-2018-217, Nov. 7, 2018
WASHINGTON ― More families will be able to get more money under the newly-revised Child Tax Credit, according to the Internal Revenue Service.
This is the third in a series of reminders to help taxpayers get ready for the upcoming tax filing season. Additionally, the IRS has recently updated a special page on its website with steps to take now for the 2019 tax filing season.
The Tax Cuts and Jobs Act (TCJA), the tax reform legislation passed in December 2017, doubled the maximum Child Tax Credit, boosted income limits to be able to claim the credit, and revised the identification number requirement for 2018 and subsequent years. The new law also created a second smaller credit of up to $500 per dependent aimed at taxpayers supporting older children and other relatives who do not qualify for the Child Tax Credit.
“As we approach the 2019 tax-filing season, I want to remind taxpayers to take advantage of this valuable tax credit if they are eligible to claim it,” said IRS Commissioner Chuck Rettig. “Tax reform changed the tax code significantly and doubling the Child Tax Credit is an example of how the changes impact taxpayers.”
Here are some important things taxpayers need to know as they plan for the tax-filing season in early 2019:
Child Tax Credit increased
Higher income limits mean more families are now eligible for the Child Tax Credit. The credit begins to phase out at $200,000 of modified adjusted gross income, or $400,000 for married couples filing jointly, which is up from the 2017 levels of $75,000 for single filers or $110,000 for married couples filing jointly.
Increased from $1,000 to $2,000 per qualifying child, the credit applies if the child is younger than 17 at the end of the tax year, the taxpayer claims the child as a dependent, and the child lives with the taxpayer for more than six months of the year. The qualifying child must also have a valid Social Security Number issued before the due date of the tax return, including extensions.
Up to $1,400 of the credit can be refundable for each qualifying child. This means an eligible taxpayer may get a refund even if they don’t owe any tax.
For more information, see Publication 972, Child Tax Credit, available soon on IRS.gov.
New Credit for Other Dependents
A new tax credit – Credit for Other Dependents — is available for dependents for whom taxpayers cannot claim the Child Tax Credit. These dependents may include dependent children who are age 17 or older at the end of 2018 or parents or other qualifying relatives supported by the taxpayer.
During the upcoming tax-filing season, the IRS urges taxpayers to use the agency’s Interactive Tax Assistant to see if they qualify for either of these credits. To find out more, visit IRS.gov.
October 18, 2017 By Paul Glantz, CPA
How To Convert To A Roth IRA In 2017 and Defer Tax On It Till 2018 If Tax Reform Passes
Considering converting your Traditional IRA into a Roth IRA? You’re not alone. Many of my clients are wondering if they should convert their IRA now and pay tax on the conversion this year, or wait till next year when tax rates may be lower.
If you are already sold on converting to a Roth IRA, you can convert this year without worrying about changes to the tax code! If tax rates turn out to be lower next year under tax reform, you can use the recharacterize-and-reconvert strategy to shift the conversion’s tax consequences from 2017 to 2018.
What are the benefits of a ROTH conversion? Roth IRAs have two major advantages over traditional IRAs:
- While distributions from a traditional IRAs are taxed as ordinary income (except to the extent they represent nondeductible contributions), Roth IRA distributions are tax-free if they are “qualified distributions”
- While Traditional IRAs are subject to the lifetime required minimum distribution (RMD) rules that generally require minimum annual distributions in the year following the year in which the IRA owner attains age 70 1/2, Roth IRAs aren’t subject to the lifetime RMD rules that apply to traditional IRAs (as well as individual account qualified plans).
There are other tax advantages. Since distributions from Roth IRAs are tax-free (if they are qualified distributions), they could keep you from being taxed in a higher tax bracket. Not only that, Qualified Distributions from Roth IRAs don’t enter into the calculation of tax owed on Social Security payments, and they have no effect on Adjusted Gross Income (AGI) based deductions!
Keep in mind that converting from a Traditional IRA to a Roth IRA, (or from another pre-tax qualified plan to Roth IRA) is not income-tax-free. Instead, it is subject to tax as if it were distributed from the traditional IRA (or qualified plan) and not rolled over into another plan of the same type, but it generally isn’t subject to the 10% premature distribution tax. A substantial conversion could move a taxpayer into a higher bracket and/or result in reduced tax breaks that have AGI-based phaseouts or “floors”.
If you convert your pre-tax retirement account to a Roth IRA during 2017, you have the ability to determine when to pay tax on the conversion—in the year of the conversion, or in the following year. This unique opportunity allows you to minimize your tax liability on the conversion, should significant changes to the tax code occur.
Here’s how it works: If congress fails to pass a tax code overhaul, or if the reform fails to lower your 2018 marginal tax rate, and you are making a Roth IRA conversion this year, simply report the transaction on your 2017 return. But if tax reform succeeds, and your marginal tax rate will be lower next year (in 2018) than this year, you can shift the conversion’s income from 2017 to 2018 through a 2-step process.
Step 1 – recharacterization. The conversion from a traditional IRA to a Roth IRA can be recharacterized (reversed or cancelled out).
The recharacterization is made via a trustee-to-trustee transfer directly between financial institutions or within the same financial institution. Any recharacterized conversion (or Roth IRA rollover from a traditional IRA) will be treated as though the conversion or rollover had not occurred. Any recharacterized contribution will be treated as having been originally contributed to the second IRA, not the first IRA. The amount transferred must include related earnings or be reduced by any loss.
Ideally, a recharacterization should be made by the due date (plus extensions) of the taxpayer’s return for the affected year, and reflected on the return for that year.
However, you can make a recharacterization even after you have filed your return for the year for which a conversion to a Roth IRA was made. Technically, you have six months from the unextended due date of the return to make a recharacterization of the amount you previously converted to a Roth IRA. For example, a conversion from a traditional IRA to a Roth IRA in 2017 may be recharacterized as a contribution to a traditional IRA as late as Oct. 15, 2018. If you want to make a recharacterization after having filed the return for the affected year, you simply file an amended return reflecting the transfer, and write “Filed pursuant to section 301.9100-2” on the amended return.
Step 2 – reconversion. After you convert an amount from a traditional IRA to a Roth IRA, not only may you transfer that amount back to a traditional IRA in a recharacterization, but may later reconvert that amount from the traditional IRA to a Roth IRA. If you take these steps, your resulting income will be fixed at the time of the reconversion.
It’s important to keep in mind that a reconversion cannot be made before the later of:
- The beginning of the tax year following the tax year in which the amount was converted to a Roth IRA; or
- The end of the 30-day period beginning on the day on which the IRA owner transfers the amount from the Roth IRA back to a traditional IRA by way of a recharacterization.
This timing rule applies regardless of whether the recharacterization occurs during the tax year in which the amount was converted to a Roth IRA or the following tax year.
If you have questions on ROTH conversions, feel free to contact us for assistance