The Special Needs Planning Team
Cynthia Haddad, CFP®, Alexandria Nadworny, CFP®, CTFA, John Nadworny., CFP®, CTFA
In collaboration with Andrea R. Maguire, CPA.
The Tax Cut and Jobs Act (TCJA) of 2017 is the largest piece of tax reform legislation that Congress has passed in over thirty years. The total impact will vary dramatically for each taxpayer.
Timing of the TCJA
With the notable exception of medical expenses (see below), TCJA begins to apply to individuals beginning January 1, 2018 and will sunset (go back to the previous law) on December 31, 2025.
Summarized below are some key changes that may impact you and could be specifically relevant to individuals with disabilities.
To read a summary of the impactful changes to all individuals, including people with disabilities, click here.
The Blind/Elderly Deduction retained.
Although personal exemptions have been done away with, individuals age 65 and over or blind, can claim an additional $1550 deduction if they file as single or head of household. Married couples filing jointly can claim $1250 if one meets the above requirement and $2500 if both do so.
The Medical Expenses Deduction has increased.
People may deduct qualifying medical expenses exceeding 7.5% (was 10% previously) of their adjusted gross income (AGI) for both 2017 and 2018. This increase applies retroactively to medical expenses incurred in 2017 and claimed on the 2017 tax return.
Repeal of Overall Limitation on Itemized Deductions.
The Act suspends the overall limitation on itemized deductions. Prior to tax year 2018, most allowable itemized deductions (other than medical, investment interest, casualty/theft or gambling losses) were limited for many upper income taxpayers.
The Child Tax Credit has doubled.
The child tax credit amount is now $2000 (from $1000) per qualifying child (the child must have a SSN) under age 17.
The TCJA widened the pool of eligible applicants. This credit will begin to phase out at AGI levels in excess of $400,000 for joint filers (was $110,000) and $200,000 for all other filers.
The refundable portion of the credit has increased by 40% allowing up $1,400 of the $2,000 credit to be refundable credit.
A New Family Credit .
Taxpayers are now able to take a $500 nonrefundable credit for qualifying relatives and for qualifying children who are not eligible for the $2,000 credit because they are age 17 and over. These qualifying children include those ages 17 and 18(or up through age 23 for full-time students and any age for adult children with a disability.)
Changes to the “Kiddie Tax”.
What is the kiddie tax? If a child (under the age of 19 or under the age of 24 and attending school full-time) has unearned income from net investment income such as; dividends, interest or capital gains, or income from a trust or UTMA, they must pay tax on that income in excess of $2,100.
In the past, earnings subject to the “kiddie tax” were taxed at the higher of the child or parents’ tax rates. Under the tax reform, beginning in 2018, the parents’ tax rate no longer matter rather a child’s net investment earnings in excess of $2,100 will be subject to estate and trust rates, marginal rates that quickly move upward.
The Exemption for Qualified Disability Trust (QDisT) or Third Party Special Needs Trust is Retained.
A QDisT may retain $4150- the amount of the exemption- tax-free each year. This is in contrast to a first party or grantor trust, which will have the income from the trust counted as part of the donor’s personal income.
Note: Many readers will have established third party special needs trusts that are not funded until their death. The following only applies if the trust is funded.
What is a QDisT?
- A QDisT is a non-grantor trust that meets certain rules and functions similar to a “complex” trust, meaning it does not require all of the income to be distributed to the beneficiary each year.
- A qualified disability trust is a third party special needs trust. This means the funds within are not created or owned by the beneficiary and the QDisT will file its own tax return.
- Beneficiaries must have a qualified disability as defined by the Social Security Administration and supported by proper documentation.
- The trust must be established before the beneficiary is age 65, however, the QDisT may claim the same treatment after beneficiary turns 65.
The kiddie tax rules do not apply to QDisT, unlike other trusts and individual tax filings.
QDisT Case Example :
Robin is Trustee of Julia’s QDisT. Julia is 15 years old. The QDisT has an investment portfolio worth $500,000, which generates $30,000 in taxable income. During the tax year, Robin paid for a vacation for Julia that cost $5,000 and for educational expenses of $5,000 for tutoring and related expenses. Robin charged a reasonable fee of $2,500 for the year.
Robin causes a Form 1041 to be filed for the trust, reporting the $30,000 income. As discussed above, there will be a $4,150 exemption used. Robin’s $2,500 in fees will be deducted for administrative expenses, and Julia’s $10,000 in distributions will be deducted. The trust will have a taxable income of $13,350. The QDisT will send a K-1 to Julia showing her distribution, and she will be responsible for reporting that $10,000 distribution on her personal Form 1040 tax return.
As the income is received as a distribution from a QDisT, the $10,000 will not be subject to the kiddie tax and Julia will be able to apply the new level of standard deduction, $12,000, toward her income.
Changes to the ABLE Law
The role of ABLE Accounts was expanded by the TCJA. We have provided a summary here based upon information from the ABLE National Resource Center.
- Increased annual contribution limit- now $15,000.
- ABLE to Work – this provision allows an ABLE account beneficiary who works and earns income to contribute funds above the $15,000 annual limit.
- The additional contribution may be up to the lesser of: the account beneficiary's earned income or the federal poverty line, which for 2018 is $12,060. This means it is possible to contribute up to $27,060 to an ABLE account in one year.
- Two additional elements of the law to be aware of when considering eligibility for the additional contribution:
- (1) the ABLE beneficiary may not be a participant in their employer-based retirement fund, including if an employer makes contributions to the fund on their behalf.
- (2) the Beneficiary's employment earnings deposited in an ABLE account are still counted in terms of Substantial Gainful Activity (SGA) or earned income, and will be taken into consideration when determining eligibility for certain public benefits.
ABLE to Work Case Example:
Sheila, an ABLE owner has a job and makes $13,000. She does not participate in her employer's retirement plan. Although her parents have put $15,000 into her ABLE account in 2018, Sheila can contribute an additional $12,060 of HER OWN MONEY into her ABLE account.
- Ability to Rollover funds from a 529 College Savings account to an ABLE -529A-account.
- Savers Credit – Provides access to the Retirement Savings Contribution Credit. An ABLE owner contributing to their own account, and meeting the following eligibility requirements, may claim this credit toward taxes owed with the maximum value reducing the taxes owed to zero. The ABLE owner must be:
- Age 18 or older
- Not a full time student
- Not claimed as a dependent on another person's return
Details about the Saver's Credit:
- Maximum credit is $2000 for an individual and $4000 for a couple
- Percent of your contribution allowed to take is reduced as your AGI (Adjusted Gross Income) increases
Saver's Credit Case Example:
You are an ABLE owner working and making $20,000. You have put $2000 into your ABLE account this year. You can take a credit of 50% of your contribution, equal to $1000 in this case, to reduce your tax liability. If possible, you can use this $1000 to contribute further to your savings.
As always, please contact us for more information about how the new tax law may impact your own personal planning.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Examples are hypothetical for illustrative purposes only. Individual results will vary.
Sources for this article:
ABLE National Resource Center
Decoding the Tax Cuts and Job Act, Larry Brant and Steven Nofziger, March18, 2018
Some Impacts of the New Tax Law on Older Adults and Disabled, Jeffrey Marshall, Marshall, Parker & Weber, LLC, December 2017
How will Tax Reform Impact Seniors and Persons with Disabilities, Nicolas J Sasso, Esq, 2018.
The ABLE Account Under the Tax Cuts and Jobs Act, Anna Hayes, Commonwealth Independent Advisor, July 11, 2018