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Category: Tax Planning

SECURE Act 2.0: An Overview

“Change is the only constant in life.” This phrase – attributed to Greek philosopher Heraclitus – is particularly relevant when it comes the recent changes to retirement savings in the United States. The Federal Government funding bill (which is over 4,000 pages long!) includes provisions from the prior proposed Setting Every Community Up for Retirement Enchantment (SECURE) Act 2.0 that will significantly change the way Americans save from retirement.

With that, let’s review some of those changes – specifically the “So What” that comes along with these changes. As we can expect in a law that is less than a week old, there are still a lot of unanswered questions on the HOW some of these changes will be implemented as well as the nuances as to WHEN each of these new laws are supposed to be put in effect (very few are scheduled to take effect right away in 2023).

To start, we will divide the changes based on who they are targeted at, based on life and career stage. Here is a quick summary of those main changes:

For those in retirement:

  • The Required Minimum Distribution (RMD) starting age will be increased to 73 starting in 2023 and 75 in 2033.
  • The penalty for missed RMDs will be decreased from 50% to 25% in 2023.
  • Employer sponsored retirement plans with a Roth account will no longer be subject to RMDs starting in 2024.
  • A one-time Qualified Charitable Distribution (QCD) will be allowed for Charitable Remainder Unitrusts (CRUTs) and Charitable Remainder Annuity Trusts (CRATs)starting in 2023.

For those nearing retirement:

  • The IRA catch-up contribution will be indexed to inflation starting in 2024.
  • A new “super catch-up” contribution will be available for those ages 60-63 in employer-sponsored retirement plans starting in 2025.
  • Catch-up contributions must be made to Roth accounts for those who made over $145,000 in the previous year starting in 2025.

For those in the early- to mid-career stages:

  • Automatic enrollment in new employer-sponsored plans will be mandatory starting in 2025.
  • Automatic rollovers between employer-sponsored plans will be allowed starting in 2025.
  • Employers will be able to offer Emergency Savings Accounts of up to $2,500 per year starting in 2024.
  • Employers will be able to make matching contributions to retirement plans to match student loan payments starting in 2024.

For education savers and beneficiaries:

  • A portion of overfunded 529 plans can be rolled over to Roth IRAs in the name of the 529 beneficiary starting in 2024.


The details:

For those in retirement: More changes to Required Minimum Distributions

RMD Age Increased

Starting in 2023, Required Minimum Distributions (RMDs) are required in the year you turn 73 (previously 72 in 2022). In 2033, the starting age for RMDs will be increased to 75. This means that if you turn 72 on or after January 1, 2023 and 73 before January 1, 2033, your applicable age to start RMDs is 73. If you turn 75 on or after January 1, 2033, your applicable age to start is 75. This delay in RMDs allows for more years to control your income based on your needs and not mandated withdrawals, as well as increased years for proactive tax planning.

RMD Penalties Decreased

The new law also reduces the 50% penalty for missed RMDs to a less severe 25% penalty in the event that any portion of an RMD is missed in the year it is required to be distributed. It also reduces the penalty further to 10% in the event of prompt payment and acknowledgement of the missed RMD. This reduced penalty goes into effect in 2023.

RMDs for Employer Roth Accounts Waived

Starting in 2024, employer Roth accounts (such as 401(k)s, 402(b)s, and TSPs) will not be subject to RMDs – just like Roth IRAs. However, if you have funds in a Roth 401(k) and are 73 or over in 2023, you still have to meet your 2023 RMD in that account. This removes the urgency to roll over employer Roth 401K accounts into Roth IRAs as you near your RMD age and adds more flexibility in account ownership in retirement.

QCDs Expanded to CRUTs and CRATS

As of 2023, Qualified Charitable Distributions (QCDs) can be used to fund Charitable Remainder Unitrusts (CRUTs) and Charitable Remainder Annuity Trusts (CRATs) with a one-time gift of up to $50,000. Previously, QCDs to these trusts were not allowed. The new law does put two significant limitations to this opportunity however. First, stating that the QCD distribution must only be to a CRUT or CRAT that “is funded exclusively by qualified charitable distributions”. Secondly, all distributions to the trust beneficiaries will be classified as ordinary income, removing more tax preferred distributions of capital gains or qualified dividends like a “standard” CRAT or CRUT. Bottom line, there is an opportunity, but with a number of strings attached that may limit its usefulness to many.

For those nearing retirement: Opportunities to save more, but with complications.

IRA Catch-Up

In prior years, through 2023, the catch-up contribution for IRAs for those over 50 years old was held static at $1,000. A 55-year-old can contribute up to $7,000 ($6,000 base plus the $1,000 catch-up) in an IRA for tax year 2022. Starting in 2024 that catch-up limit will be indexed to inflation. This is an effort to increase that limit over time to better reflect its impact to savers getting ready for retirement. This won’t create a significant increase in the amount available year to year, but aligns it more so with other limitations that are indexed to inflation, allowing it to increase over time. For those looking to maximize this savings every year, you will need to verify the new annual value each year.  

“Super Catch-Up”

SECURE 2.0 introduces a new category of catch-up contributions, the “Super Catch-Up”, for those ages 60-63 in 401(k)s, 403(b)s, and the Thrift Savings Plan. Current law allows in 2023 a catch-up contribution in these accounts of $7,500 (on top of the standard limit of $22,500 for a total of $30,000). Starting in 2025 those in that narrow age range are eligible to contribute a catch-up of $10,000 or 150% of the standard catch-up. Starting in 2026 this Super Catch-Up is adjusted for prior year’s inflation rate.  In effect this creates three tiers of contribution limits in these employer sponsored plans based on ages:

  1. Under 50: Base Contribution ($22,500 in 2023);
  2. 50-59 and 64+: Base plus Standard Contribution ($22,500+$7,500 in 2023);
  3. 60-63: Base plus the Super Catch-Up.

Bottom-line, as you near retirement you can potentially add even more to your employer sponsored retirement plans, but have to be vigilant of your specific applicable limits each year.

Catch-Ups Forced to Roth

With this one the new law gives us another significant complication. Starting in 2024 all catch-up contributions, that’s anything above the base contributions for that account type, must be done into a Roth account. Funds in a Roth account are a powerful thing for your financial future, but with a Roth contribution you have to pay the tax now. This takes away the opportunity to take pre-tax deductions on catch-up contributions for those in higher tax brackets. This only applies to those individuals with wages over $145,000 in the prior year. To help paint that picture a bit, let’s say you are 55 years old in 2024 and made $185,000 in wages in the prior year, 2023. In 2024 you can fund your 401(k) up to $30,000 (assuming no changes from 2022 limits for illustration purposes). But that $7,500 of catch-up contributions would have to be made to the Roth 401(k) and you would be on the hook for those income taxes in 2024. This is one of the key “revenue generators” included within the bill, and has some of the biggest questions on the HOW this would be put into practice. This provision makes the importance of a holistic planning approach, ensuring to balance your past, current, and future tax situation, current assets, and lifestyle plan even more important in making the decision to contribute catch-up funds to your employer plans.

For those in the early- to mid-career stages: More changes to your employer sponsored plans (401(k), 403(b), Thrift Savings Plan).

Automatic Enrollment

Starting in 2025, new employer plans (yes, just for any new plans) are required to automatically enroll employees starting at a minimum of 3% contributions. Many employers already have automatic enrollment with a gradual increase over a timeframe, but up until 2025 it is optional for employers. Automatic enrollment has been found to be a great tool in helping individuals start to save for retirement. If you are already diligent to ensure you get your employer match this is a no-change change; however, if you change employers make sure you read the plan documents carefully to determine its specific contribution increase path to avoid any surprises down the road.

Automatic Rollovers

The new law allows for 401(k) providers to automatically move your old 401(k) from a prior company to your new employer’s plan starting in 2025. This is an attempt to combat the “lost 401(k)” issues some individuals experience as they move from one company to another and potentially leave behind retirement savings. This is another item with many unknowns around HOW this would be realistically completed. Considering the questions on how this would be put in practice, it is still recommended that you carefully track prior accounts in employer sponsored plans and rollover to either a Rollover IRA or your new employer plan as appropriate for you.

Establishment of an Emergency Savings Account

To help employees save for emergencies, and reduce the reliance on hardship withdrawals from retirement accounts or taking on debt, the new law introduces an option for employers to offer an Emergency Savings Account starting in 2024. This would be savings in an after-tax basis, so no pre-tax deduction for these contributions. This would be limited to contributions of $2,500 per year and 4 withdrawals per year. If you find yourself struggling to meet your emergency savings needs, this may be a good tool for you to automate that deduction to the account and avoiding the need to reach into your 401(k) or short-term debt to fund those surprises.

Student Loan Match

This targets those individuals that are not contributing to retirement savings through work due to needing the cash flow to pay off student loans. Starting in 2024 companies can match student loan payments in retirement plans, like they would if the individual was contributing directly to the retirement plan up to the companies match. This would allow those in this position to start building some retirement savings and take advantage of compounding over a longer timeframe.


Many of these provisions are optional, not mandatory, to the employer to include. If there is a provision that you are particularly interested in and want included in your company’s plan be proactive and reach out to your Human Resources point-of-contact and let them know.

For education savers and beneficiaries: There is more flexibility with savings in 529 Accounts.

529 Rollover Option

This provision has the potential to affect you across the life stages. 529s can be a great tool to save for education related expenses. Recently the 529 options were expanded to allow for expenses for K-12 and trade schools, in addition to college. However, in the event of overfunding a 529 there were limited options to get money out of the 529 without penalties. The new law, starting in 2024, allows extra funds in a 529 account to be rolled into a Roth IRA owned by the 529’s beneficiary. There are, of course, limits in place: you can only make contributions up to the individual IRA contribution limit ($6,000 in 2022), there’s a lifetime cap of $35,000, and the 529 must have been open for at least 15 years.

To illustrate this, let’s assume a grandparent established a large 529 when their grandchild was born. That grandchild graduates in 2025 with a bachelor’s degree and is done with schooling, and there is $15,000 still in the 529. One option that has been used widely is reassigning that 529 to another individual, like another grandchild. With the new law the grandparent could instead use the 529 funds to make a Roth IRA contribution on behalf of the grandchild in 2025, 2026, etc. until those funds run out. This new provision could provide for some new and unique opportunities for families both in the event of excess funds and in the development of a gifting strategy prior to education. However, this is another of the provisions that has a lot of questions in terms of the HOW we will see this put into practice going forward.

In Conclusion (for now):

This is by no means a comprehensive list of changes within the bill, but hopefully, it provides insight into the potential impacts from some of the major provisions of the new law and how they may affect our financial lives.

With change comes opportunities. By leveraging a financial plan that encompasses all parts of your financial life, these new “tools” can be thoughtfully put to use to reach your unique goals.

Federal Income Tax Deadline Extended for Tax Year 2020

On Wednesday, March 17th, the Treasury Department and Internal Revenue Service (IRS) announced in a news release (IR-2021-59) that they were extending the filing due date for individuals for the 2020 tax year from April 15th, 2021 to May 17th, 2021. Tax payers can postpone federal income tax payments until May 17th, 2021 without penalty or interest. Penalties and interest will resume on any unpaid balance as of the new deadline.

It’s important to note, the extension does not apply to estimated tax payments due on April 15th. Additionally, unless your state follows with their own extension, state tax deadlines remain unchanged at this time.

IRS Commissioner Chuck Rettig shared in the news release, “This continues to be a tough time for many people, and the IRS wants to continue to do everything possible to help taxpayers navigate the unusual circumstances related to the pandemic, while also working on important tax administration responsibilities. Even with the new deadline, we urge taxpayers to consider filing as soon as possible, especially those who are owed refunds. Filing electronically with direct deposit is the quickest way to get refunds, and it can help some taxpayers more quickly receive any remaining stimulus payments they may be entitled to.”

The extension does not require additional forms; however, extending until October 15th still requires a extension request be filed.

I’m Selling My Home. Will I Pay Taxes on the Gain?

Note: This article was published on January 11th, 2021 and based on tax law at the time. Tax laws are subject to change.

As financial planners, we often have clients wanting to sell their home. They may be doing it to purchase a larger home for their family, downsizing their home in retirement, or simply deciding to move to another area. At the time of this writing, some housing markets are very hot, and homes are being bought and sold at a rapid rate. In saying this, we often have clients asking about the tax consequence of selling their home.

Your home is considered a capital asset. It is important to understand how capital assets are taxed when they are sold. When capital assets are sold, they may receive different tax treatment than ordinary income (e.g. wages). When an asset with an appreciated price is sold, the gains on the sale (sale price minus cost basis) are treated as either short-term capital gains or long-term capital gains in the year the asset is sold. This is reported on Schedule D of the tax return. A short-term gain is when the asset was held for one year or less. These are taxed at your ordinary income tax rate, which depends on your Adjusted Gross Income (AGI). A long-term gain is when the asset was held for more than one year. Long-term capital gains receive preferential tax treatment and are taxed at either 0, 15%, or 20%, again depending on your AGI.

There is good news. The IRS tax code will allow the capital gains on the sale of your home to be excluded from taxation (not counted in your AGI) under specific limits, if certain requirements are met. This rule is found under “Section 121” of the tax code. If you file “Single” on your tax return, you may exclude up to $250k worth of capital gains from the sale of your home. Likewise, if you file “Married Filing Jointly”, up to $500k of capital gains from the sale of your home may be excluded. The transaction is not reported on Schedule D of the tax return and does not require any additional tax forms.

As previously mentioned, there are certain requirements that must be met to qualify for the Sec. 121 exclusion. One rule is that the home must be considered your principal residence. The taxpayer must have lived in the residence for two years within the five-year period preceding the sale of the home. These two years do not have to be consecutive. Either 24 full months or 730 days will satisfy the two-year ownership and use requirements. It’s also important to note that there are certain exemptions that exist if the two-year requirement is not met.

See below for some common situations regarding Sec. 121 of the tax code:

Example 1

Jeff is single and bought his home in 2012. The purchase price then was $100k. He has not made any additional improvements to the home. He sells his home for $200k in 2021. This home has been his principal residence every year for the last 9 years. Jeff meets the requirements under Sec. 121 of the tax code, meaning he can exclude up to $250k in capital gains from this transaction. The $100k in gains that resulted from the sale of his home are excluded from taxation. He will not have to report this on his Schedule D or add $100k to his AGI on his tax return. 

Example 2

Jason’s grandmother passes away. She leaves her home to Jason in her will. She bought the home 40 years ago for $50k. The home was valued at $100k on the date of her death. Jason  inherits the home via the probate process. Because of this, Sec. 121 of the tax code doesn’t come into play. Under current tax laws, he receives the home with a “stepped-up basis” according to the value of the property at her death, which was $100k. If he sells the home immediately for $100k, he pays no capital gains tax. If he were to sell it in a few months later for $110k, he would be responsible for paying short-term capital gains tax on the $10k of gains.

I hope you found this information informative. Please click here for more information on this topic directly from the IRS website.

CARES Act – What May Affect You

The COVID-19 (COVID-19) pandemic has left its mark on global and domestic markets. Government guidelines to practice “social distancing” has significantly impacted commerce as consumers are staying at home. The U.S. stock market ended its historical bull run of eleven years in mid-March. Many businesses have suffered in this time, unfortunately resulting in many employees being laid off.

The United States Congress scrambled to create a stimulus relief bill to help aide the economy and the American people. The Senate passed the COVID-19 Aid, Relief, and Economic Security (CARES) Act on March 25, 2020. On March 27, 2020, the House of Representatives passed the bill, and it was signed into law by President Trump just hours later.

This bill is an estimated $2 trillion emergency fiscal package, marking the largest stimulus bill ever passed. The bill is quite expansive, totaling 335 pages in length. It covers quite a few areas including aide to state and local governments, aide to specific business industries, tax credits to businesses, and support to states for paying unemployment benefits. For the purposes of this article, the topics discussed will primarily focus on a few areas deemed applicable to a large portion of Americans.

Tax Updates & Changes

Prior to the CARES Act, Steven Mnuchin, Secretary of the U.S. Treasury, announced that the tax filing and payment deadline for 2019 would be moved to July 15, 2020. This also results in estimated tax payments for 1st quarter 2020, which are also normally due on April 15th, being delayed until July 15th. Estimated tax payment due dates for the remaining quarters of 2020 remain unchanged for now.

One change the CARES Act has implemented is a brand new income adjustment (above the line deduction) called a Qualified Charitable Contribution. This deduction can be claimed for up to $300 in charitable donations to qualifying charitable entities. To be eligible for the deduction, the donation must have been in cash only (appreciated-asset donations do not qualify). Cash used to fund a Donor Advised Fund is not eligible either. To claim the deduction, the taxpayer must not itemize deductions, meaning they take the standard deduction.

If you have questions about anything tax related a result of the bill, we recommend you speak with your Financial Planner or CPA.

Rebate Checks

One area of the bill that many Americans will benefit from is the “Recovery Rebate”. These rebate checks are being issued in the form of a refundable credit against 2020 income. The goal for these checks is twofold: Put money in the hands of Americans who have lost some of their income, but also help stimulate the economy with consumers spending more money. Each individual taxpayer may receive up to $1,200 (Married couples filing jointly eligible for $2,400) based on income levels from their 2018 or 2019 tax return; whichever is last on file. Each dependent child that is 16 and under also qualifies the taxpayer for an additional $500 credit. These checks will be issued in the coming weeks, while those who have a bank account on file from a tax refund are expected to receive their Recovery Rebate via direct deposit.

Although the credit is pegged against 2020 income, income levels from your most recent tax return on file (2018 or 2019) are used for eligibility. To be eligible for the full rebate check, a married couple filing jointly must have adjusted gross income (AGI) under $150,000. For those filing head of household, AGI must be under $112,500. A single taxpayer’s AGI must be under $75,000 to be eligible for the full amount. For every $100 of income over the AGI threshold, the rebate check will be decreased by $5.

Example: Charlie and his spouse Karen last filed their taxes in 2018. They have 2 children, ages 14 and 19. Charlie and Karen file their taxes as married, filing jointly. They are eligible for a maximum rebate check of $2,900 (2,400 + 500). Their AGI on their 2018 tax return was $178,000. This means their rebate will be reduced due to being over the income threshold. Their rebate check would be reduced by $1,400 (178,000 – 150,000 = 28,000; 28,000/100 = 280; 280 * 5 = 1400). The rebate check received will be $1,500.

As mentioned earlier, the rebate check is in the form of a refundable credit against 2020 income. There is good news for those that made too much money in 2018 or 2019 and are not considered eligible for the rebate check. If they face hard times in 2020 with a large reduction in income, they may become eligible for the credit once they file their 2020 taxes in early 2021. Also, for those whose income increases in 2020 and may no longer qualify, they will not have to repay the amount they received in 2019. Please note that the Recovery Rebate is considered a tax credit; therefore, it is not taxable income.

Required Minimum Distributions (RMDs)

The CARES Act has suspended RMDs from applicable retirement accounts for 2020. Even better news is that individuals who turned 70.5 years old in the second half of 2019, and chose to delay their 2019 RMD until 2020 (under old RMD rules prior to the SECURE Act), can also suspend taking RMDs until 2021 as well. For those that have already taken their 2020 RMD, but would like to undo it, there may be an option. This option would be in the form of a “rollover”. Rollovers that are not performed trustee-to-trustee can be completed as long as the individual moves assets from one account to the other within a 60-day period.  Since it is now early April, an individual who took their RMD in early February or after may be eligible for this option. They would just need to simply make a contribution back into the account for the same amount as the RMD previously taken within 60 days of the distribution.

This suspension of RMDs also applies to beneficiaries who now own an Inherited IRA. Owners of an Inherited IRAs (who took ownership of the account prior to 2020) can stretch distributions from the account over the course of their lifetime. The account owner of an Inherited IRA must take an RMD each year following the year they acquire the account. Unfortunately, there is no way to undo the distribution and place the assets back into the account.

COVID-19 Distributions

The bill also introduced a distribution that can be taken in 2020 from an IRA or employer-sponsored retirement plan in wake of the COVID-19 outbreak. This distribution can be taken for an amount up to $100,000 for individuals that have been affected or impacted in some way financially by the COVID-19 pandemic. Those that are considered impacted by the COVID-19 outbreak must be diagnosed with COVID-19, had a spouse or dependent diagnosed with COVID-19, laid off from work, owned a business that closed or reduced hours during the pandemic, or meet other criteria deemed appropriate by the IRS. A perk to the distribution is that it can be “paid back” over the next three years starting from the date the distribution is taken. This means those that had to take a COVID-19 Distribution will indeed be able to make contributions to that account in excess of normal maximum contribution levels for a three-year period. 

This COVID-19 Distribution will avoid a 10% early withdrawal penalty for those that take the distribution under age 59.5. Another perk to this distribution is that the income can either be reported all in 2020, or spread evenly over three years (2020, 2021, 2022). From a financial planning perspective, spreading the distribution income over three years may be more appropriate for some individuals, as this might keep them in a lower tax bracket and be more efficient in terms of tax savings. For those on Medicare that choose to take the COVID-19 Distribution in 2020, and report all the income in the same year, it may cause their Medicare premiums to increase in 2022 due to a two-year look back period for IRMMA.

Federal Student Loan Payments

Another major change brought forth by the CARES Act is the suspension of Federal student loan payments through September 30, 2020. During this time, interest will not accrue on these loans. Be sure to contact your custodian to ensure automatic payments are suspended. Payments are optional during this time. The great news about this suspension of payments is that borrowers who are in route for student loan forgiveness can still count the suspension period as months of payments towards their forgiveness payment plan.

For a complete look at the bill in its entirety, please visit the following link:

Secure Act Bring Changes to Your Planning

Over the summer of 2019, the House of Representatives passed the bipartisan Setting Every Community Up for Retirement Enhancement (SECURE) Act. On December 19, 2019, the Senate passed the bill, and it was signed into law by the President on December 20, 2019.

The bill affects many Americans and may potentially result in the update of many financial plans here at Longview. The bill is long and covers many areas including the following:

  • Required Minimum Distributions from qualified accounts
  • Contributions to Traditional IRAs past the age of 70.5
  • Changes to the stretch provision in Beneficiary IRA accounts
  • Updates to exceptions of penalties for early distributions from accounts
  • The use of 529 accounts to pay off qualified education loans.

There is a lot to cover! In this post, we’ll cover updates to Required Minimum Distributions (RMDs) from qualified accounts, which include vehicles like Traditional and Rollover IRA as well as 401(K) and 403(B) accounts that are in your name.

Required Minimum Distributions

As many of you are well aware, the magic age of 70 and a half (70.5) signifies the start of Required Minimum Distributions – a time in which you have to distribute a portion of certain types of accounts. The amount distributed is based on the balance of the account at the end of the previous year and a divisor based on your age at the current year. Let’s break that down a little more using Steve as an example:

Steve is 74 as of January 1, 2020, and his birthday is December 2. On December 31, 2019, Steve had an IRA that totaled $1,085,000. With his birthday in December, that means that Steve will be age 75 as of December 31, 2020, which will make his RMD divisor 22.9. So, knowing those two numbers, this is how we determine Steve’s RMD.

$1,085,000/22.9 = $47,379.91

As you can see, Steve must take $47,379.91 by December 31, 2020, and report that distribution as income on his 2020 tax return. Failure to take the distribution means he would face a 50% penalty on the amount in which he failed to distribute. To get a better understanding of what your RMD may look like, check out the IRA Required Minimum Distribution Worksheet from the IRS.

So, what does this have to do with the SECURE Act? RMDs are still the same in that a portion will need to be distributed based on your age in the current year; however, the age in which an individual has to start RMDs is now age 72 but only for those turning 70.5 after December 31, 2019. So, for those born before or on June 30, 1949, sorry, you still have to take Required Minimum Distributions starting at age 70.5.

As for those born on or after July 1, 1949, you will not have to start taking RMDs until you reach age 72. Let’s use Sue as an example as to how the change in the law will work now:

Sue’s birthday is July 11, 1949. In her annual meeting in 2019, Sue’s advisor told her of her upcoming RMDs starting 2020, given the fact that she would not turn age 70.5 until January 11, 2020. With the SECURE Act now in place, her RMD does not have to start until at least 2021, which in turn may present opportunities to consider and implement from both a financial and tax planning perspective.

One thing to note about her first RMD that is very similar to the former distribution rules is that she will not officially have to start taking her RMD until April 1 following the year that she reaches her RMD age. Under the old RMD rules, while she would have turned 70.5 in 2020, her first RMD would technically not have to be taken until April 1, 2021. The only caveat is that she would have to take her 2020 and 2021 distribution both in 2021, which would raise the amount of tax she would have to potentially pay on her 2021 tax return.

With the new RMD rules, Sue doesn’t have to take her first RMD until April 1 in the year following her 72nd birthday, which would be April 1, 2022. Again though, like before, if she did move forward with that, she would need to take both her 2021 and 2022 RMD in 2022 and report both of them on her tax return. Sometimes, this may make sense, but before implementing that, we strongly encourage you to speak with your financial planner before to see if it makes sense from a taxation standpoint, because it could affect not only the taxes paid but also your Medicare premium in future years. 

Qualified Charitable Distributions

For many of our charitably inclined clients, we may make a recommendation for them to complete a Qualified Charitable Distribution (QCD). For those who are unaware of what this is, when an individual reaches age 70.5, they can take their RMD or a portion of it (up to $100,000) and have that money sent directly to a charitable organization. The amount that is contributed by way of QCD is not counted towards any income on the income tax return. This has become even more important over the past couple years with the recent Tax Cut and Jobs Act of 2017, which increased the Standard Deduction, thus for many Americans there isn’t a tax benefit from an itemization standpoint of donating to a charitable organization.

The QCD has created a new way of making charitable donations a de-facto tax benefit. Here’s an example: 

Let’s say that Joe is 75 and has to take an RMD of $50,000. Joe is also charitably inclined and would like to give $10,000 to his favorite charity, but will still take the Standard Deduction on his tax return. With a QCD, Joe can take $10,000 from his RMD, give that directly to the Charitable Organization and then only have to report $40,000 towards his income on the tax return.

The QCD has always coincided with age 70.5 and the RMD age. Going forward, under the SECURE Act, while the beginning RMD age has changed for some, the QCD age will remain at age 70.5, meaning that an individual may have a couple of years to give from their qualified accounts before their RMD start age of 72. This, in turn, not only contributes to the goals for those who would like to give to charity but may also lower future RMDs, thus potentially lowering future tax liability too. As with any distribution strategy from your accounts, please consult with your financial planner to determine the most appropriate action to take that is in line with your goals, as well as provides benefits for you both now and in the future.

Tax Cut and Jobs Act of 2017 Overview

We previously shared with you details from the U.S. House of Representatives’ Tax Cut and Jobs Act  and the U.S. Senate’s Joint Committee on Taxation’ version under the same bill name, Tax Cut and Jobs Act. After negotiations between the two governing bodies, the Tax Cut and Jobs Act of 2017 is finalized and headed to the President’s desk.

Below is a brief rundown of some of the most notable changes for individuals and families. Most of the new tax laws are in effect for tax year 2018 and beyond unless otherwise noted.

Individual Income Tax Brackets

While House Republicans had proposed a four bracket system for income taxes, the TCJA retains the seven bracket system. However, rates and income thresholds have been adjusted. This means that almost all U.S. taxpayers will see a reduction in income taxes for tax year 2018. The current system’s income tax brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The new system sets the brackets at 10%, 12%, 22%, 24%, 32%, 35%, and 37%.  The income threshold amounts will continue to adjust for inflation.

Brackets Individuals Married Filing Jointly
10% Up to $9,525 Up to $19,050
12% $9,526 – $38,700 $19,051 – $77,400
22% $38,701 – $82,500 $77,401 – $165,000
24% $82,501 – $157,500 $165,001 – $315,000
32% $157,501 – $200,000 $315,001 – $400,000
35% $200,001 – $500,000 $400,001 – $600,000
37% $500,001 + $600,000 +

The decreased tax rates are not permanent, however, as there is a sunset provision. After 2025, without future legislation, the tax rates would increase. The Senate and House will be faced with deciding the fate of the sunsetting provision in future years.

Changes to Exemptions and Standard Deduction

One of the most notable pieces of the TCJA is the elimination of personal exemptions. The new legislation instead combines personal exemptions and the standard deduction into one single increased standard deduction amount. The new standard deduction amount is $12,000 for individuals, $24,000 for joint filers, and $18,000 for head of household. The additional standard deduction of $1,250 for blind individuals or someone over age 65 remains.

For larger families, this will mean an overall decrease in the combined amount when compared to the current combination of exemptions and standard deduction. However, the TCJA increases and expands the Child Tax Credit, from $1,000 to $2,000 per child, which should more than offset the loss of exemptions in most families. High income earners, $200,000 for individuals and $400,000 for couples, begin to phase out of the Child Tax Credit.

Changes to exemptions, standard deductions, and the child tax credit are subject to the 2025 sunset provision.

Changes to Itemizations

The Pease limitation on itemized deductions has been repealed. The Pease limitation is a reduction in certain itemized deductions that takes affect depending upon your filing status and income level. Once your income crossed the threshold amount ($261,500 for individuals and $313,800 for married filing jointly in 2017), itemized deductions would begin phasing out. The rule acts as a surtax on high income earning households. The repeal will result in a 1% to 1.3% reduction in taxes for high income earners. The sunset provision applies to this repeal, meaning the Pease limitation could return in 2026.

Additional changes to itemizations include:

  • Elimination of miscellaneous itemized deduction, including tax preparer fees, investment management fees, and unreimbursed employee business expenses.
  • $10,000 cap on combined state/local income tax and local property taxes.
  • Deductible mortgage interest only on the first $750,000 of new principal debt. Mortgages taken prior to December 15th, 2017 retain deductibility on the first $1,000,000 of principal debt.
  • Elimination of home equity indebtedness interest deductibility.
    • If a home equity loan is used to substantially improve the home, it is treated as “acquisition debt” and is still deductible.
  • Medical deductions were not repealed. Instead, the deduction was temporarily reduced to 7.5% of AGI for tax year 2017 and 2018. It reverts back to 10% of AGI in 2019.

Charitable Donations

Current rules limits donations to public charities to 50% of your AGI. The new rules increase the limitation to 60% of AGI making it easier to claim larger contribution or use carryforward charitable deductions.

The charitable mileage rate, which was expected to be increased, remains unchanged at 14 cents.

Capital Gains and Dividend Rates

There had long been concern that the 0% long-term capital gains and qualified dividends tax rate would be eliminated, but the TCJA retains the three-bracket system of 0%, 15%, and 20%. Under the old system, taxpayers in the 10% and 15% income tax bracket had a 0% capital gains tax rate. With the new tax bracket system, the capital gains rate is tied to an income threshold amount rather than the brackets. Thus, individuals with $38,600 and couple with $77,200 or less in income will have a 0% capital gains tax rate.

Instead of having the 20% capital gains tax rate take effect at the highest tax bracket, it now takes affect at the threshold amounts of $452,400 for individuals and $479,000 for couples. This means some tax payers in the new 35% income tax bracket will find themselves in the highest capital gains tax rate.

Unfortunately, the 3.8% Medicare surtax on capital gains and qualified dividends still applies. Individuals with income over $200,000 and couples over $250,000 will face the additional surtax. This effectively retains a four tax brackets of 0%, 15%, 18.8%, and 23.8% for capital gains and qualified dividends.

No Repeal of the Alternative Minimum Tax

The original bills by both the Senate and the House proposed a complete repeal of the Alternative Minimum Tax (AMT) system for individuals. Unfortunately, in negotiations, the AMT survived although the exemption amount has increased.

This difficult-to-understand supplemental income tax system dates back to 1969 and was originally designed to ensure wealthy taxpayers paid their fair share of taxes. Yet, over the years, the AMT began affecting more and more middle-income taxpayers. With the exemption amount increased to $70,300 for individuals and $109,400 for joint filers, fewer middle class taxpayers will be affected.

Kiddie Tax Rules

The Kiddie Tax is a tax on unearned income for children under the age of 19 or full-time students under 24. In 2017, tax law allowed for the first $1,050 of unearned income to be tax-free, the following $1,050 taxed at the child’s rate, and any income above that amount taxed at the parent’s rate. TCJA changes this so that the any amount above $2,100 is taxed at trust tax rates, not the parent’s tax rate. This is significant because the highest trust rate is 37% at ordinary income of only $12,500. It would take total income over $600,000 at the parents’ joint rate in order for the 37% tax bracket to apply.

Estate and Gift Taxes

The estate and gift tax exemption has effectively doubled allowing an individual to pass $11.2M and couples to pass $22.4M estate tax free. Portability of the exemption survived; if the first spouse to die doesn’t use the exemption, the surviving spouse can port the unused amount to themselves. The top rate remains at 40%. Some early discussion indicated that the estate tax could be repealed at a future date, but the repeal did not make it into the legislation. These changes are subject to the 2025 sunset provision.

Trust and Estate Tax Brackets

Tax brackets for trusts and estate were compressed, much like the individual income tax rates, leaving just four tax brackets – 10%, 24%, 35%, and 37%. However, the income thresholds tied to those tax rates did not change very much. Thus, it only takes $12,500 in trust or estate income before hitting the top bracket.

Education Planning

While a number of changes were expected to affect education planning, such as repeal of the Coverdell ESA plan and education tax credits, most did not make it into the final bill. However, one change is significant. You can now use up to $10,000 per year from 529 plans for private school expenses for elementary and secondary education. Previously, only the Coverdell ESA could be used tax-free for private educational institutions.

Alimony Credit

The bill eliminates the tax deduction for alimony paid and no longer taxes the alimony received for divorces finalized after December 31st, 2018.


  • Deductibility of student loan interest and out-of-pocket classroom expenses for teachers remains unchanged.
  • The mandate requiring that individuals retain health insurance has been repealed for 2019 and beyond.
  • No changes to 401(k) plans, IRAs, and Roth IRAs. However, the ability to recharacterize a previous Roth conversion has been repealed.
  • There are new rules for deferred compensation plans and equity granting plans, like stock option plans, that could result in funds being taxed earlier than under current plan designs. As a result, there may be changes to current plans.

Alabama Tax Credit Could Lead to Even Greater Savings For Those With Alternative Minimum Tax (AMT)

An contributor called the Alabama Accountability Tax Act of 2013 the “most radical education reform in decades”.  Similar legislation had only been passed in 16 other states at the time the Alabama Accountability Act passed in February 2013.1 It was developed with the intent to allow flexibility in meeting children’s educational needs, improve overall education performance, encourage innovation in meeting the needs of school systems and provide financial assistance through income tax credits.2 Since it was passed, there has been a great deal of controversy over the Act, which lead to a lawsuit over the constitutionality of the document. On March 2nd, the Alabama Supreme Court upheld the Act, so it is important to know how you may benefit from it.

The Act opens the door for Alabama residents to make donations to a Scholarship Granting Organization (SGO). Scholarship Granting Organizations are 501(c)3 (charitable) organizations that are created with the purpose of granting scholarships to eligible students at failing public schools so they may transfer to a private school.  The scholarships are provided to students who qualify based on family income requirements. All taxpayers who make a donation to a SGO qualify for a state tax credit of 50% of their state income taxes, up to $7500. C corporations also qualify for a 50% credit, but there is not a maximum limit on the amount of the credit. In addition, taxpayers can claim the donation as a charitable deduction on their federal return. For some, this is just a zero-sum game. The taxpayer receives a credit from the state, which lowers the state tax deduction by the same amount of the federal charitable deduction taken. However, for those who pay Alternative Minimum Tax (AMT), it actually results in additional savings because state taxes are disallowed for the AMT calculation, while charitable contributions are not.  

The Alabama Accountability Act outlines a process for making SGO donations and claiming the tax credit. The state has earmarked $25M for these credits on a first come, first serve basis. Please let us know if you are interested in learning more about this opportunity or about how to make a donation and claim a credit. This is not something you want to plan on waiting until the end of the year for if you are interested.

*In full disclosure, Jessica Smith serves on the board of a local Scholarship Granting Organization.

1 McClendon, Robert. (March 1, 2013) “Alabama Accountability Act FAQ, a guide to the most radical education reform in decades.” Retrieved April 24, 2015 from

2Alabama Accountability Act of 2013 (HB 84, 2013)