With the extended tax cuts under President Donald Trump’s recently passed tax and spending law, "Roth conversions should be accelerated to take advantage of more years of low tax rates," according to Ed Slott of Ed Slott & Co.
"You never want to leave a low tax bracket unfilled," he said. "Low tax brackets need to be maximized each year, but how much to convert each year can be trickier now since many of the new tax breaks have income caps."
Advisors, Slott told ThinkAdvisor Monday in an email, have to now weigh "which tax deductions may apply and keep Roth conversion income from pushing income over these limits and losing tax deductions."
For instance, the new $6,000 deduction for taxpayers 65 and older "is effective for this year, but it begins phasing out when income exceeds $75,000 (for individuals) and $150,000 (for married couples filing joint)," Slott relayed.
A much larger benefit for those in high-tax states, like New York and California, "is the big increase in the SALT (state and local income tax) deductions for itemizers, going from $10,000 to $40,000," Slott continued.
However, this benefit "begins phasing out after $500,000 for all taxpayers. After income reaches $600,000, the increase is lost and goes back to the original $10,000," Slott explained. "A Roth conversion could push income over the limit and a $30,000 tax deduction could be lost."
Tips and Overtime
Smaller new deductions, too, can be lost — like those for tips and overtime, Slott said. These breaks begin phasing out at modified adjusted gross income of $150,000 for an individual or $300,000 for a couple.
"In addition to the income limits, several of the provisions are temporary," with some ending in 2028, "but the SALT deduction increase ends after 2029, so timing matters as well," according to Slott.
Under the new law, "the big 20% deduction for qualified business income (QBI) was extended and that one is unique because Roth conversion income can either increase or eliminate the deduction for those subject to the QBI income limits," Slott stated. "It’s a balancing act."
Bottom line: "Roth conversions cannot be done in a vacuum. Advisors will need to look at the full array of tax benefits available to each client, each year, and optimize them with careful planning."
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.