Last week we discussed a few of the provisions of the game-changing 2017 tax reform. We continue the discussion this week with some additional highlights of the tax changes that apply in 2018.
ABLE account liberalizations. Effective for tax years beginning after Dec. 22, 2017, and before Jan. 1, 2026, after the overall limitation on contributions to ABLE accounts is reached (i.e., the annual gift tax exemption amount; for 2018, $15,000), an ABLE account’s designated beneficiary can contribute an additional amount, up to the lesser of (a) the Federal poverty line for a one-person household; or (b) the individual’s compensation for the tax year. Additionally, the designated beneficiary of an ABLE account can claim the saver’s credit for contributions made to his or her ABLE account.
For distributions after Dec. 22, 2017, amounts from qualified tuition programs (QTPs, also known as 529 accounts) may be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account, or a member of such designated beneficiary’s family. Such rolled-over amounts are counted towards the overall limitation on amounts that can be contributed to an ABLE account within a tax year, and any amount rolled over in excess of this limitation is includible in the gross income of the distributee.
Expanded use of Sec. 529 accounts. For distributions after Dec. 31, 2017, “qualified higher education expenses” for purposes of code section 529 rules, include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year.
Crackdown on recharacterizations. For tax years beginning after Dec. 31, 2017, the rule that allows a contribution to one type of IRA to be recharacterized as a contribution to the other type of IRA does not apply to a conversion contribution to a Roth IRA. Thus, recharacterization cannot be used to unwind a Roth conversion.
Extended rollover period for plan loan offset amounts. For plan loan offset amounts which are treated as distributed in tax years beginning after Dec. 31, 2017, the period during which a qualified plan loan offset amount may be contributed to an eligible retirement plan as a rollover contribution is extended from 60 days after the date of the offset to the due date (including extensions) for filing the Federal income tax return for the tax year in which the plan loan offset occurs—that is, the tax year in which the amount is treated as distributed from the plan.
Estate & gift tax exemption increased. For estates of decedents dying and gifts made after Dec. 31, 2017 and before Jan. 1, 2026, the base estate and gift tax exemption amount is doubled from $5 million to $10 million. The $10 million amount is indexed for inflation occurring after 2011 and is expected to be approximately $11.2 million in 2018 ($22.4 million per married couple).
New holding period requirement for carried interest. Effective for tax years beginning after Dec. 31, 2017, there’s a 3-year holding period requirement in order for certain partnership interests received in connection with the performance of services to be taxed as long-term capital gain. If the 3-year holding period is not met with respect to an applicable partnership interest held by the taxpayer, the taxpayer’s gain will be treated as short-term gain taxed at ordinary income rates.
Like-kind exchange crackdown. Generally effective for transfers after Dec. 31, 2017, gain on like-kind exchanges is deferred only with respect to real property that is not held primarily for sale. However, under a transition rule, the prior-law like-kind exchange rules continue to apply to exchanges of personal property if the taxpayer has either disposed of the relinquished property or acquired the replacement property on or before Dec. 31, 2017.
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