I hope you had a wonderful weekend! Looks like we might reach the low 50’s in Wisconsin this week!
LRPC’s Monday Morning Minute for this week, “Taxes: What’s New For 2017?” (presented below) comes to you courtesy of Schwab. As an independent, objective Registered Investment Advisory firm, Lawton Retirement Plan Consultants, LLC has access to research from many sources. Be assured that I will share enlightening, useful information with you each week. If you are short on time, make sure you take a look at each of the headings below.
As you work on your tax return for 2016, it may be wise to look at what is changing in the world of taxes for 2017. Understanding right now what is different this year ensures that you have ample time to reduce what you pay in 2017 taxes.
Have a wonderful week!
Taxes: What’s New For 2017?
By Rande Spiegelman, Charles Schwab & Co., Inc.
- Tax changes in recent years included an additional Medicare surtax for high-income earners, a new top rate for dividends and long-term capital gains, and the phase-out of itemized deductions for high earners.
- If you’re subject to higher taxes, it’s even more important to take advantage of whatever tax breaks apply to you.
- Learn more about this year’s inflation adjustments and common tax breaks, including retirement plan contributions and charitable giving.
Although there are no major tax law changes this year, there are still inflation adjustments and other routine changes to consider. Remember, it’s important to take advantage of the tax break you’re entitled to — it’s not what you make but what you keep that counts. Here are a number of items to consider as you plan for the year ahead.
Take advantage of federal income tax changes
To keep pace with inflation, the IRS has widened the federal income tax brackets and increased certain exemptions, deductions and credits. For additional information, please visit the IRS website.
Payroll and Medicare 2017 taxes
Payroll taxes for Social Security benefits are collected under the authority of the Federal Insurance Contributions Act (FICA), and often referred to as the FICA tax. For 2017, Social Security (Old-Age, Survivors and Disability Insurance, or OASDI) withholding remains 6.2%, but the wage base limit was raised from $118,500 to $127,500. That means a maximum of $7,886.40 per employee will be withheld in 2017 ($127,200 × .062).
The wage base for Medicare withholding remains unlimited (employee tax rate of 1.45%), but healthcare reform legislation in 2013 increased Medicare payroll withholding by 0.9% to 2.35% for amounts over $200,000 (single filers) or $250,000 (married filing jointly). Also, an additional 3.8% surtax applies to net investment income for taxpayers with adjusted gross income (AGI) over $200,000 (single filers) or $250,000 (married filing jointly).
Long-term capital gains and qualified dividends
A top rate of 15% applies to qualified dividends and the sale of most appreciated assets held over one year (28% for collectibles and 25% for depreciation recapture) for single filers with taxable income up to $418,400 ($470,700 for married filing jointly). Long-term capital gains or qualified dividend income over that threshold are now taxed at a rate of 20%.
If a married couple already has $470,700 of taxable income and an additional $100,000 in long-term capital gains and qualified dividends, the entire $100,000 would be subject to the 20% rate. If, however, they only had $400,000 of taxable income and $100,000 in long-term capital gains and qualified dividends, then $70,700 of the additional amount would be taxed at 15% and $29,300 would be taxed at 20%.
Phase-out of itemized deductions and exemptions
For 2017, the phase-out of certain itemized deductions and exemptions applies to single taxpayers with AGI above $261,650 and married taxpayers filing jointly with AGI above $313,800.
See if you’re exempt from the Alternative Minimum Tax (AMT)
The AMT income exemption amounts increase in 2017 to $84,500 for married couples filing jointly and $54,300 for single filers.
Take advantage of lower tax rates for children
In 2017, children under 19 will pay no federal income tax on the first $1,050 of unearned income (such as capital gains or interest) and will be taxed at their own rate on the next $1,050. However, they will be taxed at their parents’ tax rate on unearned income in excess of $2,100. (This will also be the case for full-time college students under age 24 unless their earned income is greater than one-half of their parents’ support.)
Individuals age 19 and older (and dependent full-time college students age 24 and older) pay 2017 taxes at their own rate.
Boost your retirement savings and potentially enjoy tax benefits
A few things to note about contribution limits:
- Traditional IRAs. Money you put in a traditional IRA is generally tax-deductible. However, if you’re an active participant in a qualified workplace retirement plan, like a 401(k) or 403(b), restrictions apply. If you’re a single filer, your contribution is partially deductible if your modified adjusted gross income (MAGI) is between $62,000 and $72,000. If you’re a married couple filing jointly, your 2017 contribution is partially deductible if your MAGI is $99,000 to $119,000. If you don’t participate in a retirement plan at work, but your spouse does and you file jointly, your contribution is partially deductible if your MAGI is between $186,000 and $196,000.
- Roth IRAs. If you’re a single filer and your MAGI is $118,000 or less, your contribution limit is $5,500 (or $6,500 if you’re 50 or older) in 2017. The contribution limit is gradually reduced for those with MAGIs between $118,000 and $133,000. If you’re a married couple filing jointly and your MAGI is $186,000 or less, your contribution limit is $5,500 ($6,500 if you’re 50 or older). That contribution limit is gradually reduced for those with MAGIs between $186,000 and $196,000.
Anyone can convert all or part of a traditional IRA to a Roth IRA, regardless of income level or filing status. Converting could be advantageous if you expect to be in the same or higher tax bracket when you withdraw the money, have a reasonably long time horizon and can afford to pay the conversion tax from a source other than your IRA at the time of conversion.
Manage college expenses with these nifty tax benefits
Consider these tax-favored ways to pay for college costs:
- A Coverdell education savings account. If you’re a single filer, you may make a maximum contribution of $2,000 per year per child, subject to income limitations. Be careful if accounts are established by different family members for the same child. Total contributions may not exceed $2,000 in any one year.
- A 529 college savings plan. Although there’s no limit to how much you can contribute each year, each state’s plan has its own lifetime limit — typically more than $200,000 per designated beneficiary. You can also treat a 529 contribution as being made over five years for gift-tax. For example, a married couple could contribute up to $140,000 per child up front without using any of their lifetime gift tax credit.
- Tax credits. The American Opportunity Tax Credit is a modification of the Hope Credit and makes the credit available to a broader range of taxpayers. You may claim up to $2,500 on eligible college expenses paid from a non-529 account, subject to income limitations.
- Tax deductions. You may be able to deduct up to $2,500 of student loan interest, subject to income limitations.
Plan your gifts and estate to make the most of these tax breaks
The gift tax annual exclusion amount remains $14,000 for 2017. That means you generally can give up to $14,000 every year (or $28,000 for spouses splitting gifts) to any number of people without those gifts being taxed. You can also give unlimited amounts toward tuition or medical expenses if you pay the provider directly. Beyond that, the lifetime gift and estate tax exemption will apply.
Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to retirement plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or firstname.lastname@example.org or visit the firm’s website at http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.
Additional Important Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.