BASKING RIDGE, NJ — This alert from the Ed Slott Elite IRA Advisor Group offers an overview of the tax reform proposal, unveiled last week in Washington, D.C. It’s way too early to tell what will stay or what will go, but stay tuned.
It’s here. On the morning of Thursday, November 2, House Republican leaders finally released their delayed and much-anticipated tax reform plan. The bill, which is called the Tax Cuts and Jobs Act, is more than 400 pages long and calls for a complete overhaul of the tax code. There are many changes proposed, and there are winners and losers. It is the opening shot in what without a doubt promises to be an epic legislative fight. Here are some key items to watch as the tax battle begins in Congress.
401(k)s and IRAs Safe for Now
What is not in the tax bill is just as significant as what is included. There has been much discussion about eliminating or reducing the pre-tax salary deferrals for 401(k) plans. The bill keeps the current rules for tax-deferred 401(k)s and IRAs in place. There would be no reduction of contribution limits. Replacing pre-tax retirement savings options with after-tax Roth options, otherwise known as “Rothification,” is also not included the proposed legislation.
Stretch IRA and NUA Survive
Also surviving, at least for now, is the stretch IRA. The bill does not call for its elimination. The tax break for net unrealized appreciation (NUA) is currently spared as well.
Recharacterization is one of the rare do-overs allowed under the tax code. Clients who are having second thoughts about Roth conversions currently get a second chance. However, recharacterization’s days may be limited. The bill would eliminate this strategy and make conversions irrevocable. This change would apply to taxable years after December 31, 2017. Additionally, the ability to recharacterize IRA or Roth IRA contributions is also repealed.
Estate Tax Repeal
The bill calls for an increase in the estate tax exemption to $10 million (as of 2011, indexed for inflation), beginning in 2018. After 2023, the estate tax, and the generation skipping tax, would be eliminated completely while maintaining a full step up in basis. The gift tax would remain, but with lower rates and an exclusion of $10 million.
Employer Plan Changes
The bill includes several provisions that would increase access to both in-service and hardship distributions from qualified plans. There is also good news for employees whose plan terminates or who separate from employment while they have plan loans outstanding. They would have until the due date for filing their tax return for that year to roll over the loan balance to an IRA to avoid the loan being taxed as a distribution.
The standard deduction for all taxes would increase to $12,000 for individuals and $24,000 for married couples. The child tax credit would be increased to $1,600 from $1,000.
Tax reform may be bad news for clients who itemize deductions. On the chopping block are many popular deductions, such as the medical expense deduction. This would mean the end to the exception to the 10 percent early distribution penalty for distributions from retirement plans for deductible medical expenses.
The deduction for personal casualty losses would be eliminated, except personal casualty losses associated with special disaster relief legislation, such as was recently passed for victims of Hurricanes Harvey, Irma, and Maria, would not be affected.
The deduction for mortgage interest would be limited, as well as the state and local tax deduction.
The plan would reduce the number of marginal income-tax rates to three (12 percent, 25 percent, 35 percent) from the current seven, and would keep a rate of 39.6 percent, for the very highest earners.
The bill calls for the elimination of the alternative minimum tax (AMT).
The bill promises to lower the tax rate for “pass-through” businesses to 25 percent for a portion of income. A special formula would be used to determine what portion of income would qualify.
While the first step has been taken toward sweeping changes to the tax code, there is a very long way to go before any of these proposals become law. We can expect a lot of heated debate and likely significant changes to this bill over the next few weeks. Stay tuned for the latest updates.
Editor's Note: Walter Pardo is a master elite adviser with Ed Slott Elite IRA Advisor Group.