05 Apr Tax Overhaul Impact: Financial Planning

As taxpayers struggle to understand the impact of what is being labeled “the most sweeping tax rewrite in decades,” the Law Office of Jennifer Guimond-Quigley has put together a three-part guide on the fundamental changes clients will face. This is the second part of that series.

The recent tax overhaul touches just about every person who files on April 15. Many key provisions have been permanently altered, including federal estate tax exemption levels and 529 plans. Below is a breakdown of how these two common facets of financial planning have been changed.

Estate Tax Relief Increased

The new changes are a huge win for those who face estate taxes. Generally, estates pay a 40 percent federal tax on inherited property. The threshold for the federal exemption increased significantly. For estates of those who pass away after December 31, 2017 and before January 1, 2026, the basic exclusion amount prior to a necessary inflation adjustment is $10,000,000. This means that in 2018, an individual can shelter $11,200,000 in assets from the federal estate tax, and that amount will increase each year through 2025. However, if there is no further Congressional action, the exemption level will revert back to the pre-2018 levels in tax year 2026.

Taxpayers need to remember that Illinois also employs its own estate tax, and its exclusion level of $4,000,000 per person remains unchanged for 2018.

529 Plans Are Expanded

A 529 plan is a tax-advantaged savings fund designed to encourage saving for future college expenses. As long as the funds withdrawn from the account are spent on qualified higher education expenses, they are tax free. Qualified costs include items such as, tuition, books, room and board, computer software and equipment at any eligible post-secondary institution.

Under the new tax reform, the 529 plan has been expanded to include expenses for tuition connected with enrollment or attendance at an elementary or secondary public, private or religious school. While the new change is permanent, account holders need to be aware that the 529 withdrawals are capped at $10,000 per year when the funds are used for public or private school tuition through 12th grade.

The tax overhaul brought significant changes, and individuals and families are encouraged to identify ways the alterations impact them now or in the future. To understand the full breadth of impacts and formulate a long-term plan, it is advisable to speak with a reputable tax professional.

Due to the complex nature of the new changes, it is recommended that taxpayers consult a trusted tax professional to understand how taxes will change. Read more in our tax overhaul series in regards to family law and exemptions and deductions.