Three Overlooked Changes in the Republican Tax Bill

After much political drama and grandstanding, the GOP’s Tax Cuts and Jobs Act is now officially the law of the land, taking full effect in 2018. We won’t bore you here with talk about changes to tax rates or attempts to identify the winners and losers. Nevertheless, there are three changes that we consider noteworthy and have received little attention from the mainstream news outlets.

First, fees paid to investment advisors are no longer deductible. This deduction has been eliminated along with the other deductions listed under “miscellaneous itemized deductions” subject to a floor of 2% of adjusted gross income. These would include fees for tax preparation, trustee services, safe deposit box rentals, et al. 

Second, Roth conversions can no longer be recharacterized. A Roth conversion is the transfer of assets from a traditional IRA to a Roth IRA, usually done when the future tax rate is expected to be higher than the current tax rate and funds are readily available to pay the resulting taxes. The recharacterization provision allowed the reversal of a Roth conversion up until October 15th of the year following the conversion. This provision was particularly useful when the market went down after the conversion. After all, who would want to pay taxes on an amount that is much higher than the value of the converted assets? Uncle Sam is now saying that if you want the benefit of a Roth conversion, you have to accept the risk that it may not work out as you planned.

Third, 529 plans can now be used to fund tuition expenses for primary and secondary schools, up to $10,000 per year per student. This applies to public, private, and even religious schools. Prior to this, the only account that could be used for this purpose was a Coverdell Education Savings Account, which allows a maximum annual contribution of only $2,000.

To understand exactly how the GOP tax bill will affect you, we strongly advise consultation with a qualified tax professional. If you need any assistance with Roth conversions, 529 accounts, or tax-efficient investing, please contact us at info@clarityca.com or call us at 800-345-4635.