What new tax code means for financial planning


Your Finances

By Kate Stalter

For The New Mexican

When Congress wants to get something done in a hurry, it manages. That's what happened with the rewrite of the U.S. tax code that was signed into law just before Christmas.

There's been plenty of attention on changes to tax brackets. But what does the new rule mean for your investments and your financial plan?

According to Michael Kitces, a noted author and speaker on financial planning and investment topics, "The legislation will result in substantive tax reform for corporations, with the elimination of the corporate alternative minimum tax [AMT] and consolidation down to a single 21 percent tax rate [from 35 percent], all of which are permanent."

"However," Kitces added, "when it comes to individuals, the new legislation is more of a series of cuts and tweaks, which arguably introduce more tax planning complexity for many, and will be subject to another infamous sunset provision after the year 2025."

Not all tax experts and economists are bullish. For example, Eric Toder, Institute Fellow and co-director of the Tax Policy Center in Washington, D.C., says the bill will "increase the federal budget deficit." Naturally, some politicians are already discussing possible government spending cuts.

Here are some ways the new law could affect your hard-earned savings and investments, as well as a look at changes to government programs that retirees depend on.

Investment-related changes

Preferential treatment for long-term capital gains and dividends will not change, which is good news for many investors.

However, the 3.8 percent Medicare surtax on investment income for taxpayers with income higher than $200,000 (or $250,000 for those married and filing jointly) was retained.

The new law repeals rules pertaining to recharacterizations of Roth conversions. In plain English, this means you can no longer convert a traditional Individual Retirement Account to a Roth, but later change your mind and undo the conversion. One-time Roth conversions, which can benefit retirees, are still allowed.

Changes to Social Security, Medicare

House Speaker Paul Ryan and Senator Marco Rubio stirred up anxiety in recent media appearances. In a December interview with Denver radio host Ross Kaminsky, Ryan said, "We're going to have to get back next year at entitlement reform, which is how you tackle the debt and the deficit." He cited Medicare and Medicaid as "problems."

Rubio gave an interview to Politico Playbook, saying that spending cuts could come from structural changes to Medicare and Social Security.

Laurence Kotlikoff, an economics professor at Boston University and consultant to our firm, says it can be problematic for elected politicians to focus on these issues.

"I would not have them design a bridge across the Charles River," he says. "We need to have rational health care" and "we need to shut down the old [Social Security] system, pay everyone off and move the money into personal accounts that are collectively invested and converted into annuities."

For the moment, recipients of Social Security, Medicare and Medicaid should realize that these programs are considered mandatory by the federal government. As such, it is required that Congress fund them. Despite panicked reports you may read on the internet, there is almost zero risk that funding will be cut off overnight and these programs dissolved.

There was concern that Medicare would be cut in 2018 but Congress enacted a stopgap measure to maintain current spending.

However, that could mean cuts down the road.

When it comes to Social Security, keep in mind: Congress has never slashed the core benefit for current recipients. Any "cuts" would look different. For example, Republicans have discussed using the Chained Consumer Price Index as a new gauge of inflation. This metric assumes consumers trade down for a cheaper good or service when other options are too expensive. It follows, then, that this would result in lower cost-of-living adjustments.

Another way to cut benefits is to raise the retirement age. Already, people born in 1960 or later have to wait until age 67 to receive their full Social Security benefit. Although no changes to the full Social Security age have been made since 1983, don't be too shocked if Congress begins inching this higher.

Confirmed changes

to Social Security

Although these were not part of the new tax legislation, some changes to Social Security will affect retirees in 2018. As you may have heard by now, the Social Security Administration will institute a 2 percent increase to benefits.

There is also a higher tax cap. Workers will contribute 6.2 percent of earnings up to $128,700 in 2018. That's an increase of $500 over 2017. The Social Security Administration expects about 12 million Americans to pay the higher tax.

There also will be a slightly higher earnings limit for people below full Social Security age who continue working while collecting their benefit. You may now earn up to $17,040, a $120 increase over 2017's limit.

As with anything enacted by Congress, expect more changes and more debate. Expect unintended consequences. Technical corrections will almost certainly be on the horizon, along with an army of tax lawyers and sophisticated CPAs who will unearth new strategies designed to exploit any loopholes.

To shed light on these topics, we are offering a seminar with more detailed information about how the new law will affect investors, and what your Social Security and Medicare claiming strategies should look like. If you have retirement on the horizon, you don't want to miss this workshop, "New Financial Strategies For 2018: Investment Taxes, Social Security and Medicare."

Kate Stalter, founder of the independent firm Better Money Decisions, helps people throughout Northern New Mexico plan for retirement. For a free portfolio review and consultation, contact her at 844-507-0961, ext. 702, or kate@bettermoneydeci­sions.com.




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