filing. Partial interest could be charged if you owe a substantial amount and the total amount that you had withheld during the year is less than 110% of your total tax liability for 2017. Overwithholding will of course result in a refund at the time of filing. In other words, getting withholding exactly right is not a huge deal for most people. We just want to get it close so that we’re not surprised by a large tax bill in April or a large refund (which means you provided the government with an interest-free loan all year),

If you are concerned about your withholding and want help conducting a paycheck checkup, please contact your advisor. Send a recent paystub for each earner in the family, the final paystub for any employment that may have ended earlier in the year, and an estimate of the regular pay and (if applicable) bonus pay that you’ll receive for the remainder of the year. Using last year’s deductions, the new tax laws (our understanding of them), and the pay information, we should be able to figure out if you’re in the ballpark on withholding, or if you should make some adjustments to avoid a big shock in April.

IRS Statement Re: Prepaid Property Tax

Yesterday, the IRS issued this statement with regard to the tax deductibility of prepaid property tax.  In it, they state that the property tax must be both assessed and paid in 2017 in order to be deductible in 2017.  The statement is just a reminder/clarification, not a new rule.  It follows with what I wrote in my last post about prepaying property taxes…  “Be aware though that in most cases, if the county accepts the prepayment as a deposit placed in an escrow account, it is not considered “paid” for Federal tax purposes.  It has to be paid against a levied tax to be deductible.”  If there is no tax yet, then your county could just be putting your prepayment in a suspense or escrow account and that is definitely not deductible.  If your tax has not yet been assessed, then there is no tax bill to prepay and that means your situation is the same as the 2nd example in the IRS statement.  Clearly not deductible.  If the tax was already assessed and payment isn’t due until sometime in 2018, or if they are taking your payment, levying a tax to offset it, and applying the payment against a levied tax (with amount not finalized, but known to be at least as much as last year), then that should be deductible.  I highly doubt many counties are going through that level of trouble though.  Most likely, either the tax has already been assessed and you’ve been notified of it, in which case payment would be deductible if make by 12/31/2017, or the tax has not been assessed and is not deductible for 2017, regardless of when it is paid.

Other (Less Urgent) Things To Do Regarding The Tax Bill (TCJA)

The following is a quick brainstorming list of things to think about doing if/when the TCJA becomes law.  They don’t need to be done before the end of 2017 so I carved them out separately from my previous post.

  1. Update your tax withholding to account for your new level of deductions. Note that IRS guidance on this may be delayed until late Jan / early Feb due to the complexity in calculations.
  2. Payoff HELOC debt if the loss of tax deductibility makes the after-tax interest rate cost prohibitive vs. other options.
  3. Revise estate plan (if necessary) to account for bigger exemption. Consider lifetime gifting plans to take advantage of the bigger exemption if estate tax may be an issue for you in the future.
  4. Increase 529 contributions to account for private K-12 expenses if you know you will incur those expenses.
  5. Keep in mind that alimony will not be deductible to the payer / taxable to the receiver starting with divorces that take place after 12/31/18 (the bill gives one extra year to prepare for this).
  6. If you have any children with financial accounts in their names, review the new “kiddie tax” rules and plan accordingly as their tax system has shifted to follow the trusts and estates rates.
  7. If you have an AMT credit, likely due to the exercise of an Incentive Stock Option, without a corresponding sale in the same year, prepare for that credit to get “released” more quickly (i.e. larger credit each year until fully used).
  8. Note that the floor for deducting medical expenses in 2017 and 2018 only, is changing from 10% to 7.5% (if you’re able to itemize). For some, this may mean tracking their out-of-pocket expenses and providing them to their tax preparer at tax time.  Again, this is retroactive and applies to 2017.
  9. Since unreimbursed employee expenses are no longer deductible, the days of keeping mileage logs to take a tax deduction for use of your vehicle for work as an employee are over (unless required for your employer to reimburse you). In a related note, if you use your car for work as an employee (outside of commuting) and your employer doesn’t pay for that mileage, it’s worth discussing that with them since you are no longer going to be able to deduct the mileage for tax purposes.
  10. If you own a business, client entertainment is no longer deductible. Meals are still 50% deductible.  Keep that in mind when setting up events if the tax treatment matters.
  11. Employers can no longer reimburse employees tax-free for moving expenses. Any moving expense that an employer pays will be considered taxable income.  If you’re signing on with a new employer and they say they’ll pay for moving expenses, ask them to “gross up” those payments such that you are made whole after-tax.  If they refuse, note that they’re really only paying / reimbursing you for 55-80% of the net moving cost.

What To Do (or not do) In 2017 Regarding The Tax Bill (TCJA)

The House and Senate have now passed the tax bill (though the House needs to vote again after some minor amendments in the Senate) and then it will be on its way to the President for signature.  While anything is possible, and the odds of the President signing in January rather than December have increased dramatically, it seems safe to assume that the bill will eventually become law.  There’s not a ton of time left to take action and there aren’t a lot of people who can take any action to take advantage of / avoid the disadvantages of the new tax law.  In this post, I’ll outline what you might be able to do, why you might be able to do it, and (maybe most importantly) why it may not work in certain situations.  These are general rules.  Proceed with caution.  Things can get very complicated and unintended consequences are possible.  The bill has not yet become law and there is some small risk that something prevents it from becoming law which means that actions you take under the assumption that it will become law may backfire.  I tried to keep this list simple, but unfortunately, there’s just no way to do that while providing enough actionable information.  Taxes simply aren’t simple.  Thanks Congress!

Consideration #1

Because: Federal tax rates are falling for every tax bracket in 2018,

Consider: Deferring income to 2018 from 2017 when you have the ability to do so,

Unless: You’re going to have substantially more income in 2018 than 2017 that could push you up to the next tax bracket OR you’re able to deduct state income taxes this year that you won’t be able to deduct next year (see below) and those state income taxes cause more tax savings than deferring the income to a lower federal rate year.


  • avoid exercising non-qualified employee stock options in December that could be exercised in January 2018 (all else being equal)
  • contribute more to your 401k in the final payroll of 2017 and less in 2018 (but not less than the match amount),
  • defer some end of year revenue if possible if you’re self-employed or have a side job, or accelerate some expenses that you can take in 2017 instead of 2018 (including equipment purchases that would qualify for Sec 179 immediate expensing). This is especially important if your business would qualify for the 20% deduction on pass-thru income in future years.
  • perform deductible repairs / maintenance on rental properties in 2017 that you were considering doing in 2018.

Consideration #2

Because: Federal tax rates are falling for every tax bracket in 2018,

Consider: Accelerating deductions to 2017 from 2018 when you have the ability to do so since they will have a larger impact in reducing your taxes in 2017,

Unless: You’re going to have substantially more income in 2018 than 2017 that could push you up to the next tax bracket OR those deductions wouldn’t provide as much (or any) benefit in 2017 as they would in a future year due to the Alternative Minimum Tax (AMT) in 2017, or because you can’t itemize in 2017.

Examples (but see below for limitations):

  • Pay any state income tax that you might owe for 2017 via an estimated tax payment before the end of 2017. Note: this won’t work if you’re already “in AMT” for 2017 and you have to reasonably believe that you owe what you pay (can’t just pay an extra amount in 2017 to deduct it Federally and then receive a big state refund in 2018 and take it as income Federally at a lower tax rate).
  • Pay your Jan 1st mortgage payment prior to the end of December 2017 (your mortgage lender should report the interest for that payment on your 2017 1098), though most people do this already.
  • Pay outstanding property tax bills that aren’t due until some time in 2018 before the end of 2017 (this is only relevant in certain jurisdictions that bill in one year but set the bill’s due date in the following year). Note: this won’t work if you’re already “in AMT” for 2017 and you generally can’t prepay future year property tax bills that haven’t been generated yet.
  • Make additional charitable contributions in 2017 that you would have otherwise made in a future year or consider starting a Donor Advised Fund which allows you to make a lump charitable contribution into a fund, take the full deduction this year, and then distribute to charity in future years as you see fit.
  • Take any Miscellaneous Itemized Deductions in 2017 that you would have otherwise taken in a future year (see link for list). Note: this won’t work if you’re already “in AMT” for 2017.

Comment: How do you know that you’re “in AMT” for 2017?  If your income and deductions are similar in 2017 than they were in 2016, you can use your 2016 taxes as a guide.  Check line 45 of your 2016 Form 1040.  If there is a number on it, you’re “in AMT” and assuming the same situation in 2017, you will not benefit from those items above marked as not working if you’re in AMT.  If there’s no number on line 45 it means you likely wouldn’t be in AMT if you didn’t pay additional state income / property taxes or those items that would be considered Misc. Itemized Deductions.  But, if you do make those extra payments, it could push you into AMT.  To determine how much room you have until you hit AMT, check with your tax preparer who should be able to go back to your 2016 return and slowly increase your deductions that aren’t deductible for AMT until you hit AMT.  That will give you an approximate limit to the extra payments you can make in 2017 before hitting AMT.  If your 2017 situation is different from 2016, then the only way to know how much room you have for additional payments in 2017 is to prepare a mock tax return for 2017 which is not an easy task as it means gathering all the information that would be on your tax documents (W-2, 1099s, 1098s, etc.) without actually getting your tax documents in the mail.

Consideration #3

Because: The standard deduction is increasing substantially starting in 2018, fewer and fewer people will be able to itemize, meaning that their deductions won’t provide any benefit above the standard deduction. To estimate whether you’ll be able to itemize or not in 2018, add up the following for 2018 (use your 2016 Schedule A as a guide if your situation is going to be the same:  1) state/local taxes = the sum of Line 5 + Line 6 of your Schedule A, but only $10k as a max, 2) mortgage interest = Line 15 of your Schedule A (but back out any mortgage interest that’s associated with a HELOC, 3) charitable contributions = Line 19 of your Schedule A.  If you are single and the above adds up to less than $12k or if you’re married filing jointly and it adds up to less than $24k,

Consider: Accelerating deductions to 2017 from any future year.

Unless: those deductions wouldn’t provide any benefit in 2017 due to the Alternative Minimum Tax (AMT) in 2017, or because you can’t itemize in 2017.

Examples: Same as Consideration #2

Comment: Same as Consideration #2.

Consideration #4

Because: The deduction for state/local taxes paid is going to be limited to $10k per year (both Single and Married Filing Jointly!), which includes state/local income taxes, sales taxes, and property taxes,

Consider: Accelerating deductions to 2017 from 2018 for state/local income/sales taxes or property taxes,

Unless: those deductions wouldn’t provide any benefit in 2017 due to the Alternative Minimum Tax (AMT) in 2017, or because you can’t itemize in 2017.  Note that if the total of your state/local tax deductions in future years will be less than $10k, the only benefit here is that which is described by #2 above.

Examples (note that none of these work in AMT):

  • Pay any state income tax that you might owe for 2017 via an estimated tax payment before the end of 2017. Note that the tax bill specifically outlaws pre-paying 2018 state income taxes.  They would not be deductible in 2017 and would instead be treated as paid in calendar 2018 so that the system can’t be gamed.
  • Pay outstanding property tax bills that aren’t due until some time in 2018 before the end of 2017 (this is only relevant in certain jurisdictions that bill in one year but set the bill’s due date in the following year). You can only do this if the bill has already been generated.  Also, for those who pay their property taxes through an escrow account, you can still make a payment out-of-pocket.  Your escrow company will eventually make the same payment and it should be refunded back to the escrow account or back to you at that time.  If it goes back to the escrow account, your next escrow reconciliation will pick up the overpayment and refund it back to you.
  • If you live in a state with no income tax and you instead deduct sales taxes, and you’re planning to buy a big ticket item (car, truck, boat) soon, do it before the end of 2017 so you get the additional sales tax deduction in 2017.

Individual Income Tax Provisions of the TCJA – now updated w/ details of the final bill

The Conference Committee has now released their Conference Report which resolves the differences between the bills passed by the House and the Senate.  In a previous post, I noted those differences.  In this post, I’ll note the corresponding provisions in the conference report.  This final bill will need to be passed on both chambers and then signed by the president to become law.  Prediction markets currently give a ~90% chance of this happening prior to the end of 2017, a ~5% chance of it passing in the first half of 2018, and a ~5% chance of it not passing at all.  So this is pretty close to a done deal.

  • Income Tax Rates – lower rates for all, temporarily through 2025, but different from both the House and Senate plans.  See comparison of today’s rates vs. the rates in the final bill below, courtesy of The Tax Foundation.  All rates revert to 2017 law (indexed for inflation) after 2025 unless extended by another Congress.


  • Kiddie Tax – follows the Senate proposal, such that a child’s investment income is taxed with trust and estates rates (higher), vs. being taxed at the parent rate after a threshold.  Reverts to existing law after 2025.
  • Tax Rates for Dividends and Long-Term Capital Gains – remain as they are today.  0% applies if income puts you in the old 0%, 10%, or 15% tax bracket, 15% applies if in the prior 25%, 33%, or 35% bracket, and 20% applies if in the old 39.6% bracket.
  • Capital Gain / Loss Tax-Lot Accounting – the provision to force First In First Out (FIFO) treatment on sales was eliminated.  Current rules which allow LIFO, specific, ID, or FIFO remain in effect.
  • Alternative Minimum Tax (AMT) – follows the Senate proposal.  AMT is not repealed, but the exemptions amounts are increased and the phaseout income at which the exemption begins to be reduced is also increased.  When combined with the SALT limitations and the elimination of miscellaneous itemized deductions subject to the 2% of AGI floor (see below), AMT shouldn’t impact nearly as many taxpayers as it previously did.  Reverts to existing law after 2025.
  • Standard Deduction – increased to $12k single, $24k MFJ.  This increase, when combined with the SALT limitations and the elimination of miscellaneous itemized deductions subject to the 2% of AGI floor (see below) means fewer taxpayers will itemize their deductions.  Reverts to existing law after 2025.
  • Child Tax Credit – credit is increased to $2k per child ($500 for other dependents like parents), and begins to phase out at $200k single, $400k MFJ.  Reverts to existing law after 2025.
  • Adoption Credit / Credit for Plug-In Vehicles / Hope Scholarship Credit / Lifelong Learning Credit – no change to any of these.   Existing law remains in effect.
  • Itemized Deductions Limited – Keep in mind though that with the higher standard deductions, fewer people will need to itemize so loss of some of the below isn’t as bad as it seems.  All of these revert back to existing law after 2025.  These include:
    • State and Local Taxes (SALT) and / or Property Taxes will only be deductible up to a combined max of $10k.  Note that this is the same for Single and MFJ, thereby imposing a marriage penalty via this deduction.  Additionally a provision was added to disallow a 2017 deduction on 2018 state/local income taxes that are prepaid so that taxpayers can’t game the system by prepaying future year’s worth of state taxes in 2017.
    • Mortgage interest deduction would only be allowed on up to $750k of new mortgage debt (vs. $1M today), and there would be no more $100k of HELOC debt interest deduction allowed. Existing mortgages (closing prior to 12/15/2017 or with a binding contract prior to that date) would be grandfathered in the old rules.
    • Casualty loss deduction eliminated (unless specifically authorized by special disaster relief).
    • Medical expense deduction remains, with the AGI threshold reduced from 10% to 7.5% for 2017 and 2018 only (reverts to 10% thereafter).
    • Misc. Itemized Deductions that are subject to the 2% of AGI floor (see IRS Publication 529 for a list of these deductions) are all eliminated.
  • Other deductions / exclusions:
    • Moving expenses deduction eliminated.  Reverts after 2025.
    • Alimony deduction eliminated and alimony would no longer be taxable to the receiver.  Effective starting 2019 and does not revert after 2025.
    • Student loan interest deduction is NOT eliminated.  Existing rules are retained.
    • Tuition and fees deduction is NOT eliminated.  Existing rules are retained.
    • Sec 121 exclusion of gain on the sale of a principal residence is NOT changed.  The 2 of 5 year rule remains in effect with no income caps.
  • Retirement Accounts – generally unchanged except that 401k plan loan repayments get a little easier in the case of a termination. Rather than needing to repay the loan within 90 days of termination or treating the loan as a distribution, borrowers would have the ability to repay the loan to a new retirement plan or IRA by the due date of that year’s tax return (including extensions).
  • 529 College Savings Plans  enhanced to allow up to $10,000/year of tax-free distributions for private / homeschool K-12 expenses.  Edit 12/19/17 – after Senate amendments to conform to Reconciliation rules, the “homeschool” portion of this provision was dropped.  529 withdrawals cannot be used for homeschool expenses.
  • Estate Tax – is not repealed, but the exemption would be doubled (~$11M per person / $22M per couple).
  • ACA Individual Mandate – repeals the “Individual Mandate” (the provision that requires everyone to have health insurance, or pay a penalty on their taxes), by reducing the penalty for not having insurance to $0.
  • Employer Benefit Changes – No change to dependent care FSAs, adoption benefits, tuition reimbursement plans,  reduced / free tuition for employees of educational institutions, pre-tax transportation plans (parking / commuting). free gym memberships.  Tax-free moving expenses reimbursements would no longer be allowed though.   There would also no longer be deductions to the employer for (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or (3) a facility or portion thereof used in connection with any of the above items.

Over the next few days, I’ll post my thoughts on what, if anything, we can do before the end of 2017 to take advantage of (or limit the disadvantages of) the new tax laws going into effect.  Stay tuned!