2018 Gift Tax Exclusion Rises to $15,000; Other Cost-of-Living Adjustments Increase Modestly

The IRS recently issued its 2018 cost-of-living adjustments. In a nutshell, to account for inflation, many amounts increased, but some stayed at 2017 levels. As you implement 2017 year-end tax planning strategies, be sure to take these 2018 adjustments into account in your planning. (However, keep in mind that, if Congress passes a new tax law, some of these amounts may change.)

Gift and Estate Taxes

The annual gift tax exclusion increases for the first time since 2013 to $15,000 (up from $14,000 for 2017). It’s adjusted only in $1,000 increments, so it typically increases only every few years.

The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. For 2018 the amount is $5.60 million (up from $5.49 million for 2017).

Individual Income Taxes

Tax-bracket thresholds increase for each filing status but, because they’re based on percentages, they increase more significantly for the higher brackets. For example, the top of the 10% bracket increases by $200 to $400, depending on filing status, but the top of the 35% bracket increases by $4,675 to $9,350, again depending on filing status.

2018 ordinary-income tax brackets
Tax rate Single Head of household Married filing jointly or surviving spouse Married filing separately
10% $0 –     $9,525 $0 –   $13,600 $0 –   $19,050 $0 –     $9,525
15% $9,526 –   $38,700 $13,601 –   $51,850 $19,051 –   $77,400 $9,526 –   $38,700
25% $38,701 –   $93,700 $51,851 – $133,850 $77,401 – $156,150 $38,701 –   $78,075
28% $93,701 – $195,450 $133,851 – $216,700 $156,151 – $237,950 $78,076 – $118,975
33% $195,451 – $424,950 $216,701 – $424,950 $237,951 – $424,950 $118,976 – $212,475
35% $424,951 – $426,700 $424,951 – $453,350 $424,951 – $480,050 $212,476 – $240,025
39.6% Over $426,700 Over $453,350 Over $480,050 Over $240,025

The personal and dependency exemption increases by $100, to $4,150 for 2018. The exemption is subject to a phaseout, which reduces exemptions by 2% for each $2,500 (or portion thereof) by which a taxpayer’s adjusted gross income (AGI) exceeds the applicable threshold (2% of each $1,250 for separate filers).

For 2018, the phaseout starting points increase by $3,100 to $6,200, to AGI of $266,700 (singles), $293,350 (heads of households), $320,000 (joint filers), and $160,000 (separate filers). The exemption phases out completely at $389,200 (singles), $415,850 (heads of households), $442,500 (joint filers), and $221,250 (separate filers).

Your AGI also may affect some of your itemized deductions. An AGI-based limit reduces certain otherwise allowable deductions by 3% of the amount by which a taxpayer’s AGI exceeds the applicable threshold (not to exceed 80% of otherwise allowable deductions). The thresholds are the same as for the personal and dependency exemption phaseout.

AMT

The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.

Like the regular tax brackets, the AMT brackets are annually indexed for inflation. For 2018, the threshold for the 28% bracket increased by $3,700 for all filing statuses except married filing separately, which increased by half that amount.

2018 AMT brackets
Tax rate Single Head of household Married filing jointly or surviving spouse Married filing separately
26% $0 – $191,500 $0 – $191,500 $0 – $191,500 $0 –  $95,750
28% Over $191,500 Over $191,500 Over $191,500 Over $95,750

The AMT exemptions and exemption phaseouts are also indexed. The exemption amounts for 2018 are $55,400 for singles and heads of households and $86,200 for joint filers, increasing by $1,100 and $1,700, respectively, over 2017 amounts. The inflation-adjusted phaseout ranges for 2018 are $123,100–$344,700 (singles and heads of households) and $164,100–$508,900 (joint filers). Amounts for separate filers are half of those for joint filers.

Education- and Child-Related Breaks

The maximum benefits of various education- and child-related breaks generally remain the same for 2018. But most of these breaks are limited based on the taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within the applicable phaseout range are eligible for a partial break — breaks are eliminated for those whose MAGIs exceed the top of the range.

The MAGI phaseout ranges generally remain the same or increase modestly for 2018, depending on the break. For example:

The American Opportunity Credit. The MAGI phaseout ranges for this education credit (maximum $2,500 per eligible student) remain the same for 2018: $160,000–$180,000 for joint filers and $80,000–$90,000 for other filers.

The Lifetime Learning Credit. The MAGI phaseout ranges for this education credit (maximum $2,000 per tax return) increase for 2018; they’re $114,000–$134,000 for joint filers and $57,000–$67,000 for other filers — up $2,000 for joint filers and $1,000 for others.

The Adoption Credit. The MAGI phaseout ranges for this credit also increase for 2018 — by $4,040, to $207,580–$247,580 for joint, head-of-household and single filers. The maximum credit increases by $270, to $13,840 for 2018.

(Note: Married couples filing separately generally aren’t eligible for these credits.)

These are only some of the education- and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible.

Retirement Plans

Not all of the retirement-plan-related limits increase for 2018. Thus, you may have limited opportunities to increase your retirement savings if you’ve already been contributing the maximum amount allowed:

Type of limitation 2017 limit 2018 limit
Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans $18,000 $18,500
Annual benefit for defined benefit plans $215,000 $220,000
Contributions to defined contribution plans $54,000 $55,000
Contributions to SIMPLEs $12,500 $12,500
Contributions to IRAs $5,500 $5,500
Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans $6,000 $6,000
Catch-up contributions to SIMPLEs $3,000 $3,000
Catch-up contributions to IRAs $1,000 $1,000
Compensation for benefit purposes for qualified plans and SEPs $270,000 $275,000
Minimum compensation for SEP coverage $600 $600
Highly compensated employee threshold $120,000 $120,000

Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits all will increase for 2018:

Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if the taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:

  • For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
    • For a spouse who participates, the 2018 phaseout range limits increase by $2,000, to $101,000–$121,000.
    • For a spouse who doesn’t participate, the 2018 phaseout range limits increase by $3,000, to $189,000–$199,000.
  • For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2018 phaseout range limits increase by $1,000, to $63,000–$73,000.

Taxpayers with MAGIs within the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $5,500 contribution limit (plus $1,000 catch-up if applicable and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.

Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:

  • For married taxpayers filing jointly, the 2018 phaseout range limits increase by $3,000, to $189,000–$199,000.
  • For single and head-of-household taxpayers, the 2018 phaseout range limits increase by $2,000, to $120,000–$135,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)

Impact on Your Year-End Tax Planning and Retirement Planning

The 2018 cost-of-living adjustment amounts are trending higher than 2017 amounts. How might these amounts affect your year-end tax planning or retirement planning? Contact us for answers. We’d be pleased to help.