We’re fresh off the deadline for the filing of our 2017 tax return. Now before you put taxes out of mind for another year, it’s important to look ahead to 2018. The federal legislature enacted a new tax law which reformed the tax code in significant ways, affecting nearly every person who files a tax return. The law became affective on January 1, 2018, which means the tax return you file next year in 2019 will incorporate all the new changes. We’ll take some time to summarize a few of the notable changes here, but by no means is this an exhaustive list. We encourage you to talk to an elder law attorney as well as a certified professional accountant so you can plan for any new tax exposure and utilize the planning tools and opportunities available to maximize your benefits.
Federal Estate Tax vs. Washington State Estate Tax
One of the more commonly talked about reforms is the doubling of the federal estate tax exemption limit from $5.49 million to over $11 million. Previously, federal estate tax exposure only applied to the portion of an individual’s net estate which exceeded $5.49 million at time of death becomes subject to federal taxes. The terms “inheritance tax” or “death tax” are a bit misunderstood in this sense, as many citizens do not reach the $5.49 million exemption limit and far fewer are ever to reach an $11 million threshold. Furthermore, married couples can elect what’s called “Portability” and when done properly, has the effect of doubling the exemption for the marital community to over $22 million. In sum, only those with substantial estates will benefit from this particular exemption increase.
For our clients, the Washington State estate tax exposure is far more likely to apply as exemption limits are significantly lower. As of 2018, the amount of an individual or married couple’s net estate at time of death exceeding $2.19 million will be subject to a hefty estate tax of 40%. Moreover, there is no “Portability” election for married couples. However, depending on your situation and whether you are married, there may be other ways to increase exemption limits such as creating a Revocable Living Trusts and/or using charitable gifting to reduce your taxable estate.
Standard Deductions & Child Tax Credit Increases
There has been a substantial increase in the standard deduction. Each individual now has a standard deduction of $12,000 (up from $6,350) and married couples can now deduct $24,000 (up from $12,700) without having to itemize tax returns. In theory, this will help reduce the number of people to itemize deductions on their tax returns, making them more cost effective and less burdensome. Similarly, an increase in the Child Tax Credit doubled from $1,000 to $2,000 per child goes into effect beginning this year. But, while the standard deductions and child tax credits increased across the board, there are also some notable decreases in deductions.
Medical Expenses & Health Insurance
Many of our loved ones, particularly those who are disabled and/or receiving care at an assisted living or nursing home, spend a large percentage of their disposable income on medical care, leaving little to pay the resulting taxes. In 2017 and 2018, most, if not all, of these individuals were able to deduct out of pocket medical expenses incurred in excess of 7.5% of their total Adjusted Gross Income (AGI). Thankfully, this does not change next year for your 2018 tax return. However, the deduction will decrease beginning January 1, 2019. After that time, individuals will only be able to deduct the portion of medical expenses that exceed 10% of their AGI.
Another big change is the removal of the tax penalty for people who failed to obtain health insurance coverage during the year. Beginning with your 2018 tax return, which is to be filed in 2019, the existing penalty will no longer apply.
Charitable giving generally receives favorable treatment in reducing our tax exposure. As such, it is often employed as part of one’s estate plan, both before and after death. Gifts made during your lifetime tend to reduce your taxable income while testamentary gifts tend to reduce your taxable estate. The tax reform modified several aspects to charitable gifting, which affect the timing and amount of gifts. We encourage everyone, but particularly individuals and married couples whose estates are at or above the estate tax limits described above, to talk to a CPA about how these changes may affect you and your loved ones.
These are just a few of the changes this tax reform has brought to our attention. Every individual’s financial situation is different and we encourage everyone to not only keep their estate plan up to date, but to also work with a financial advisor and certified professional accountant who will properly guide you through these and any future tax law changes. For more information about how these changes affect you or your estate plan, please feel free to contact our office.
As always, thanks for reading
The team at the Elder Law Offices of Barry M. Meyers.
Barry M. Meyers
David M. Neubeck
Sara LC Hulford
Elder Law Offices of
Barry M. Meyers, P.S.
DISCLAIMER: The content of this newsletter is: for information purposes only, subject to change by government agencies, should not be relied upon as current, and, does not constitute legal advice. Reading this newsletter does not establish an attorney-client relationship.