The passage of the Tax Cuts and Jobs Act – the new, sweeping tax reform bill just signed into law by President Trump – means that those of you who contributed to Traditional IRAs over Roth IRAs in high-tax years may have made a very good bet. The new tax law means that income taxes on most middle-income retirees will be much lower than they otherwise would have been, had the tax reform not passed.
Those of you who contributed to Self-Directed Roth IRAs over the years, only to see this year’s tax reform bill bring taxes down, and not up, still have the consolation of tax-free growth on assets you leave in the Roth for at least five years. So you have not lost anything, but Self-Directed Traditional IRA owners may be much better off under the Tax Cuts and Jobs Act.
Here are the highlights of the new tax law as they pertain to Self-Directed IRA investors:
- The standard deduction is nearly doubled, to $12,000 for singles, $18,000 for heads of households and $24,000 for married couples. However, the $4,050 personal exemption and dependent exemptions are repealed. The number of people who do not itemize their tax returns is likely to substantially increase.
- The Child Tax Credit is increased through 2025. The law increases the maximum child tax credit from $1,000 to $2,000 per qualifying child. The refundable part of the credit is raised, from $1,000 to $1,400. That means taxpayers can qualify for a tax credit of up to $1,400, even if they have no tax liability for the current year.
- The new law retains seven tax brackets, but the tax rate for each bracket except the lowest one is reduced. The old tax brackets were 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The new brackets are 10%, 12%, 22%, 24%, 32%, 35% and 37%.
- The income thresholds for each bracket have been increased to the advantage of the taxpayer. You can find a set of tables with the new brackets and income thresholds here.
- The corporate tax rate is lowered from 35% to 21%. The effects of double taxation on C corporations are much reduced.
- The Child Tax Credit is increased to $2,000, $1,400 of it will be refundable. That is, you can get the benefit of it even if you have zero tax liability, or less than $1,400 of tax liability.
- The alternative minimum tax (AMT) threshold is raised from $86,200 to $109,400.
- Alimony is no longer deductible to the payer, but not countable as income to the recipient. This provision begins in 2019, and may have a substantial effect on divorce proceedings.
- Section 529 plans may now be used to pay for K-12 schools. Previously, they could only be used for college/post-secondary expenses. Section 529 plans can also be used for homeschooling costs.
- Businesses with up to $25 million in income may use the cash accounting method. Previously, businesses with $5 million or more in income were required to use the accrual method of accounting.
- The Affordable Care Act penalty for not having qualified health insurance is reduced to zero under the Tax Cuts and Jobs Act.
- Personal income tax preparation fees are no longer deductible.