For some people, Roth IRAs can offer income and estate tax benefits that are preferable to those offered by traditional IRAs. However, it’s important to take note of just what the distinctive features of a Roth IRA are before making the choice.
Traditional vs. Roth
The biggest difference between traditional and Roth IRAs is how taxes affect contributions and distributions. Contributions to traditional IRAs generally are made with pretax dollars, reducing your current taxable income and lowering your current tax bill. You pay taxes on the funds when you make withdrawals. As a result, if your current tax bracket is higher than what you expect it will be after you retire, a traditional IRA can be advantageous.
In contrast, contributions to Roth IRAs are made with after-tax funds. You pay taxes on the funds now, and your withdrawals won’t be taxed (provided you meet certain requirements). This can be advantageous if you expect to be in a higher tax bracket in retirement or if tax rates increase.
Roth distributions differ from traditional IRA distributions in yet another way. Withdrawals aren’t counted when calculating the taxable portion of your Social Security benefits.
A Roth IRA may offer a greater opportunity to build up tax-advantaged funds. Your contributions can continue after you reach age 70½ as long as you’re earning income, and the entire balance can remain in the account until your death. In contrast, beginning with the year you reach age 70½, you can’t contribute to a traditional IRA — even if you do have earned income. Further, you must start taking required minimum distributions (RMDs) from a traditional IRA no later than April 1 of the year following the year you reach age 70½.
Avoiding RMDs can be a valuable benefit if you don’t need your IRA funds to live on during retirement. Your Roth IRA can continue to grow tax-free over your lifetime. When your heirs inherit the account, they’ll be required to take distributions — but spread out over their own lifetimes, allowing a continued opportunity for tax-free growth on assets remaining in the account. Further, the distributions they receive from the Roth IRA won’t be subject to income tax.
As you begin planning for retirement (or reviewing your current plans), it’s important to consider all retirement planning vehicles. A Roth IRA may or may not be one of them. Please contact our firm for individualized help in determining whether it’s a beneficial choice.
Sidebar: TCJA eliminated option to recharacterize Roth IRAs
The passage of the Tax Cuts and Jobs Act late last year had a marked impact on Roth IRAs: to wit, taxpayers who wish to convert a pretax traditional IRA into a post-tax Roth IRA can no longer “recharacterize” (that is, reverse) the conversion for 2018 and later years.
The IRS recently clarified in FAQs on its website that, if you converted a traditional IRA into a Roth account in 2017, you can still reverse the conversion as long as it’s done by October 15, 2018. (This deadline applies regardless of whether you extend the deadline for filing your 2017 federal income tax return to October 15.)
Also, recharacterization is still an option for other types of contributions. For example, you can still make a contribution to a Roth IRA and subsequently recharacterize it as a contribution to a traditional IRA (before the applicable deadline).
When Congress was debating tax law reform last year, there was talk of repealing the federal estate and gift taxes. As it turned out, rumors of their demise were highly exaggerated. Both still exist and every taxpayer with a high degree of wealth shouldn’t let either take their heirs by surprise.
Exclusions and exemptions
For 2018, the lifetime gift and estate tax exemption is $11.18 million per taxpayer. (The exemption is annually indexed for inflation.) If your estate doesn’t exceed your available exemption at your death, no federal estate tax will be due.
Any gift tax exemption you use during life does reduce the amount of estate tax exemption available at your death. But not every gift you make will use up part of your lifetime exemption. For example:
* Gifts to your U.S. citizen spouse are tax-free under the marital deduction, as are transfers at death (bequests).
* Gifts and bequests to qualified charities aren’t subject to gift and estate taxes.
* Payments of another person’s health care or tuition expenses aren’t subject to gift tax if paid directly to the provider.
* Each year you can make gifts up to the annual exclusion amount ($15,000 per recipient for 2018) tax-free without using up any of your lifetime exemption.
It’s important to be aware of these exceptions as you pass along wealth to your loved ones.
A simple projection
Here’s a simplified way to help project your estate tax exposure. Take the value of your estate, net of any debts. Also subtract any assets that will pass to charity on your death.
Then, if you’re married and your spouse is a U.S. citizen, subtract any assets you’ll pass to him or her. (But keep in mind that there could be estate tax exposure on your surviving spouse’s death, depending on the size of his or her estate.) The net number represents your taxable estate.
You can then apply the exemption amount you expect to have available at death. Remember, any gift tax exemption amount you use during your life must be subtracted. But if your spouse predeceases you, then his or her unused estate tax exemption, if any, may be added to yours (provided the applicable requirements are met).
If your taxable estate is equal to or less than your available estate tax exemption, no federal estate tax will be due at your death. But if your taxable estate exceeds this amount, the excess will be subject to federal estate tax.
Be aware that many states impose estate tax at a lower threshold than the federal government does. So, you could have state estate tax exposure even if you don’t need to worry about federal estate tax.
Strategies to consider
If you’re not sure whether you’re at risk for the estate tax, or if you’d like to learn about gift and estate planning strategies to reduce your potential liability, please contact us.
The new tax reform law, commonly called the “Tax Cuts and Jobs Act” (TCJA), is the biggest federal tax law overhaul in 31 years, and it has both good and bad news for taxpayers.
Below are highlights of some of the most significant changes affecting individual and business taxpayers. Except where noted, these changes are effective for tax years beginning after December 31, 2017.
• Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37% — through 2025
• Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately) — through 2025
• Elimination of personal exemptions — through 2025
• Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit — through 2025
• Elimination of the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty — effective for months beginning after December 31, 2018
• Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes — for 2017 and 2018
• New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income taxes; $5,000 for separate filers) — through 2025
• Reduction of the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers), with certain exceptions — through 2025
• Elimination of the deduction for interest on home equity debt — through 2025
• Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters) — through 2025
• Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses) — through 2025
• Elimination of the AGI-based reduction of certain itemized deductions — through 2025
• Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances) — through 2025
• Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year
• AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers — through 2025
• Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing) — through 2025
• Replacement of graduated corporate tax rates ranging from 15% to 35% with a flat corporate rate of 21%
• Repeal of the 20% corporate AMT
• New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025
• Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
• Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
• Other enhancements to depreciation-related deductions
• New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
• New limits on net operating loss (NOL) deductions
• Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers
• New rule limiting like-kind exchanges to real property that is not held primarily for sale
• New tax credit for employer-paid family and medical leave — through 2019
• New limitations on excessive employee compensation
• New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation
This is just a brief overview of some of the most significant TCJA provisions. There are additional rules and limits that apply, and the law includes many additional provisions. Contact your tax advisor to learn more about how these and other tax law changes will affect you in 2018 and beyond.
Shawna Ridgeway was born and raised around a farm in Revilo, Tenn. She has two sisters: Ashly (13 months older) and Taylor (10 years younger). She currently lives in Five Points with her husband, Kyle, and their two sons, Gunner and Boone. She received a BBA in Accounting and the Outstanding Accounting Student award from Martin Methodist College in 2012. She went on to receive her MBA in Accounting from the University of North Alabama in 2014.
We asked Shawna about her career in accounting. Here’s what she said.
How long have you been with Greg Lemon CPA, PLLC? What was your first impression of the firm?
I’ve been with GLCPA since July 2016. I have loved the firm from the start. I love the wide array of services that we offer and the small-town feel of the firm.
How did you first get involved in accounting?
One of my high school teachers, Mary Pack, introduced me to accounting. I was in the first accounting class at Loretto High School and it was something that just “clicked” and that I enjoyed doing. I went on to compete in an FBLA competition for accounting where I placed in the top 10 in the state and went on to the national competition.
What do you love most about your work?
I love to dig. If something is off, even by a few dollars, I love to find out where it is. It’s so rewarding to find that small error or issue that’s causing the numbers to not balance.
What’s the best thing to happen since you started working at GLCPA (in the accounting field)?
The best thing has been working in audit, which has always been the area of accounting that I was most drawn to. There aren’t a lot of opportunities in audit locally, and having that opportunity has been great.
What do you wish other people knew about working in a CPA firm?
That it’s a lot more involved that people think. Most people think all we do are taxes, which is so far from the truth. We offer so many other services that would benefit individuals, small businesses, large businesses and anyone in between.
Tell me about someone who has influenced your decision to work in accounting.
That’s easy – several of my past teachers influenced and pushed me to do my best and follow my heart. Roberta Niedergeses and Mary Pack always pushed me and believed in me in high school. Paula Stephenson and Kayla Wiggins always pushed me in college, and always believed I could do whatever I wanted. Those types of influences are so important to young minds!
What’s it like to be an Auditor?
I personally love it. You never know what the next challenge is going to be and there is never a set “day to day” plan. Every day is different, and I truly love that about my job.
What do you consider the most rewarding experience of your educational pursuits and/or career?
It’s always rewarding when you’re finally complete with a job and you have a happy client! I especially enjoy it when we are able to help the client’s learn more about their books and how to understand their financials.
What are your goals as you continue your career with GLCPA?
My current goal is to get my CPA license, which is something I plan to start working on soon. I also hope to continue to learn and grow as an auditor so I can serve those in my local community.
Greg Johnson, CPA will be joining Greg Lemon CPA, PLLC as the Director of Auditing for the Columbia, TN firm. A graduate of Middle Tennessee State University, Johnson has been serving clients in the Southern Middle Tennessee Region for 25 years, with a specialty in tax and financial statement audits.
“I couldn’t be more excited about this merger. Greg’s expertise in preparing financial statement audits for governmental entities, non-profits, and a variety of other for-profit businesses will bring tremendous value to our clients,” said Greg Lemon, owner. “He is an exceptional fit for us and I look forward to expanding the skills of our team.”
Greg Lemon CPA, PLLC and Well House Financial Group hosted an open house and ribbon cutting for their new Lawrenceburg office. An estimated 50-60 people were in attendance. Guests enjoyed Chicken Minis, fruits trays and cookies from Chik-fil-a, as well as coffee from Muletown Coffee. A $25.00 gift certificate to Ty Alexander's was awarded to Jantzen Kelley.
“We look forward to providing comprehensive accounting services to the Lawrenceburg area,” says Stephanie Hunt. “Feel free to stop in and discuss your tax planning and preparation needs.”
Click here to view photos of the new office.
Name: Chris Weninegar
Company name: Muletown Coffee
How long have you been a member of the Columbia community?
5 years. After my wife and I were married, we lived in Birmingham and I was in the music industry. I passed through Columbia on my way to Nashville on the weekends. I liked downtown Columbia and the view of the river. After my wife finished grad school, we decided to move here for a year and stay if we liked it. Five years, three children and one successful coffee shop later, we think it’s a great place to live.
Tell us your favorite memory as a member of the Columbia community.
The day we opened Muletown Coffee. It was the day of the Christmas parade and I wasn’t sure how it would go. We had been working so hard for months and I was a little afraid no one was going to come in. In four hours, we did $1,800 in sales (which is about 600 cups of coffee). I felt very proud.
How did you choose the name “Muletown Coffee”?
When I moved to Columbia, I heard about Mule Day. I thought that was quirky and cool, plus I love unique stories about a town’s heritage. It’s probably the opposite of what you would name a coffee shop but I think Columbia has embraced the name.
What is your favorite thing about Columbia?
Its authenticity. It’s a real small town with all the amenities we need.
How did you start and grow your business?
We built everything in the coffee shop ourselves. While we were building it out, we started a Facebook page to show the progress of Muletown Coffee. We gained 1,200 followers. Once everything was built and we passed the health inspection, it was ours. We sent out a message to our followers the day of the Christmas parade and they showed up.
I used to wonder how anyone could afford to start a business. We started ours with a loan from my father-in-law and a 0% APR credit card. Now, I know there are no limits. You just have to set out and do it – I believe that 100%.
How long have you worked with Greg Lemon CPA, PLLC?
A little over a year. We were looking for a bookkeeper who would make us a priority and answer questions to help us grow our business. With Greg Lemon CPA, we get everything we need, when we need it. Everything is handled. We have a lot of trust in their team.