2018 Investment Tax Changes for Parents

This post is in: Blog, Business
No Comments

Lots of tax changes coming your way this next year! Today, I want to talk to you about three things: 529 plans, kiddie tax and Roth accounts.

Let’s start with 529 plans.

A 529 plan (named after IRS Code Section 529) allows families to save money for college. The money inside the plan grows tax free. States generally manage the plans and, to encourage participation, 33 states provide a deduction or credit based on the amount contributed on state income taxes.

Prior to 2018, the 529 funds could be used set aside and grow for the future higher education costs. After Congress’s latest rewrite of the Tax Code, parents can now use 529 plans to cover tuition not only at college and universities, but also at private elementary and high school. Homeschooling cost can be covered as well. That sudden big expansion and its ramifications haven’t all been studied at the federal and state level.

The benefit will be to parents who send their children to private schools. For early grades and most people, the funds haven’t simply had enough time to grow. However, there will be a new strategy for people who put money aside in 529 plans, take the state income tax deduction or credit and then immediately pull the money out for private school costs. Basically, by running it through the 529 plan, they saved state income tax money.

Parents, grandparents and others can contribute to 529 plans up to the tax exclusion amount which is $15,000 or $30,000 for a couple per beneficiary.

If your child is under the age of 19 (or age 24 if the child is a full-time student) and receives unearned income, the unearned income over the amount of $2100 (2017 threshold) is taxed at the parent’s tax rate. Effective for 2018, the kiddie tax now follow the trust tax rate, not the parent’s rate. As an example, a parent’s income of $120K would have meant a kiddie tax rate of 25%. Now, unearned income over $12,500 will be taxed at 37%.

And one more random investment fact. If you convert your traditional IRA to a Roth in 2018, you can now no longer change your mind if the stock goes down. You can’t convert back, starting in 2018. Assume your Roth conversion is forever.

Leave a Comment