What the Federal Tax Overhaul Means for Families with Special Needs
Late last year, Congress passed the biggest federal tax overhaul in decades, a change which is unofficially referred to as the Tax Cuts and Jobs Act of 2017. Originally intended to simplify tax filings, it did anything but. What do these tax changes mean to individuals with disabilities and their families? The answer depends on where they fall in the tax brackets.
For many individuals and families, the tax savings will be less than had been signaled by Congress and the White House. While individual tax rates dropped slightly and the standard deduction doubled, the personal exemption has been discontinued. Rates for capital gains, qualified dividends and net investment income stayed the same. Many itemized deductions were repealed and those that remain should be weighed against the improved standard deduction, both in terms of actual savings and the increased complexity of the filing process. As a rule of thumb, 2017’s tax changes will prove most beneficial to families with adjusted gross incomes of $60,000 or more.
Here is a chart that compares federal tax rates for single individuals and for married individuals filing jointly (“MFJ”) before and after passage of the tax legislation. It illustrates that, in general, individual tax rates dropped two to three percentage points.
In addition, while changes to corporate taxes are permanent, the new personal tax provisions are temporary, requiring congressional action to prevent their expiration in 2025. Lobbying efforts are afoot, and how these provisions may change over time is anyone’s guess. But for purposes of planning for tax year 2018, here are the highlights.
What Stayed the Same
It had been feared that the deduction for medical expenses would disappear, but it remains intact. In fact, for purposes of 2018 taxes, it’s slightly more generous than it was prior to the legislation—applicable to outlays exceeding 7.5 percent of the filer’s adjusted gross income. Beginning in tax year 2019, the 10 percent threshold returns. Individuals whose medical costs are largely covered by Medicare or Medicaid are likely to be challenged to meet this requirement.
Education-related deductions are also unchanged. If there are out-of-pocket costs for schooling at any level, they can be claimed.
Additionally, third-party special needs trusts (SNTs) structured for qualified disability trust (QDisT) treatment continue to enjoy tax-favored status. But the reason that QDisTs receive tax-preferred treatment has changed. Prior to the new law, QDisTs qualified for a larger personal exemption than other tax-paying trusts─ $4,050 versus $100. After tax reform, QDisTs continue to receive a personal exemption, rather than losing it like other taxpayers.
For 2018, the QDisT exemption has actually increased to $4,150. But remember, any distribution from the income of a separately taxable trust to or for the beneficiary becomes taxable to that individual rather than the trust, as long as the distribution doesn’t exceed income received by the trust. The result is that, though the calculation changes, the amount of income which can be completely tax-sheltered continues to be significantly greater if the trust is a QDisT.
You can still deduct contributions to your favorite charity—even if you’re not itemizing. In fact, the limit has been increased for contributions of cash to 60 percent of the filer’s adjusted gross income. If cash donations exceed that threshold, they can be carried forward for up to five tax years.
Other remaining credits and exclusions that may be of special interest to families include:
- The child and dependent care expense credit,
- The adoption credit, and
- The exclusion for employer plan assistance for dependent care and adoption costs.
While the alternative minimum tax remains, its exemptions have been increased.
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