After weeks of headlines suggesting that new tax rules would make life harder on them, investors and retirement savers can breathe easier with the final tax bill. Many of the more significant proposals failed to make it in.
Still, there were some important changes, and it’s also worth taking stock of the key regulations that were left standing.
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Here’s what changed for investors
The following items are set to take effect in the 2018 tax year, so for returns filed in April 2019. Keep in mind that plenty are slated to expire at the end of 2025 — and don’t count on them being renewed. Remember the so-called Bush tax cuts of 2001? They also had a sunset provision, and plenty of those laws never got extended, says Mark Luscombe, principal analyst with Wolters Kluwer Tax & Accounting in Riverwoods, Illinois.
The miscellaneous itemized deduction was a catch-all bucket of expenses, including investment fees and expenses, tax-preparation fees, safe-deposit box fees, union dues and trustee fees (for example, for an IRA). Your expenses had to top 2% of your adjusted gross income before you could take this deduction, but it was a nice option to have. Not anymore.
That change tips the scale a bit in favor of commission-based brokerage accounts, rather than fee-based advisory accounts, says Tim Steffen, director of advanced planning at financial-services firm Baird in Milwaukee. “Commissions go toward your cost basis when you sell. Those commissions go to reduce your capital gain,” he says.
Now that there’s no deduction for advisory fees, those commission-based trading accounts might be more appealing. “I’m not saying that people will start switching from advisory to commission accounts, but from a tax standpoint, the tax does favor those a little bit more now,” Steffen says. “Hopefully the advisor provides a little more value than just executing trades.”
Before, converting a traditional IRA to a Roth IRA came with an escape hatch: By the tax-filing deadline — when you would have to pay income tax on any money you converted — you could reverse, or “recharacterize,” your decision. People tended to do this if they experienced investment losses in the account in the time between conversion and the tax-filing deadline.
That escape hatch is now firmly locked. If you did a Roth conversion in 2017 and you think you might change your mind, act fast. “That right is going to go away, and if you want to recharacterize it you have to do it by Dec. 31,” Luscombe says.
If you’re saving for your child’s education in a 529 plan, the new rules let you use up to $10,000 of that money per year to pay for elementary and secondary school costs. The K-12 area was formerly the purview of Coverdell savings accounts, so more people might go with a 529 as a result.
While capital gains tax rates didn’t change, how we talk about them did. Before, the 0%, 15% and 20% rates for long-term capital gains and qualified dividends applied to specific tax brackets. For example, you didn’t owe the 15% cap-gains rate until you hit the 25% income tax bracket.
Because the new rules change the income tax brackets, and because lawmakers seem to have wanted to maintain existing capital gains rates, those same long-term capital gains rates (0%, 15% and 20%) now apply to specific income thresholds:
- The 0% rate applies for those with income up to $38,600 for single filers and up to $77,200 for joint filers
- The 15% rate applies for single filers with income between $38,601 and $425,800 and joint filers with income between $77,201 and $479,000
- The 20% rate applies for single filers with income above $425,800 and for joint filers with income above $479,000
The way children’s unearned income (read: investment gains) are taxed has changed. Previously, kids paid taxes at the parents’ rate on any unearned income over $2,100. The new rules change that, applying the same capital gains rates that estates pay to children’s unearned income. Thus, children pay 0% on unearned income up to $2,600; 15% on unearned income from $2,600 to $12,700; and 20% on income above $12,700.
If you lose your job, it’ll be slightly easier to pay back any outstanding 401(k) loans. Under the old rules, if you lose your job while you have a 401(k) loan outstanding, that loan becomes due and payable within 60 days. If you don’t, you risk owing taxes and a 10% penalty on that money. The new tax rules give you until the tax-filing deadline to pay back your loan.
Here’s what didn’t change
There were some rumors floating around as the tax bill was being debated, but these provisions never came to pass:
No first-in-first-out rule on selling securities. The FIFO rule would have raised tax bills for investors because it would have tied your hands in determining which shares could be sold first. Rather than choosing to sell your recent purchase of, say, Apple stock, you’d be forced to sell the first shares you ever bought. In situations where those older shares had a much lower cost basis, you would’ve been on the hook for a bigger tax bill.
But this FIFO provision wasn’t included. You can still decide which shares you want to sell when.
No slashing of the maximum contribution to 401(k) plans. In 2017, you can contribute $18,000 to your 401(k), and that rises to $18,500 in 2018. If you’re 50 or over, the total is $24,000 ($24,500 next year). Those figures are unchanged, despite rumors a couple of months ago that those limits were going to get whacked down to $2,400.
No, filing your taxes isn’t going to be that much simpler. “Certainly not to the degree we expected when we got the first proposal from the House back in early November,” Steffen says. “That proposal eliminated many deductions, eliminated AMT [alternative minimum tax], eliminated the estate tax. It was going to go to four brackets instead of seven. It was going to be a much simpler bill.”
As it is, while the almost-doubled standard deduction will help people avoid itemizing, there are still seven income tax brackets, and quite a few deductions and credits to consider. That said, if the alternative minimum tax was a worry for you, you’re less likely to fall prey to that parallel tax, thanks to an increase in the AMT exemption amounts. That will simplify your life.
The article 6 Things Investors Need to Know About the New Tax Plan originally appeared on NerdWallet.