4Thought Blog

4_thought_blog_graphic-red_border_-_sides_only.jpg

Gift Tax Exclusion to Increase; Other 2018 Cost-of-Living Adjustments

Posted by Concannon Miller on Thu, Nov 9, 2017

Find me on:

gift taxes.jpgThe IRS recently issued its 2018 cost-of-living adjustments. In a nutshell, to account for inflation, many amounts increased, but some stayed at 2017 levels. As you implement 2017 year-end tax planning strategies, be sure to take these 2018 adjustments into account in your planning. (However, keep in mind that, if Congress passes a new tax law, some of these amounts may change.)

Gift and Estate Taxes

The annual gift tax exclusion increases for the first time since 2013 to $15,000 (up from $14,000 for 2017). It’s adjusted only in $1,000 increments, so it typically increases only every few years.

The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. For 2018 the amount is $5.60 million (up from $5.49 million for 2017).

Individual Income Taxes

Tax-bracket thresholds increase for each filing status but, because they’re based on percentages, they increase more significantly for the higher brackets. For example, the top of the 10% bracket increases by $200 to $400, depending on filing status, but the top of the 35% bracket increases by $4,675 to $9,350, again depending on filing status.

2018 Ordinary-Income Tax Brackets

Tax rate

Single

Head of household

Married filing jointly or surviving spouse

Married filing separately

10%

  $0 - $9,525

 $0 - $13,600

  $0 - $19,050

  $0 - $9,525

15%

  $9,526 -  $38,700

 $13,601 -  $51,850

 $19,051 -  $77,400

  $9,526 -  $38,700

25%

 $38,701 -  $93,700

 $51,851 - $133,850

 $77,401 - $156,150

 $38,701 -  $78,075

28%

 $93,701 - $195,450

$133,851 - $216,700

$156,151 - $237,950

 $78,076 - $118,975

33%

$195,451 - $424,950

$216,701 - $424,950

$237,951 - $424,950

$118,976 - $212,475

35%

$424,951 - $426,700

$424,951 - $453,350

$424,951 - $480,050

$212,476 - $240,025

39.6%

Over $426,700

 Over $453,350

Over $480,050

 Over $240,025

The personal and dependency exemption increases by $100, to $4,150 for 2018. The exemption is subject to a phaseout, which reduces exemptions by 2% for each $2,500 (or portion thereof) by which a taxpayer’s adjusted gross income (AGI) exceeds the applicable threshold (2% of each $1,250 for separate filers).

For 2018, the phaseout starting points increase by $3,100 to $6,200, to AGI of $266,700 (singles), $293,350 (heads of households), $320,000 (joint filers), and $160,000 (separate filers). The exemption phases out completely at $389,200 (singles), $415,850 (heads of households), $442,500 (joint filers), and $221,250 (separate filers).

Your AGI also may affect some of your itemized deductions. An AGI-based limit reduces certain otherwise allowable deductions by 3% of the amount by which a taxpayer’s AGI exceeds the applicable threshold (not to exceed 80% of otherwise allowable deductions). The thresholds are the same as for the personal and dependency exemption phaseout.

READ MORE: Big Tax Changes for Businesses, Individuals in New House Bill

AMT

The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.

Like the regular tax brackets, the AMT brackets are annually indexed for inflation. For 2018, the threshold for the 28% bracket increased by $3,700 for all filing statuses except married filing separately, which increased by half that amount.

2018 AMT brackets

Tax rate

Single

Head of household

Married filing jointly or surviving spouse

Married filing separately

26%

 $0 - $191,500

 $0 - $191,500

 $0 - $191,500

 $0 - $95,750

28%

  Over $191,500

 Over $191,500

 Over $191,500

  Over $95,750

The AMT exemptions and exemption phaseouts are also indexed. The exemption amounts for 2018 are $55,400 for singles and heads of households and $86,200 for joint filers, increasing by $1,100 and $1,700, respectively, over 2017 amounts. The inflation-adjusted phaseout ranges for 2018 are $123,100–$344,700 (singles and heads of households) and $164,100–$508,900 (joint filers). Amounts for separate filers are half of those for joint filers.

Education- and Child-Related Breaks

The maximum benefits of various education- and child-related breaks generally remain the same for 2018. But most of these breaks are limited based on the taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within the applicable phaseout range are eligible for a partial break — breaks are eliminated for those whose MAGIs exceed the top of the range.

The MAGI phaseout ranges generally remain the same or increase modestly for 2018, depending on the break. For example:

  • The American Opportunity Credit: The MAGI phaseout ranges for this education credit (maximum $2,500 per eligible student) remain the same for 2018: $160,000–$180,000 for joint filers and $80,000–$90,000 for other filers.
  • The Lifetime Learning Credit: The MAGI phaseout ranges for this education credit (maximum $2,000 per tax return) increase for 2018; they’re $114,000–$134,000 for joint filers and $57,000–$67,000 for other filers — up $2,000 for joint filers and $1,000 for others.
  • The Adoption Credit: The MAGI phaseout ranges for this credit also increase for 2018 — by $4,040, to $207,580–$247,580 for joint, head-of-household and single filers. The maximum credit increases by $270, to $13,840 for 2018.


(Note: Married couples filing separately generally aren’t eligible for these credits.)

These are only some of the education- and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible.

READ MORE: 2017 Year-End Tax Planning: Looming Tax Reform Creates Challenges for Businesses

Retirement Plans

Not all of the retirement-plan-related limits increase for 2018. Thus, you may have limited opportunities to increase your retirement savings if you’ve already been contributing the maximum amount allowed:

Type of Limitation

2017 limit

2018 limit

Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans

$18,000

$18,500

Annual benefit for defined benefit plans

$215,000

$220,000

Contributions to defined contribution plans

$54,000

$55,000

Contributions to SIMPLEs

$12,500

$12,500

Contributions to IRAs

$5,500

$5,500

Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans

$6,000

$6,000

Catch-up contributions to SIMPLEs

$3,000

$3,000

Catch-up contributions to IRAs

$1,000

$1,000

Compensation for benefit purposes for qualified plans and SEPs

$270,000

$275,000

Minimum compensation for SEP coverage

$600

$600

Highly compensated employee threshold

$120,000

$120,000

Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits all will increase for 2018:

Traditional IRAs: MAGI phaseout ranges apply to the deductibility of contributions if the taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:

  • For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
    • For a spouse who participates, the 2018 phaseout range limits increase by $2,000, to $101,000–$121,000.
    • For a spouse who doesn’t participate, the 2018 phaseout range limits increase by $3,000, to $189,000–$199,000.
  • For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2018 phaseout range limits increase by $1,000, to $63,000–$73,000.


Taxpayers with MAGIs within the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $5,500 contribution limit (plus $1,000 catch-up if applicable and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.

Roth IRAs: Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:

  • For married taxpayers filing jointly, the 2018 phaseout range limits increase by $3,000, to $189,000–$199,000.
  • For single and head-of-household taxpayers, the 2018 phaseout range limits increase by $2,000, to $120,000–$135,000.


You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)

Impact on Year-End Tax and Retirement Planning

The 2018 cost-of-living adjustment amounts are trending higher than 2017 amounts. How might these amounts affect your year-end tax planning or retirement planning? Contact us for answers. We’d be pleased to help.

© 2017

Topics: Individual tax planning

Concannon Miller’s unique, holistic and intimate approach to financial health sets us apart from smaller CPA firms with more limited resources as well as mega firms where mid-sized clients struggle for attention. Contact us here to talk about improving your business.

This communication is designed to provide accurate and authoritative information in regard to the subject matter covered. However, the general information herein is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purposes of avoiding tax penalties.

Subscribe for more Timely Tips for Businesses

Recent Posts