How Tax Reform Impacts Retirement and Estate Planning
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The new tax law will alter many decisions, from whether to itemize deductions or how quickly to pay off a mortgage.

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In December of 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), the most sweeping tax legislation in decades. This overhaul in federal tax law shifts many incentives and limits that can affect your overall tax bill. For that reason, it’s a great time to review your retirement and estate-planning objectives, and to consider adjusting your plans to take the new rules into account.

Many of these changes are set to expire after 2025, so consider moving quickly to take advantage of this eight-year window.

Here are some strategies you might want to factor into your planning:

Recheck the numbers on a Roth IRA conversion

If you hold assets in a traditional IRA, you may want to consider evaluating the impact of converting some or all of your IRA to a Roth IRA under the lower tax rates that currently apply for many individuals. This strategy may be beneficial given that withdrawals from a Roth IRA are tax-free as long as the account owner is at least 59½ and has held the account for at least five years. Roth IRAs also provide the ability to pass assets to heirs tax-free.

Note that you’ll pay taxes on the conversion now, and it’s generally a better strategy to pay that bill with other liquid assets rather than funds from the IRA itself. Until 2018, investors were able to undo a Roth conversion in a process called recharacterization. However, under the new law, recharacterization of Roth conversions are no longer allowed. This change is permanent and will not expire after 2025.

Now that income tax rates are lower and the standard deduction has doubled, Roth conversions may still make sense for many individuals. However, it’s critically important to double-check the numbers—and consult your financial professional—before you take this now-irreversible step.

Reconsider itemizing

Taxpayers who used to itemize their deductions may no longer need to worry about their tax-deductible expenses, given that the standard deduction has nearly doubled, to $12,000 for single filers and $24,000 for married couples filing jointly. Track your expenses closely this year to see if itemizing will still be advantageous and adjust accordingly going forward. For the majority of taxpayers, particularly retirees, the standard deduction will likely make sense.

Pay off mortgage debt

The TCJA puts a new cap on how much of your mortgage interest payments you can claim as a deduction on your federal taxes. For mortgages taken out after December 15, 2017, you can deduct the interest on only the first $750,000 of mortgage debt. Furthermore, interest on some home equity loans will no longer be deductible. (One major exception: The interest on home equity loans taken out to improve your primary residence can still be deducted.) Given these new limits, certain wealthy homeowners may find it more advantageous to pay off their mortgages.

Bunch medical expenses

The TCJA has temporarily lowered the threshold for qualified medical expense deductions for 2017 and 2018. If your medical expenses exceed 7.5 percent of your adjusted gross income, you can claim them as a deduction if itemizing deductions still makes sense for your tax situation. But this new lower threshold is set to expire unless Congress takes further action. If possible, consider bunching your medical expenses to get major issues taken care of before 2019, when the threshold will revert back to 10 percent.

Adjust your giving strategy

As a result of the higher standard deduction, fewer people will likely be itemizing, which means that charitable contributions may no longer provide the tax benefit they once did. Other new provisions provide incentives for giving: If you are 70½ or older, you may directly transfer and exclude from income up to $100,000 per year from your traditional IRA to a charity in a qualified charitable distribution. And while there is still a federal estate tax (and a state estate tax in some states), the federal exemption has dramatically increased. However, these changes are slated to revert back to pre-2018 numbers in 2026. Talk to your tax professional about taking advantage of this limited window of opportunity that may allow you to reduce your taxable income and taxable estate by making larger tax-free gifts.

Changes in tax law can affect your personal finances in complex ways. Consult your tax and financial professionals to make a plan that is appropriate for your situation.

 

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Pacific Life, its affiliates, their distributors and respective representatives do not provide tax, accounting or legal advice. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor or attorney.

The results and explanations generated by this calculator may vary due to user input and assumptions. Pacific Life does not guarantee the accuracy of the calculations, results, explanations, nor applicability to your specific situation. We recommend that you use this calculator as a guideline only and ultimately seek the guidance of an experienced professional. CalcXML, the provider of this information and interactive calculator, is an independent third-party and is not affiliated with Pacific Life.

The above is provided for informational purposes only and should not be construed as investment, tax, or legal advice. Information is based on current laws, which are subject to change at any time. You should consult with their accounting or tax professionals for guidance regarding your specific financial situation. 

According to the Tax Cuts and Jobs Act of 2017, the federal estate, gift and generation-skipping transfer (GST) tax exemption amounts are all $10,000,000 per person (indexed for inflation effective for tax years after 2011); the maximum estate, gift and GST tax rates are 40%. In 2026, the federal estate, gift and generation-skipping transfer (GST) tax exemption amounts are scheduled to revert to $5,000,000 per person (indexed for inflation for tax years after 2011).

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