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A Guide to 2018 Tax Law Changes and More (Part 3 of 3)

8. The qualified medical expense deduction improves. One of the few itemized deductions kept under the tax reforms also has a lower threshold this year. You can now deduct any out-of-pocket medical expenses exceeding 7.5% of your adjusted gross income (AGI). This applies to qualified medical expenses in 2017 and 2018. (The old deduction threshold was 10%.)

9. 529 plan assets may now be used to pay for qualified elementary education expenses.
Prior to 2018, 529 plans were college savings vehicles only; assets within them were earmarked for payment of qualified higher education expenses. Now, federal tax law says you can also distribute up to $10,000 a year from a 529 plan to pay for K-12 tuition, tutoring, and linked curriculum materials and that these qualified distributions will be tax free. Some state laws governing 529 plans do not allow this, however. As a result, 529 plan participants in select states are being told to wait before devoting any 529 plan assets to elementary education, as they risk wading into a gray area in terms of tax law by doing so.

Incidentally, funds from 529 plans may not be used to pay homeschooling expenses for students who would otherwise attend classes in grades K-12.

10. No one may recharacterize a Roth IRA conversion. Before this year, a traditional IRA owner who “went Roth” and subsequently changed his or her mind had a chance to undo the conversion within a certain time frame. This option is now disallowed.

11. The federal estate tax exemption doubles. Very few households will pay any death taxes during 2018-25. This year, the estate tax threshold is $11.2 million for individuals and $22.4 million for married couples; these amounts will be indexed for inflation. The top death tax rate stays at 40%.

12. Two changes apply to the charitable deduction. The charitable deduction was retained amid the tax reforms, but middle-class taxpayers may have far less incentive to donate to charity than they once did due to the greater standard deduction. A pair of adjustments have been made. One, taxpayers can now deduct charitable donations equal to 60% of their incomes; previously, the limit was 50%. Two, charitable contributions made to a university or college that give the donor the right to buy sports tickets are no longer deductible.

13. Certain types of discharged student loan debt are now exempt from income tax. From 2018-25, no income tax will be applied to federal or private student loan debt discharged because of the borrower’s death or disability.

In the past, if a borrower died or became severely disabled while carrying an outstanding education loan balance, the lender could release the borrower from liability and reduce the debt to zero. The only problem: the I.R.S. viewed the discharged debt as the equivalent of income. A $10,000 discharged student loan would have ordinary income tax levied on it. Now, that will not happen. The new law does not mandate private lenders to discharge debt on these occasions, however.

Written by Nicole M. Albrecht

Nicole Albrecht may be reached at (951) 719-1515 or Nicole@thinkfas.com.

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