The Tax Cuts and Jobs Act: Today’s Q&A Mailbag
By Jim Glass, JD
Follow Us on Twitter: @theslottreport
Good Afternoon Mr. Slott,
Based on the Path Act of 2015, which made the QCD permanent, and the information from Checkpoint “2017 Tax Reform: Special Study on Individual Tax Changes in the ‘Tax Cuts and Jobs Act’”, it appears the Path Act of 2015 was not repealed regarding QCD.
Do you agree with my assumption?
Yes, Qualified Charitable Distributions (QCDs) remain available under the new law. In fact, it may make them more popular than before.
This is because the new law will have the effect of reducing or even eliminating the tax-saving value of charitable contribution deductions for many individuals. While the charity deduction remains available it is an itemized deduction and total itemized deductions must exceed the amount of the standard deduction to provide tax savings. The new law eliminates many itemized deductions and near doubles the standard deduction, so the benefit of itemizing will be reduced for many taxpayers.
Example: The standard deduction for a married couple under the new law is $24,000 (increased from $12,700). So in 2018 a couple with $13,000 of other itemized deductions will receive no tax-saving benefit from the first $11,000 of an additional charity deduction.
Until now, many people who have taken taxable distributions from Traditional IRAs also have claimed charitable contribution deductions which offset the taxable income from their distributions. Going forward, to the extent that their tax benefit from the charity deduction is reduced so this is no longer true, they will be better off making gifts to charity by using QCDs. Because QCDs are not included in income, the tax result of a QCD is much the same as from a deduction offsetting 100% of a taxable distribution.
A QCD must be made directly to a charity from the IRA, can be as large as $100,000, and be used to satisfy required minimum distribution requirements.
Now that it appears that Congress is going to enact tax reform this week, is the elimination of the Roth recharacterization option part of the final bill?
The new tax law eliminates the ability to use recharacterization to reverse the conversion of a Traditional IRA into a Roth IRA. Starting in 2018, such a conversion is final when made.
However, the law preserves, as before, the option to convert an annual contribution made to a Roth IRA into one made to a Traditional IRA, and likewise to convert a contribution to a Traditional IRA into one made to a Roth IRA.
This option is especially beneficial for individuals who misjudge their final income for the year at the time they make a contribution -- and so misjudge their ability to contribute to a Roth IRA under income-level eligibility rules, with the result that they contribute to the wrong type of IRA. It enables them to correct this mistake later.
Can you please tell us if the “backdoor” Roth conversion is still available to traditional IRA holders under the GOP’s latest proposed tax plan? Will this type of Roth conversion be allowed in 2018 and future years, or is 2017 the last year one can do such conversions?
"Backdoor" Roth IRA funding is a way to move money into a Roth IRA that can be used by persons who have too much income to be eligible to make a direct contribution to a Roth IRA.
In 2018, married couples with Modified Adjusted Gross Income (MAGI) of $199,000 or more, and single persons with MAGI of $135,000 or more, are ineligible to make any contribution to a Roth IRA. But no income limitation applies to persons converting to Roth IRAs, or makingcontributions to nondeductible Traditional IRAs.
Thus, individuals who have too much income to contribute directly to a Roth IRA may be able to instead contribute up to $5,500 (or $6,500 if age 50 or older) to a traditional IRA and then make a rollover of funds from it to the Roth IRA. Even larger backdoor transfers may be possible by contributing to a 401(k) plan and then making a rollover from it to a Roth IRA, if the plan allows in service distributions.
The new tax law does not change any of this, so "backdoor" transfers to Roth IRAs remain available as before.
But be careful, the new tax law does eliminate the ability to use recharacterization to reverse a conversion of Traditional IRA or 401(k) funds into a Roth IRA if you later decide doing so was a mistake. When you make a backdoor conversion it will be final. A tax bill may result on a conversionr from a nondeductible Traditional IRA to a Roth IRA if you own more than one IRA and some hold pre-tax funds (due to the "pro rata rule" applying to transfers) while calculating the tax result of a rollover from a 401(k) can be complex. So check the tax consequences with your expert advisor before acting.
As the year comes to a close and the proposed tax bill is being finalized, I'm wondering if there is any
change to the favorable tax treatment of NUA?
I originally plan to take advantage of the NUA treatment in 2018. Your answer is very important to me as I only have a a couple of weeks to decide whether I should move my timeline.
Thanks for your help.
The new tax law doesn't change the rules regarding Net Unrealized Appreciation (NUA), so as far as that goes you can proceed as you intended. But be sure to consider how the other provisions of the new law will affect your tax situation in 2018, and whether their consequences may indirectly affect your best strategy for utilizing NUA.