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How Tax Bill Impacts 4 Key Areas for Advisors & Clients

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Industry officials and political watchers are busy digesting the final GOP tax cut bill completed Friday, which is expected to be passed by the House and Senate early this week and signed into law by President Donald Trump by week’s end.

The conference committee version released Friday “more closely resembles the Senate version, and includes tax rate cuts for individuals, corporations and pass-through businesses, an elimination of many forms of tax deductions, larger exemptions from the estate tax and Alternative Minimum Tax, and numerous changes affecting multinational businesses,” said Tim Steffen, director of Advanced Planning at Baird Wealth Solutions Group.

“While steps were made to simplify our federal tax system,” the final GOP bill “seemed to fall short of where previous versions landed,” Steffen continued. “For example, rather than repealing the estate tax and AMT, this proposal simply expands the exemptions. Fewer taxpayers will be affected by them, but with AMT specifically, many will still have to go through the calculations to be sure.”

The Tax Foundation released Monday its analysis of the bill, finding that it would lead to a 1.7% increase in GDP over the long term, 1.5% higher wages, and an additional 339,000 full-time equivalent jobs.

(Related: The Tax Cuts and Jobs Act: An Advisor’s Guide)

On a static basis, the Tax Foundation said, “the bill would reduce federal revenues by $1.47 trillion, but additional economic growth would raise an additional $600 billion in revenue. With the dynamic revenue feedback, expiring provisions, and the functional repeal of the individual mandate, the dynamic revenue loss would be $448 billion.”

1. Retirement Plans

From a retirement industry perspective, the tax bill “is kind of boring,” said Brian Graff, CEO of the American Retirement Association. “In this case, boring is good.”

Graff noted the following areas that were included in either the House and Senate versions that were taken out of the final bill, which he called a “collective win” for the retirement planning industry: Proposals to require ‘Rothification’ of 401(k) plans; cutting or freezing retirement plan contribution limits; eliminating 403(b) and 457 plans; and basically eliminating all forms of nonqualified deferred compensation.

As Graff noted, the final bill does include, however, the following provisions impacting retirement plans:

  • Repeals the ability of individuals to recharacterize a contribution to a Roth to a traditional IRA
  • Extended rollover period for plan loans

Added Graff: “I do believe there is some pent-up desire to do several retirement-related measures, including [Multi-Employer Pension Plans], with action possibly next year.”

As noted previously, the bill also reduces taxes on pass-through businesses, which Graff notes creates “an unintended consequence” that undermines the incentives for small-business owners to sponsor a retirement plan for their workers.

2. College Planning

The final tax cut bill also makes changes to 529 college savings plans. As Baird’s Steffen notes, under the bill, Section 529 plans would be able to distribute up to $10,000 per year to cover the cost of K-12 expenses while enrolled in a public, private or religious school.

“Today, the only tax-preferred way to save for those costs is by using a Coverdell Education Savings Account. No changes would be made to the rules regarding Coverdell accounts,” he said.

The definition of qualified expenses for a 529 account would be expanded to include certain homeschooling expenses, he continued, and “if a student loan is discharged due to the death or permanent disability of the student, that discharge would no longer be considered taxable income.”

The discharge of debt provision would expire after 2025, Steffen said, “while the other two changes would be permanent.”

3. Estate Tax Changes

The GOP plan would double the estate exemption beginning in 2018.

“The exemption is currently scheduled to be $5.6 million, meaning it would become $11.2 million per person, or $22.4 million per couple,” Steffen explained.

“Those who had already used their estate exemption in prior years would be able to make additional tax-free gifts to non-spouse beneficiaries next year,” he added.  

The increased estate tax exemption, Steffen said, would expire after 2025 and revert back to the law in effect for 2017 with inflation adjustments.

4. Alternative Minimum Tax

The final GOP bill follows the Senate version and increases the AMT exemption amounts, thereby reducing the number of taxpayers subject to AMT.

Under the proposal, Steffen notes, the AMT exemption for couples would increase from $78,750 in 2017 to $109,400 in 2018 (and from $50,600 to $70,300 for singles).

The AGI level at which the exemption is phased out would also be increased, from $150,000 in 2017 to $1,000,000 in 2018 for couples (and from $112,500 to $500,000 for singles).

“As a result, executives looking to exercise Incentive Stock Options should consider delaying those exercises until 2018,” Steffen counsels.  

Also, “those with AMT credit carryovers will find it much easier to recover those with these larger AMT exemption levels,” he said. “These increased exemptions and phase out levels would expire after 2025 and would revert back to their 2017 levels, with inflation adjustments.”

— Related: The Tax Cuts and Jobs Act: An Advisor’s Guide


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