2017 IRA Contribution Rules

The deadline to make IRA contributions for tax year 2017 is Tuesday, April 17. The maximum contribution is $5,500 per individual ($6,500 if age 50 or over) or 100 percent of earned income, whichever is less.

There are income limits which determine whether you can deduct your Traditional IRA contribution or if you qualify to make a Roth contribution. The following table gives the phase-out range for the most common circumstances. Keep in mind that if neither you nor your spouse participates in a work-sponsored plan, you can deduct IRA contributions regardless of your income.

Do you qualify to deduct your Traditional IRA contribution?
If your income is less than the beginning of the phase-out range, you qualify. If your income is over the phase-out range, you do not. If your income falls inside the range, you partially qualify.

Modified Adjusted Gross Income Phase-Out Range
Tax Filing Status For 2017 Contributions For 2018 Contributions
Single, participates in an employer-sponsored retirement plan: $62,000 – $72,000 $63,000 – $73,000
Married filing jointly, participates in an employer-sponsored retirement plan: $99,000 – $119,000 $101,000 – $121,000
Married filing jointly, your spouse participates in an employer-sponsored retirement plan, but you do not: $186,000 – $196,000 $189,000 – $199,000

Do you qualify to contribute to a Roth IRA?

Modified Adjusted Gross Income Phase-Out Range – Roth
Tax Filing Status For 2017 Contributions For 2018 Contributions
Single: $118,000-$133,000 $120,000-$135,000
Married, filing jointly: $186,000-$196,000 $189,000-$199,000

If your filing status differs from those listed above, please contact your advisor and he or she can help you determine whether you qualify.

Harli Palme, CFA, CFP®


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What Do You Need to Know About the Tax Cut and Jobs Act?

Major tax legislation generally only happens around once a decade. The last time we had a major re-write of the tax code was in 2003. Just like that round of legislation, most of the individual provisions in the Tax Cut and Jobs Act of 2017 (TCJA) are not permanent and will roll back in 2025. Legislators have indicated that they want to revisit the permanency of those provisions if fiscal indicators show that the bill is not adding to the deficit. Focusing on individual tax laws, we will look at the most common and impactful changes.

Beginning with income deductions, TCJA will remove personal exemptions from the tax code. In 2017, the value of this deduction was $4,050 per individual claimed on the tax return. This deduction was effectively collapsed into the standard deduction, which is currently $6,350 for a single person and $12,700 for a couple filing jointly. The new standard deduction will be $12,000 for a single person and $24,000 for a couple filing jointly. This creates a higher threshold for those seeking to utilize an itemized deduction. To make matters worse, many of the allowable itemized deductions have been either limited or fully eliminated. One sore spot for those taxpayers living in high tax states is a deduction cap of $10,000 on property taxes and state income Taxes. This limitation is an aggregated cap of these deductions. Miscellaneous itemized deductions have also been eliminated. The most common of which include tax preparation fees, investment management fees, and various unreimbursed employee expenses.

The mortgage interest deduction is also another itemized deduction that has come under scrutiny. The deductible limit of a new mortgage after December 15th, 2017 is $750,000 – a reduction from the current limit of $1 million. In addition to this, home equity interest will no longer be an allowable deduction on the Schedule A and there is no grandfathering of this rule. Charitable giving deductions were maintained, as well as medical expense deductions, with a lower threshold for two years. However, with the reduction of taxes paid deductions, removal of miscellaneous deductions, limitation of mortgage interest, and raising of the standard deduction; it will become more difficult to meet the threshold of itemized deductions going forward. This is especially true for retirees with paid off homes.

Now for some good news – tax rates are headed down. There will still be 7 tax brackets, but the rates are going down by 2-3% in each of the brackets. There are some adjustments to the income limits of each bracket, but the top bracket is reduced by 2% to 37%. Another sigh of relief for many taxpayers is that the Alternative Minimum Tax (AMT) will no longer affect taxpayers with under $500,000 of income for a single person, and $1,000,000 of income for a couple. In addition to raising the income limit, the exemption was also expanded. Additionally, those with minimum tax credits will be eligible to carry them forward and utilize them in future tax years. The relief on the tax rate and AMT front should help soften the blow of the lost deductions for many.

For those with children or grandchildren, the next two sections are important. With the loss of personal exemptions for dependents, this could have created a tax burden for families with more than two children. However, there was an expansion of the child tax credit, including an increase in the credit from $1,000 to $2,000, and an increase in the income phase out to $200,000 for a single person and $400,000 for a couple. As a result, a family with 4 children and income under $400,000 would receive an $8,000 tax credit. It is also important to note that there is a new tax credit for dependents who are not qualifying children, which could include college age students or even dependent parents or siblings.

The new law makes an important-to-note change to how kiddie taxes are calculated. Currently, unearned income is taxed at either the child’s tax rate, or the parent’s if it is above $2,100. Under TCJA, instead of the additional tax being calculated at the parent’s rate, it will now be calculated at the Estate/Trust tax rate. This is problematic, especially for inherited IRAs with minor beneficiaries because the tax rate hits the top tax bracket of 37% at just $12,500 of income. Fortunately, much of the income being earned by custodial accounts is tax-advantaged qualified dividends and capital gains, which will be taxed at the long-term capital gain rates of 15%, 20%, or 23.8% (where the Medicare Surtax applies). One strategy to reduce future tax rates in custodial accounts is to consider incurring capital gains in 2017 where the capital gain tax rate will be at or below 15% on the parent’s return. This is preferable because the tax brackets for individuals are much larger than the tax brackets for Estates and Trusts. A relatively small amount of income for minors will cause them to be taxed at the highest capital gain rate in 2018 and beyond. 529 plans also received some attention in the new law. The qualified usage of 529 dollars was expanded to include a $10,000 per student per year tax-free distribution for private elementary and secondary schools.

For those looking for additional estate planning options, TCJA has resulted in an expanded estate tax exemption of $11.2 million per person. This results in a maximum exemption of $22.4 million for a married couple utilizing both exemptions. The law continues to have a tandem gift tax exemption, tied to the amount of the estate tax. This means an individual is able to give away up to $11,200,000 without incurring any gift taxes.

There were a few notable new provisions, including a 20% deduction to “pass through” business income (excluding service based businesses like attorneys, medical professionals, and accountants, unless their total income is less than certain income limits), future alimony treatment, the repeal of the moving expense deduction, and changes to the Roth re-characterization rules. Additionally, corporate tax rates have been reduced to 21%, the new inflation measure for tax purposes will be Chained CPI, and the individual insurance purchase mandate has been repealed. These three provisions are permanent and will not rollback after 2025.

There were also a number of provisions floated in either the House or Senate bills along the way that never made it into the final bill. A few of these items are the removal of the student loan deductions, removal of the medical expense deduction, changing to “FIFO” or First in, First Out accounting method for selling stock, and changes to the capital gains exclusion for selling your primary residence.

It may be beneficial to defer income into 2018 as much as possible, and incur deductions in 2017 where possible.   If you have questions about increasing charitable giving prior to the end of the year to take advantage of 2017’s lower standard deduction, reach out to your advisor as soon as possible. Our custodians work on a best effort basis as we near the end of the year. Those utilizing a Qualified Charitable Distribution from IRAs as their sole charitable giving mechanism are not affected by the changes to the standard deduction. With all of these changes, we continue to stay on top of optimal tax planning strategies both for end of year purposes, as well as looking forward into 2018.

Tax Cut and Jobs Act “Cliff Notes” Version

  • Tax Rates:
    • Overall, they are down, with 7 brackets continuing and rates of: 10%, 12%, 22%, 24%, 32%, 35%, 37%
  • Exemptions/Deductions
    • Personal exemptions are going away
    • Standard deduction rising to $12,000 for a single person and $24,000 for a couple
    • State, property, and sales tax deductions are aggregated and capped at $10,000
    • Medical deductions remain, and AGI limitation reduces for next two years
    • 2% miscellaneous itemized deductions are eliminated
    • Mortgage interest deduction is limited to mortgages up to $750,000 and home equity debt is no longer eligible for deduction
  • AMT
    • AMT remains, but with much higher exemptions and income phase-in limits of $500,000 for a single person and $1,000,000 for a couple
  • Child Tax Credit
    • Has been increased from $1,000 to $2,000 per qualifying child and income phase-outs are raised to $200,000 for a single person and $400,000 for couples
  • Kiddie Tax
    • Will now be subject to fiduciary (Trust/Estate) tax rates
    • Includes inherited IRA income
  • 529 Plans
    • Now allow for up to $10,000 per child, per year tax-free distribution for private elementary and secondary education expenses
    • Also now includes up to $10,000 per year tax-free distribution for home school expenses
  • Estate Tax and Gift Tax Exemption
    • Has been increased to $11,200,000 per person with portability of exemption between spouses
  • Business pass-through rules
    • Preferential tax deduction for pass through entities, not in the service industry. However, Engineers and Architects are able to take advantage of this deduction.
    • Of pass through income, 20% is eligible to be taken as a deduction from income
    • For those in service based fields, namely physicians, accountants, attorneys, etc, deduction is still eligible for MFJ taxpayers with less than $315,000 income
  • Proposed Changes that did not make the final bill
    • First in, First out recognition of capital gains for appreciated securities
    • Removal of the student loan deduction
    • Removal of medical expense deduction


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Get Ready for Tax Season

Regardless of whether you prepare your own tax return or hire a professional to do it for you, you are still responsible for collecting the information necessary to complete it.  Well-organized records can make the process significantly easier and potentially save money with your CPA who typically charges by the hour.

One way to tackle this chore is to create a checklist of the documents and information needed to complete your return.  As you gather the documents, start to organize them in a file by the following categories and check them off the list.

Prior Year’s Tax Return

Use last year’s tax return as a starting point to create your checklist.  Although you may have new sources of income or different deductible expenses for the current year, this is usually a fairly comprehensive list of needed documents such as Form 1099 or 1098.  It will also serve as a reminder of information you may need to determine from bank statements or receipts such as medical expenses.

Sources of Income

This category generally includes wages, dividends, interest, partnership distributions, retirement and rental income.  You may receive a Form W-2, 1099, or K1 that indicates the amount of income reported to the IRS.  For other types of income, such as alimony received, you may need to determine the amount to report from bank statements.

Adjustments to Income

These are direct reductions to taxable income that commonly include deductible IRA contributions, alimony paid, Health Savings Account (HSA) contributions, SEP, SIMPLE or other self-employed pension plan contributions,  and self-employed health insurance payment records.

Deductible Expenses

If you itemize deductions rather than taking the standard deduction, you may need to collect source documents indicating the amount of mortgage interest paid (Form 1098), real estate and personal property taxes paid, medical expenses, and charitable contributions to be reported on Schedule A.

Tax Credits

Tax credits are a direct reduction of your tax bill so take a few minutes to research available 2017 credits.  You may be able to claim the American Opportunity Credit if you have a child in college or a Residential Energy Credit if you have made any “green” home improvements.

Basis of Property

This is also a good time to review and update the basis of property if necessary.  Home improvements made during the year may have increased the basis so collect and file those valuable receipts.

Taxes Paid

Federal and state taxes you have already paid may be found on your W-2 but if you pay quarterly estimated taxes you may need to collect records of payment.

While this is not a comprehensive list of every possible tax document needed to complete a tax return, it is a starting point from which you can develop your own, one that reflects your unique life circumstances.  Start organizing now and maybe tax season won’t be your least favorite season of the year.

Nancy Blackman - Parsec Financial Corporate Headshots
Nancy Blackman – Portfolio Manager
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Taxable Income Reduction Strategies

As a trusted financial advisors for our clients, our priority is to stay apprised on current tax laws, as well as provide planning opportunities to reduce future tax liabilities. For many of our clients, their Traditional IRAs are also their largest tax liability. When an IRA is responsibly managed, the hope is that the account will continue growing until the owner’s late 70s. At that point in time, the mandatory withdrawals from the account may offset any capital appreciation and earnings on the account. When taking into account these growth expectations, as well as the client’s necessary cash flow, many clients find that the RMDs in their 80s will far exceed their necessary cash flow. These factors contribute to an increasing likelihood of the client having a higher tax rate later in life. Higher Modified Adjusted Gross Income(MAGI) is one concern that has a trickle down effect. When MAGI gets high enough, it can result in an income based adjustment for Medicare Part B and D. It should be clear by now that a healthy retirement can actually increase tax concerns.

So, by now you may be saying, “Thanks for the depressing news Daniel, I don’t think I want to read any further. ” I encourage you to keep reading.
Controlling Income

The first step in keeping MAGI low is controlling income. For retired individuals, there are two main sources of cash flow. The first being social security and pensions. These are fixed amounts that cannot be changed. The second source is income from personal assets. This includes brokerage accounts, Traditional IRAs, and Roth IRAs. A brokerage account is not a tax-deferred account. Therefore any income produced by the account will contribute to MAGI. It is possible to manipulate a brokerage account’s holdings to reduce taxable income. The second source of cash flow is withdrawals made from Traditional IRAs to supplement income or fulfill an RMD. These withdrawals are fully taxable to the individual. In addition to Traditional IRA withdrawals, Roth IRA withdrawals can be made, however, these withdrawals are not taxable to the individual if made after 59 ½. The IRS gives us tax tables, from these, we are able to determine the maximum amount of taxable income we want to produce for clients. As I said before, it may become impossible to keep income below this desired threshold when RMDs get larger and larger. If this is the case, we move on to advanced planning techniques.

Roth Conversions and Charitable Remainder Trusts 
One of our favorite techniques to reduce the impact of RMDs is to combine the benefits of a Roth IRA with a charitable gift. The establishment of a Charitable Remainder Trust may allow someone with charitable intentions for their estate to realize the benefit now. The Charitable Remainder Trust can provide a lifetime income stream for the donor, as well as provide a large charitable deduction. In this tandem planning technique, the charitable deduction can offset the income incurred from a Traditional to Roth conversion. The reduction in the size of the Traditional IRA will also truncate the amount of the RMD going forward.
This particular technique is just an example of some of the advanced planning options we evaluate with our clients. Every situation is different with special circumstances to consider. If you have any questions about these strategies, contact one of our advisors.
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