7 Ways the New Tax Law Impacts your Financial Planning and Investments

While many of the changes to the tax code have been covered by mainstream media, including the bracket changes, the increase in the standard deduction, the elimination of personal exemptions and the lowering of the corporate rate, here’s a few of the changes from the Tax Cuts and Jobs Act (TCJA) you may have missed related to your financial planning and investments.  

1) 529s and Future Parents – Parents with kids in private school caught a nice break here, as now they’re able to make distributions up to $10,000 per student per year for K-12 education.  With such wider use for 529s, couples that don’t even have kids yet may want to maximize the time funds grow tax-free by opening 529s for themselves as both “owner” and “beneficiary” and then just changing the beneficiary to their children once they have them.

TCJA and Financial Planning

2) Pass-through entities and company retirement plans – While owners of C corporations benefit the most from the new tax bill, many pass-through business owners also win big.  With the new $315,000 threshold limit for the 20% pass-through deduction, tax planning to lower income by contributing to defined benefit plans and defined contribution plans is now more important than ever.  On the other hand, given how much lower pass-through rates are now for many business owners relative to ordinary income bracket rates, it may make sense for some business owners to not contribute as much to these tax-deductible plans.  They'll be withdrawing these funds later in life at ordinary income tax rates that are potentially much higher than the deduction tax rate they'll be getting when they contribute.  

3) Goodbye Roth re-characterizations, but hello more Roth conversions.  Gone are the days of doing multiple Roth Conversions in a single year, and then keeping the conversions and paying taxes on the accounts that went up, and then doing a recharacterization and avoiding the taxes on the accounts that went down.  Starting in 2018, reversing a conversion of a traditional IRA into a Roth IRA isn’t allowed.  You can still do a 2017 recharacterizations until October 15, 2018.

Although, given the bracket changes, it will make sense for more people in early retirement to do Roth conversions.  A common strategy with Roth conversions is to convert just enough IRA funds to stay in the same tax bracket.  With the new lower brackets wider apart than before, more dollars can be converted in those brackets without spilling over into higher brackets.  Also, another Roth conversion strategy is to compare retiree married bracket rates in their 60’s to potential widowed single bracket rates in their 80’s and 90’s.  With less of a “marriage penalty” in the new brackets, it makes sense for more couples early in retirement to do Roth conversions.

4) More breathing room for paying back company retirement plan loans after you leave your employer – No judgments if you have a 401K loan outstanding, although it’s seldom a good idea financially.  More so, up until the new tax bill, you had to pay off that loan within 60 days of leaving your job.  Now you have more time to pay off the loan if you leave your job, as it’s not due until your tax return deadline.

5) Charitable deductions, bunching deductions, Donor Advised Funds, and Qualified Charitable Distributions (QCDs) – With so many of the itemized deductions eliminated under the new tax bill, many Americans will likely start to oscillate years of taking the standard deduction and bunching itemized deductions.  For those charitably inclined, it might make sense to contribute to a donor-advised fund at somewhere like Schwab or Fidelity to take the immediate charitable deduction and then allocate those funds to your charity of choice over time.  With the AGI limit for cash contribution deductions to charities increasing to 60%, donor-advised funds are even more advantageous for some people. 

With the charitable deduction being used less frequently with the new higher standard deduction, another approach available to people over 70.5 years old is to make Qualified Charitable Distributions (QCDs).  Retirees can use QCDs to count toward their Required Minimum Distributions (RMDs) and save money on taxes by essentially using the standard deduction and a charitable deduction at the same time.  Moreover, QCDs will preserve the step-up in basis for securities that would have otherwise been used to make the charitable donations from a taxable brokerage account; this strategy is particularly appropriate for older investors with large estates.  There are some limitations to making QCDs however, such as a $100,000 per year maximum and not being able to use them for private foundations or donor advised funds.  

6) Municipal bond market – The new tax bill affects the municipal bond market in a myriad ways.  We’ll likely see curtailed supply due to the loss of the tax exemption on refunding bonds, lower demand from corporate buyers due to their lower tax rates, and possibly higher demand from individuals in high tax states looking for tax breaks due to the cap on their State and Local Taxes (SALT) deduction.  The biggest thing to watch out for over the long-term is potential muni issuer credit deterioration due to the SALT deduction changes.

7) Alternative Minimum Tax (AMT) changes and stock options.  This was a big win for many high earning Americans with both the exemption increasing and the phase-out increased.  If you have incentive stock options (ISOs), it’s probably time to talk to your CPA and financial advisor to re-visit your framework for evaluating and executing your stock options.


David Flores Wilson, CFP®, CFA, CDFA®, CCFC is a New York City-based CERTIFIED FINANCIAL PLANNER™ Practitioner & Wealth Advisor at Watts Capital.  He can be reached at dwilson@planningtowealth.com.